Widow’s Monetary Portion of the Family Business
Eric P. Finamore
Situation
The founder of a family-owned freight delivery services company, Bob Sr., left the business to his two sons, Bill and Bob Jr., as equal shareholders upon his death. Each had significant compensation packages including salary and retirement benefits.
Bob Jr. died unexpectedly five years ago, leaving behind his widow, Betty, and their young children. Since his death, Bill continued to pay into Bob Jr.’s retirement account for the benefit of his deceased brother’s family. Bob’s shares in the business were passed onto Betty through his estate. Betty claimed she should be obtaining more compensation than only her late husband’s retirement benefit. Betty filed a lawsuit against the company for the value of her husband’s interest in the company, seeking the company to buy her interest out. Additionally, she retained a business valuation expert who valued the company at $3,000,000.
The company had faced multiple financial challenges with high accounts receivables and escalating operating costs, relying on a line of credit to remain operational. Fortunately, the company had a long history, a solid reputation in the community, and many loyal customers, so the prospects for continued operations and turning a profit were good.
During this time, Bill continued operating the company and drew his salary, while personally guaranteeing the line of credit, using his family home as collateral. Two of Bill’s sons work in the business as salaried employees and seek to become third-generation owners of the business. Bill also hired a business valuation professional who placed the net value of the business at close to zero after adjustment for receivables, debts, depreciation of vehicles, long-term warehouse lease obligations, and other costs.
Action
Both parties have agreed to mediate their disputes. Betty has demanded $1,000,000 in settlement for her claims. Bill responded that the company has insufficient cash to pay Betty and the only option for purchasing her interest is to enter into a long-term payment agreement based upon company profits. Both parties recognize that the cost of litigation will be substantial and there is minimal liquidity available to satisfy the claims.
The mediation of the dispute focused on the following problems and obstacles:
- Bill’s counsel requested mediation prior to filing and serving a responsive pleading. Betty’s counsel disagrees and wants to proceed with pretrial discovery to obtain financial information which he believes will help Betty’s position in the mediation. Pretrial discovery will increase the costs on both sides.
- During the pre-mediation attorneys’ meeting with the mediator, Bill’s attorney states the business has no cash and that any settlement must involve a long-term payment. Betty’s lawyer rejects this condition, and the parties seem to be at an impasse.
- Counsel jointly requested Betty and Bill each make a lengthy opening statement to the mediator and the parties. Betty remains grief-stricken at the loss of her husband, and she starts to cry. Her demonstration of grief continues throughout the mediation. She is angry because she feels that Bill will not honor Bob Jr.’s legacy with the business.
- Betty made the initial demand of $1,000,000 and Bill made a counterproposal of $100,000 paid out over 10 years. Betty insists Bill increase his offer before she makes a counterproposal.
- Bill will not budge from his expert’s valuation of the business as a basis for discussion.
- After the parties have mediated for four hours, Betty reduces her demand to $500,000 with $100,000 down and $400,000 over 8 years. Bill has offered $300,000 with $50,000 down and $250,000 over 8 years. Betty refuses to consider any further movement. In response to Betty’s locked in position, Bill threatens to walk out.
Outcome
For successful mediation of this dispute, the mediator must help the parties to recognize their own interests in settlement. At first glance the case is about money. Betty is looking to the resources of the company to help her raise her young children who have lost their father. Bill is challenged with keeping the company solvent on his own, with customers who are slow in paying their bills, and his own home as collateral for the business’ line of credit. But the case is also about each party’s interest in defining their own legacy. For Betty it is honoring her late husband’s contribution to the success of the company, while for Bill it is keeping the business running so his two sons will become the third generation of the family, assuring the company’s continued success.
The parties considered having Betty assume a continued role in the company, possibly as a non-voting manager, but Betty decided that she had neither the time nor the expertise to participate in running the business.
The parties were able to agree on a settlement falling between their last financial positions of $75,000 in cash, and $300,000 paid out over six years. Additionally, Bill agreed to include Bob Jr.’s name in a memorial as part of the company logo on delivery vehicles. For Betty, this settlement provided her with means of assuring that she would have funds for her children’s education, and it gave her emotional closure regarding Bob Jr.’s role in the company. For Bill, the settlement provided financial certainty, the ability to budget for continued business operations, and the chance to hand the business over to his sons.
With this outcome achieved via mediation, both parties were able to avoid a risky and expensive litigation, which would have been depended on disinterested people – judge and jury – whose lives do not depend upon the result. The mediation and settlement agreement allows for closure and assures that everyone is satisfied with the outcome.
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