consider allowing the employees the opportunity to buy in at set intervals (e.g., at the end of every year) so that it is easy to determine an appropriate value for their shares at the time. To encourage ownership, Lillian may even want to provide Mayford and Bertha with an annual cash bonus intended to help pay the cost of the share acquisition. By providing this type of an opportunity in sequential years, it is possible for a company to provide a meaningful ownership stake to key employees without ever putting the employee in the position of having a hefty tax burden or requiring a major cash outlay at any one time. Regardless of how Lillian chooses to approach the issue, either by stock awards or allowing her employees the chance to buy in, she will want to be sure that she works with her accountant and attorney to put the structure in place. The accounting must work, both from a cash flow and a tax perspective. And the appropriate legal pieces must be put into place to ensure that Lillian’s business doesn’t inadvertently trip over a legal requirement (e.g., securities considerations associated with the transfer of the shares) or create a perverse incentive for her employees (e.g., she will likely want to put forfeiture provisions
in place in a shareholders’ agreement so that neither Mayford nor Bertha can extract value from the company by leaving early and demanding cash payment for the shares). Finally, Lillian will want to work with her advisors to ensure her approach to this problem is part of a comprehensive plan intended to get her to her ultimate objective of exiting the business — in whole or in part — on her terms and timetable. By doing so, she may be able to approach the ultimate transition of ownership in a streamlined fashion — having engaged employee owners who are ready to take the reins and who need only to fund the purchase of just over a majority of the business (rather than 100 percent). Since a smaller purchase is required under this scenario, it may be easier for the company to find financing. Alternatively, Lillian may herself be amenable to seller financing — where she sells her remaining stake for a promissory note payable over time. But in either case, Lillian will have positioned herself in the best possible posture to achieve her objective of having captured the value in the business she built and transitioning it to her employees for its future growth.
Brian B. DeFoe is a business lawyer at Lane Powell, where he focuses his practice on helping companies in the customer-facing food, beverage and hospitality industries. Brian can be reached at defoeb@lanepowell.com, via phone at (206) 223-7948, on Twitter @BrianBDeFoe or Instagram @HoochLaw. Visit www.hoochlaw.com for more thoughts on spirits and the laws that govern them. This is intended to be a source of general information, not an opinion or legal advice on any specific situation, and does not create an attorneyclient relationship with our readers.
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