Saul started an interior commercial painting business when he was 25 years old and a newlywed.  Saul’s wife Tammy helped out with the business while also holding a full-time job elsewhere.  As the business grew Tammy became its full-time administrator and Saul partnered with his younger brother Joel.  Saul and Joel considered themselves as equal owners and equal contributors to the business.  Tammy remained the sole additional employee of the business with no ownership stake.

Now as mid-lifers, Saul and Joel have the satisfaction of seeing the results of their hard work.  While drawing satisfactory salaries they have enjoyed watching their children mature and launch.  Their service diligence has resulted in many loyal commercial clients.  Their pace of life is balanced, their lifestyle is comfortable and their personal financial obligations are relatively minimal with small mortgages and building retirement nest eggs.  They estimate another 8 to 10 years operating the business will mean they can retire without financial worry.

Recently life has thrown them the proverbial curve ball.  Saul at age 54 has had a serious heart attack.  Recovery is slow and he is unable to work.  Tammy’s time is split between the her administrative work in the business and caring for her husband Saul.  Joel at age 52 is carrying the entire painting workload of the business.  He is unable to maintain the pace of the business on his own and consequently revenues have gone down substantially.  There is no cash flow to hire help with the painting.  The business is at risk primarily because:

  • Payroll remains the same for Saul and Joel even with lower revenues;
  • Client loyalty is wavering due to the inability to maintain service levels;
  • Tammy is still receiving a partial paycheque for her administrative work but her reduced hours and increased expenses for Saul’s care is financial unsustainable for much longer.

Even more urgent is the stress on the family members.  The brothers never considered drawing up any formal legal arrangement for the business.  Although two families were reliant on the revenue from the business it remained structured as an informal agreement between brothers.  No corporate structure was created and no shareholder agreement was drawn up.  Now, while under substantial stress, they face difficult decisions about ownership and control.  A relatively straight forward shareholder agreement could have planned the options available when the unexpected happens such as:

  1. The number of shares each owner has;
  2. Rules on transferring the shares including rights of first refusal for the other partner;
  3. Exit options such as buy-outs should one partner need or wish to exit;
  4. Winding up the company;
  5. Disposal of assets.

It is much easier to create a shareholder agreement when participants are excited about building a business than responding to a business challenge.  Aging is a risk factor for health problems and therefore should be an incentive for business owners to get the right legal structure and ground rules in place.  Unfortunately for Saul, Joel and Tammy their future is shaky because both their financial security and their family harmony are now at risk.

*picture from Nemo via Pixabay