Buy-Sell and the 5D's - The 7-Power Contractor

Buy-Sell and the 5D’s

My dad, Irving, called my two brothers and I into a private meeting one day centered on him telling us that we each needed to get an estate plan done. He also instructed us to put together buy-sell agreements for our family business.

At the time, I, as the last full-time member having joined the business, had worked five full years even though I was just 25. Marty was 29, and Richie was 28, and we thought, “We’re young… so… why do we need to do this?”

You too may think it was ridiculous for people so young to have to go through the trouble of creating an estate plan. I mean who wants to think about that in their 20’s? In fact, at the time, my wife, Natalie, actually was pretty upset about the whole thing. As for buy-sell agreements, we were a close family and we worked really well together beyond the normal friction that any family business can create.

Why would we need to do something so formal?

As it turned out, it was really as much for the protection of our wives and our future kids as it was for the business and one another as partners.

When you have partners in business whether they’re related or not, a plan for what I came to call the 5D's is essential for heading off an untimely death to your business or an incredible struggle for the survivors.

My dad had also learned the value of a buy-sell as his partner, my uncle, had gotten sick and died quite young and quite suddenly. And although they thought they had covered it all, they found out there’s way more to what needs to be addressed in a well-designed buy-sell.

A good plan requires, at a minimum, professional advice from your accountant and your lawyer. The problem is they tend to only focus on their area of concern, and they lose track of the big picture.
For example, an accountant may only be interested in the tax consequences while the attorney is only interested in the legal consequences.

The way I did it and the way I have my clients do this smart planning is to gain clarity on what they want first to happen when the 5D's come up. Then get both the accountant and attorney in the same room so they’re both on the same page.

It’s worth every penny to do it this way because mistakes made will have big repercussions later on.

Once you have a plan, there are preventive steps that may involve key insurance policies and a buy-sell that is always kept current and based on an objective measurable valuation.

This is where it can make a lot of sense to bring in a Certified Financial Planner and a Professional Insurance Broker based on your proposed plan to make sure contingencies are put in place that make sense.

Also I’m not a lawyer or an accountant so please consult with your own trusted advisors.

So, what are the 5D's?

  1. Death: Let’s face it, we don’t live forever. And when you’re young you can feel invincible, but life can turn fast. It’s expensive to die and without a good plan it can be ruinous to your family and your business partners.
  2. Disability: You could be disabled from job related accidents, and the contracting industry has all too many incidents that do occur. Or you may be walking across a street and get hit by a car… heaven forbid! I don’t know, but I do know it happens. And if it did, what would you and your family do to address the bills and loss of future income? Plus, you may need to be replaced at your company so it can continue to function for your partners and their families.
  3. Divorce: This could be a messy divorce from your spouse that handcuffs the business. Or it could be the growing desire to be free of your business partners, and you want a “divorce” from working with them. Once you want a divorce to happen, it’s too late to start planning for it.
  4. Disaster: Natural catastrophes like hurricanes, floods, earthquakes, and more can wreak havoc. Sometimes, it’s local to just your business, for example, a devastating fire or some other thing that puts you and your business flat on your back.
  5. Debt: Crippling debt can arise from mismanagement, killing the golden goose by sucking out too much money in perks, weak sales, crumbling economy, and a whole lot more. There comes a time that bailing out may be better than crashing the plane onto the ground and injuring others.

Whatever you do, do not wait until one or more of the 5D's arise. Do what you need to do to get in front of it now because however expensive it will be to do it now, it is a drop in the bucket financially and emotionally compared to what you might experience if you leave the impact of the 5D’s to chance.

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