Until Yesterday at 4:35 p.m.: A Short Story

by Marc Haberman, LUTCF

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In Brief: Jane Stimson is the victim of this story. The characters are her husband, Charlie, and his friends, Hank Summers and Bill Rogers, business partners and equal owners of Central Brands, Inc. Central Brands was a thriving business until tragedy struck. Other characters in the story include a lawyer whose original advice is not taken; a lawyer who tells Jane the bad news; and Ted Holmes, who could have helped. Unfortunately, no one listens to him.

Except for the names used, this story is true. It happened yesterday. It will occur somewhere today. Tomorrow, who knows? The setting may be in your town. The principal characters may be you and your associates.

Central Brands, Inc. was a wonderful business, until yesterday at 4:35 p.m.  Bill Rogers, Hank Summers and Charlie Stimson, who owned it equally, in 15 years had built it from scratch into a $6 million business.  Industrious and financially cautious, they were best friends, well liked and even envied by their competitors. They handled their success well, never forgetting the difficult early days.  

The growth of the business had been steady, improving year after year. The graph showed no downward curves…..until yesterday at 4:35 P.M. The news of Charlie Stimson’s death reached his associates shortly after the unthinkable event had occurred. Hank and Bill were the first people Jane Stimson called---their reaction a combination of shock and extreme sadness.

Within 24 hours, thanks to human nature and economics, the interests of Bill Rogers, Hank Summers and Jane Stimson were no longer one, as they had been for over 15 years. In fact, so adverse did they suddenly become, this story unfolds into two parts instead of one.

What Jane’s Lawyer Told Her: “At this time I would prefer not talking with you about unpleasant things, but that’s not fair to you. You know, Jane, Charlie had very little outside of his interest in Central Brands. I don’t think his estate, including his life insurance, will exceed $500,000. You and the boys can’t live on the income from that. His stock in Central Brands is worth perhaps $2 million, but in my opinion there is absolutely no chance of selling the stock for that amount. Frankly, I doubt that you are going to get more than $600,000 for it.

You see, Jane, although the stock was worth $2 million while Charlie was alive, the value was traceable chiefly to the salary that he drew. Most small corporations like Central Brands have virtually no profits after salaries are paid, and no dividends were paid for years.

I believe you have three options. The first is to be particularly friendly to Bill and Hank and hope they buy the stock at a good price. The second, assuming their offer for the stock is not satisfactory to you, is to make as much trouble for them as you can. You can insist they comply with every technical feature of corporation law. As a minority stockholder, you have certain rights--you can demand permission to inspect the books, and request notices of directors’ and shareholders’ meetings. In other words, you can become a real annoyance to them. The third option is to take a lot less for Charlie’s stock than you think its worth. Your problem would be solved if you could sell the stock on the outside to someone other than Bill or Hank, but such a sale is practically impossible.  I don’t want you to worry, Jane, but I want to prepare you for the inevitable - a big loss on the stock.”

What Bill & Hank’s Lawyer Told Them: “The problem you two face can be handled two ways. One is the business approach and the other is sentimental. As your lawyer, I have to be concerned with the business perspective. You want to buy Charlie’s stock for the lowest price possible. Despite what you think the stock is worth, I believe you can buy his one-third interest for less than $1 million. Remember, Jane can’t do anything else with the stock except sell to you or hold it. She won’t find anyone else interested in buying it, because no dividends are paid.

I know what happens in cases like this. She will think your first offer is crazy, but you have to sit tight. As the months go on, she will become more and more interested in selling at your terms. There is another approach to the problem---the sentimental approach. I want to caution you, however, in this regard. You really can’t afford to be sentimental, because you personally don’t have the cash to buy the stock, nor does the corporation. While you value the business at $6 million, remember this figure consists of such things as plant, inventory, machinery and very little cash. Nor can you figure you will pay Jane what you will save on Charlie’s salary. He will have to be replaced and it will cost just about as much or more as he was earning to replace him. Even if you don’t hire anyone else, you cannot think his whole salary is now available to you. The income tax situation is such that little of it would remain.

Let me suggest that you try to get the stock for $100,000 or less. You can wait and Jane can’t afford to do so. In a year or so, when the small estate Charlie left her begins to dwindle, she’ll be glad to accept your terms. It’s too bad, but that’s the way it has to be.

Yes, it could have been avoided: Only six months before Charlie’s death, Ted Holmes presented a solution. He suggested, as had the lawyer, they enter into an agreement whereby at the death of any one associate, the survivors would purchase his stock. He suggested also each be covered by life insurance, so when death occurred the necessary purchasing power would be instantly available. But the owners weren’t listening. Had they listened, they would have realized Ted’s plan was doubly effective. Should one stockholder die, the others would own all of the stock without having to take any money from the business. The estate of the deceased stockholder, on the other hand, would immediately receive one hundred cents on the dollar. At that point, however, Hank remarked, “My partners don’t work hard enough to die young.

They were still laughing when Ted told them how his plan provided a fair method of valuing the stock at any time and a simple adjustment if the insurance proved to be greater or smaller than the value of the stock. When Holmes told them the premiums involved were a small percentage of the value of the stock, their minds were elsewhere. Ted Holmes, unfortunately, was not a high pressure salesman. He was a sound financial advisor, more concerned about the good will of Central Brands than making the sale. He told the owners thousands of progressive businessmen had entered into agreements such as he proposed, but he knew further talk was hopeless. The owners of Central Brands resisted and they didn’t buy. Even now, Jane Stimson doesn’t know that a simple solution always existed, or was actually proposed. Hank and Bill haven’t mentioned it to each other.

How will it end? It’s a fairly common story. The business resources will be extremely strained for years to come, such that any expansion is out of the question. Each morning, Hank and Bill will be far less satisfied with their business than they’d been just months before. Jane and her sons’ standard of living will be about equal to those first years of business before the children were born, when all the owners frequently gave up their weekly checks to buy new equipment.

The bitterest phase of the whole situation, however, is that Hank and Bill, conscious of an implied pledge to look after Jane, will consider her an outsider. She, in turn, will learn that her best friends have become little more than nodding acquaintances.

Lesson Learned: The death of a key partner or major stockholder can cause a difficult readjustment problem. Soothing this transition period, modern business insurance furnishes cash from outside the company, provides time to train a replacement and assures continuation of present management, and it also provides a fair buyout to the heirs of that individual.

For more information, please contact Marc Haberman at 408.294.3431 or by email.

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