Sharon: Business Planning
Sharon and Anita were partners in a successful practice that provided accounting and bill paying services to upper middle class and wealthy individuals, families, and businesses.
Prior to starting their practice, they had worked together for more than twenty years at a large public accounting firm, and always got along well. They knew that building a practice would take time and that they would struggle, so they cut back on “unnecessary” legal services and used a form operating agreement as the organizing document for their business.
Over time, the business was successful - they expanded, hired associates, and they each made a good living.
Tragically, at age 62, Anita was diagnosed with cancer. As Anita went through treatment options, Sharon struggled to keep things going in her absence. She often told her husband that she wished they had purchased disability insurance to cover this potential problem.
Doctors were initially hopeful that Anita would survive, but after two years of fighting her cancer, she succumbed and passed away at age 64.
Sharon was sad to lose her longtime friend, but determined to rebuild the business. She planned to invite one of her associates to become partner.
Unfortunately, she soon learned that the “standard” LLC operating agreement that she and Anita had put in place twenty years earlier required her to purchase Anita’s share of the business at an unaffordable price. Although the valuation language made no financial sense, it was in the agreement and Anita’s husband was determined to enforce it.
The two sides fought over the agreement and its enforceability for more than a year. Eventually Sharon settled with Anita’s husband (at a price she could barely afford). During the drawn out battle, the associate Sharon had hoped to make partner took another opportunity. The fight also distracted Sharon and she lost business. Eventually she sold the firm for substantially less than anticipated.
This problem could have been avoided with proper planning and an operating agreement (or shareholder agreement) that reflected business realities, rather than vague thoughts from decades earlier.
(Note, that it’s important to realize that the opposite problem can be just as devastating - an operating agreement that requires a retiring shareholder to accept less than full market value for her shares because the valuation formula does not reflect a truly fair market value.)