That Stock Certificate

by John Dunlavey
Vantage Financial Group
Independence, Ohio

Sometime back I was conducting a management seminar in Cleveland for collision repair shop owners. I held up a blank stock certificate and asked the group "What does this piece of paper do for you?" The answers came back: "It means I own the company and I can vote the stock." "It gives me the right to pay myself a salary and share in the earnings." "I can sell my stock at a profit."

Then, one of the owners, a man about 45, stood up and announced, "You’re all wrong. That stock certificate means nothing, by itself. Let me tell you what happened to me."

He proceeded to tell his story:

"About 15 years ago, the man who was to become my partner, Ken, and I worked in a medium-sized body with 11 technicians. The owner developed cancer, and when he died, no one was there to buy the shop. His wife didn’t know how to run it and she was considering closing the doors. We didn’t have much money, but we told her if the price were low enough, we could buy the business from her and pay her off over several years. We didn’t want to lose our jobs, and besides, we saw the chance of a lifetime. She reluctantly agreed.

"We bought the stock 50-50. Ken became president, running the office and doing most of the estimating, and I ran the shop. It was rough going for several years, but we managed to build it up and eventually we paid off the widow. Ken’s wife Mary even worked part time in the front office because they had two kids in college. We started to pay ourselves substantial incomes, including nice year-end bonuses.

"One Monday morning Ken decided to go in early. He slipped out of bed lest he wake Mary, walked into the bathroom, got in the shower, had a massive heart attack, and died. At the funeral my wife and I tried to console Mary. I said, ‘Don’t worry, Mary. We’ll always be here for you.’

"For the next couple of weeks, I tried to fill in for Ken, running the front office plus the shop, but it was more than I could handle, so I started interviewing for a manager.

"Ken’s widow, Mary, stopped in one morning to see me. She said, ‘I need money to pay bills. I know you can’t legally continue to pay Ken, but I still need income. Let me work part time as I have been, and I’ll just take what we had been earning before.’ I said, ‘Mary, I don’t know how to break this to you, but 1. If I pay you a lot of money for the work you do here the IRS will call it a dividend; 2. My other office employees will get angry and quit; and 3. You aren’t qualified for, nor would you want the job for which I am interviewing.’

"She thought for a few moments, and then said, ‘Well, you and Ken made over $200,000 in profits last year. Since I now own half the stock, give me my half of the profits.’ I said, ‘Mary, I can’t give you half of the earnings. If I do, it’s a dividend, and I can’t deduct it. If I pay you a dividend, I have to pay myself the same dividend, and I can’t afford to. Quite frankly, most of the earnings are wrapped up in new equipment and receivables, and we need every dollar..’

I could see that Mary was getting frightened, but what could I do? She got up, said something about talking to their lawyer, and walked out. Later that morning my wife called me, obviously upset. She had called Mary to get together for lunch, and when she asked Mary what was wrong, Mary screamed ‘Go ask your husband,’ and hung up the phone.

"Mary got a good attorney, but it didn’t do her much good. He told her that her 50 percent stock certainly gave her a vote, but without a controlling interest she couldn’t force me to do anything. He suggested she just sell me her stock.

"So, through her attorney, Mary offered to sell me her stock. But I didn’t need her stock, and besides, I couldn’t afford it even if I wanted it, now that Ken’s gone. So they tried to find an outside buyer. But no one was willing to buy Mary’s stock and put themselves in her position. If they couldn’t control the company they weren’t willing to give her more than ten cents on the dollar.

"Mary and my wife used to be best friends. Now they haven’t spoken in over two years. Mary took a part-time job as an H&R Block tax preparer. She had to sell her home and rent an apartment, and her children had to drop out of college. She still owns half the stock, and her attorney comes and examines our books every month."

Most businesses fail after the owner dies, gets disabled, or retires. It happens every day. If you don’t plan for the continuation of your business beyond you, it won’t likely happen. Then you will have destroyed on the way down what you so arduously built on the way up.

Next month we will explore just what steps you can take now to avoid serious problems in the future. In the meantime, take a few minutes to answer the following questions:

Reprinted from the March 1997 Issue of Collision Repair Industry INSIGHT.

© 1997 Collision Repair Industry INSIGHT. All Rights Reserved

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