FAMILY BUSINESS AGREEMENT A good estate tax plan must be followed by an agreement among heirs for whom the plan was forged. The agreement must be designed to resolve conflict that might arise in a manner that preserves the business and the emotional health of the family. Many people spend considerable time, money and effort devising an estate plan, without structuring a good “people plan” that helps resolve potential conflict, allowing severance of unwanted or unproductive joint ownership of assets, without killing the business financially and making the lawyers rich. In fact, concern over in-fighting among children about the management of an asset or business often acts as an impediment to the parents doing proper tax planning. The most effective agreement between co-owners is one that is never enforced to the letter of its terms, because the terms are sufficiently detrimental to all sides that it compels reasonable discussion, negotiation and compromise. However, the terms can not be so punitive that they cannot be enforced as a fail-safe to remedy an intolerable situation. Scenario: Parent sells non-voting stock to each of two trusts for son and daughter. Son runs the business and daughter is married and raising her own two children. Son and daughter have a good relationship but differing views regarding money and business. Son wants to reinvest profits to grow the business and is willing to accept risk. Shareholder Agreement Page Two: Daughter is not comfortable with risk and would like to stay the course, taking distributions rather than putting her capital at risk. Daughter’s husband also frequently points out the large salary and many perks her brother enjoys running the company.

This will not become an open conflict while the parents are alive; however, after the parents’ passing trouble will undoubtedly arise. A shareholders’ agreement exists between the children and their trusts which provides:

Son, while actively running the company, has an option to purchase his sister’s stock every 3rd year, on January 1st, for a price set by an independent appraiser, plus a 10% premium (The Call Option). Terms require a 10% down payment with the balance paid over 10 years with interest at the then-prevailing Prime rate.

Daughter may at alternating 5-year intervals sell her stock back to the company. However, she must accept a 20% discount if she elects to exercise this right (The Put Option). Terms require no down payment, with payments over 10 years at the Applicable Federal Rate (significantly less than Prime).

Additionally, for the Put Option to be effective, the company must have a certain amount of base liquidity and profitability, and must not violate any banking or lending covenants.

Possible Scenarios: Son cannot tolerate being in business with his sister and considers exercising his Call Option. His issues for exercising include:

Overpays for the shares by 10%, must come up with 10% of purchase

price immediately, paying the balance at a rather high interest rate

Daughter has no interest in owning a growth stock that will not pay dividends and would like to be cashed out. Her issues for exercising the Put Option include:

Takes a significant haircut on the value of her shares Must wait 10 years for full payment at a low interest rate

Probable Outcome: To resolve the issue, Son and Daughter meet and one of the following takes place:

Son agrees to increase distributions in an effort to persuade his sister not to compel a buy-out

Shareholder Agreement Page Three:

Son offers to buy stock incrementally but pays full appraisal price without the premium Daughter is persuaded that her brother’s plans to grow the company will result in greater value to her later and agrees to stay the course

Under most scenarios, the terms of the agreement do not see the light of day. However, if negotiation is beyond reason, it simply may make sense to use the agreement to avoid litigation, which is more costly than either the premium or discount. Obviously, the premium, discount, interval, interest rates, etc., are all unique to the type of business, financial and family situation. Franchise businesses, capital intensive enterprises, heavily leveraged entities, management intensive companies - all will have different variations of discounts, terms interest rates, etc. The Stanley-Laman Group, Ltd. has worked for high net worth families for over 30 years and has assisted hundreds of business owners in finding the right balance of tax, financial and people solutions in helping clients with their estate plans. We welcome the opportunity to discuss the above or other planning topics at your convenience. Yours truly, William G. Stanley WGS/