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Laurie Owen: Store Pre-Nup

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Laurie Owen explains why every store needs a buy-sell agreement.

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[h3]Store Pre-Nup[/h3]

[dropcap cap=Q]uick show of hands for those of you out there with one or more partners* in your business. How many of you: Have a formal buy-sell agreement in place, and have looked at it in the last year, and can accurately summarize what it states in the event of a death, disability and/or departure of a partner?[/dropcap]

*If you are a sole owner, you’re not off the hook — keep reading!

If you’re like the majority of jewelers we see in our workshops and performance groups, I’m guessing there are few hands left in the air after the last question. That’s a bit scary, considering what’s at stake here. The cost of dealing with a partnership that’s gone bad without a good buy-sell can be significant. Without a good buy-sell in place, you could be in jeopardy of losing your hard-earned dollars.

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[inset side=right]Life (and death) happens. People move on, die or suffer debilitating health problems.[/inset]For example, a jewelry company had three shareholders, one shareholder being the founder of the company, who owned 60 percent of the stock, and two other shareholders who each owned 20 percent of the stock.

One of the 20-percent shareholders died suddenly. His spouse contacted the surviving shareholders and demanded to be bought out. Because there was no written agreement, things got a little sticky. The spouse of the deceased shareholder negotiated the price of the stock with the two surviving shareholders. But the surviving partners didn’t have the funds to buy the shares. Negotiations failed, and it went to court. The resulting legal costs, time and energy spent could have been prevented with a buy-sell agreement in place.

A buy-sell agreement is a legal agreement that outlines the manner in which the ownership of the company will transfer in the event of retirement, voluntary resignation, disability or death of a shareholder or partner. Think of it as a “partnership pre-nup.” As with most relationships, business partnerships start off with the best of intentions, but often don’t end up that way. Life (and death) happens. People move on, die or suffer debilitating health problems. In my opinion, the best time to deal with such concerns is before the occurrence of a problem, not after it has already taken place.

A good buy-sell addresses all of these possible occurrences, plus it will have:

— Some type of formula or appraisal method to determine the value of the stock

— Purchase terms in the event a stock buy-out is triggered

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— A non-compete clause that would hold up in court in the event that your partner(s) leaves and decides to open his own store.

— A lawyer experienced in buy-sell agreements can help you either draw up one or review an existing one. A good insurance agent can review it as well and recommend cross life and disability insurance for your partners so that surviving family members can be bought out with the insurance policy proceeds. This is a good example of a project where a team approach involving several of your professional advisers is a good idea.

For those of you sole owners out there, a good buy-sell agreement is still essential. In virtually every state, when a single shareholder/owner of a corporation dies, the corporation will die or pass to the spouse or heirs of the decedent. In many cases, the surviving spouse is ill-equipped to run the company, dealing with the customers and clients of the firm, managing employees and paying the bills — including estate taxes.

My intent here is not to scare but to create a sense of urgency out there among all of you to take action now. If you have an existing buy-sell, dust it off and read it with a “what-if” frame of mind and ask some your experienced advisors to do the same. If you don’t have one, get going now!

[componentheading]LUCKY NUMBERS[/componentheading]

[contentheading]53.6%[/contentheading]

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That’s the average amount of inventory as a percentage of total assets (as measured by owner’s compensation plus net profit before tax) that the top 25% of the FIT Jewelers Financial Bench-mark Study kept in 2006. That compares to 64.6% for all companies studied. In other words, for every dollar of total assets, the top 25% has gone from keeping 64 cents of inventory to 53.6 cents of stock. The conclusion? You can make more money with less inventory.

[componentheading]MONEY MATH[/componentheading]

[contentheading]How do you figure your inventory as a percentage?[/contentheading]

Grab your year-end balance sheet, total all of your assets (short-term: cash, accounts receivable, inventory, other current assets and long-term fixed assets such as cases and fixtures). Divide your inventory number by your total asset number to get the percentage. Faster still, have your bookkeeper set up your financial reports going forward in a common-sized format: in both dollars and percentages of sales for your income statement and dollars and percentage of total assets and total liabilities for your balance sheet. Common-sized statements give you a much better ability to spot trends and make comparisons between different size companies and different sales amounts from period to period in your own company.


Laurie Owen is senior vice president at Business Resource Services. Contact her at [email protected].

[span class=note]This story is from the July 2007 edition of INSTORE[/span]

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