We never plan for something really bad to happen, but when it happens, we must be prepared. When it comes to running a business, everybody who works closely to this particular business is an important part of it. But being the general manager creates bigger challenges when passing away. That is what happened a year and a half ago.
One of my clients, Sebastien, who became one of my best friends along the way, was the production manager for a roofing company. After a couple of pretty rough years of declining sales, the company was gaining back momentum again. My friend was working on the field, selling to new clients, keeping close relationships to existing one and making sure every projects were conducted on time with a high level of quality. He and his boss (and owner), Mike, had begun, 3 years prior, a buyback program which consisted of buying progressively shares of the company on a 13 year period. Also, the brother of the owner, Alan, had 15% shares but he’s the one that would receive the shares of the owner in case he dies.
What had to happen, happened. The owner suddenly, at 58 years old, died of a heart attack. Everyone was taken by surprise.
Fortunately for the company and the employees, Sebastien has been in the roofing industry for 15 years and was gaining control of the company slowly. So he knew how to operate the company from now on. He was forced to leave the field for couple of weeks while finishing all the paperwork, but took that time to train one of his employees to replace him with the clients and managing the jobs. So on the operational side of the company, everything was going well. And as I mentioned, they had gained momentum, so the cash flow as well as the working capital was very fine, in the short term.
But, on the side of the ownership, the shares were supposed to be transferred to his brother, Alan, who would become the owner and general manager of the company. The main problem is that he did know anything about roofing and the 2 personalities of Sebastien and Alan didn’t match at all! So the company couldn’t continue to go well without Sebastien but it was impossible for him to be bossed around by Alan.
Mike had planned his estate really well, because everything was taken care of. When the lawyer came in to settle the case, he discovered that a life insurance policy was issued long ago for the company and another one a couple of years ago for his brother.
The 2 main points were already planned
As we have seen in business partners planning, there are 2 main areas where you must have considered evaluating before something dramatic happens.
- Transition costs: Sebastien received a check of 250,000$ for his company to cover the cost for the takeover and short term losses. Because it took about 3 hard months to finish it up, of course he wasn’t able to do all he had to do on the field and training and selling and now administrating the company. So, this emergency fund was his reserves to survive crucial months in the beginning. He took about 175,000$ for his working capital and 75,000$ to buy new equipment.
- Alan, as written in Mike’s will, inherited all of the remaining shares of Mike (since he had no spouse and no kids). But to make sure that he renounced to take control of the company, Mike had put a second life insurance on his head, leaving Alan with an amount of money equal to the worth of his remaining shares. So as he cashed in the life insurance check, he also officially renounced to own the shares. Then Sebastien became the only owner of the company and Alan didn’t have anything to do with the decision making process.
This is so critical here to plan this out, because Alan, since he was supposed to receive the shares of Mike, had only one thing in his head: how can I get money out of the company? Only 4 days after the death of Mike, he had booked an appointment with the accountant of the company and was planning to sell vital parts of the company. In the roofing industry, as in many other industries, you cannot sell the company for its real value, but only for the equipment and the licenses. Because without the management team in place, no one is able to keep the relationship with the clients and keep the quality level at the same level as the owner and the production manager.
To leave you with an update of how the company and Sebastien is doing, he took the sales and increased it by 18% his first year and his profits were up by 12.5%. He told me that he was stressed out because of all the legal procedures and many appointments, but knowing that the cash flow would not affect his decision making, he considered that everything went fine!