How a business owner avoided a fire sale

The problem

Two friends started a commercial landscaping company in Mesa in the mid-2000s. Equal partners. By 2023 the company was doing around $3 million a year in revenue, employing twenty-two people, and had long-term service contracts with several HOA communities and commercial properties in the East Valley.

One of the partners, we'll call him Dan, had a major stroke at age fifty-four. He survived but could no longer work. His wife came into our office with the operating agreement and the buy-sell we had drafted two years earlier. What would happen to the business?

What we did

When we originally worked with Dan and his partner, we drafted an operating agreement update that defined what happens to a member's interest at death, disability, or departure. Disability was defined with a specific test: inability to perform material duties for more than ninety consecutive days, certified by the member's treating physician.

We wrote a buy-sell agreement in parallel. On a triggering event, the company would buy the affected member's interest at a pre-agreed valuation formula (a multiple of trailing twelve-month revenue, adjusted for working capital). The buy-sell was funded with term life insurance and term disability buyout insurance on each partner, with the company as owner and beneficiary.

We also had each partner sign a pour-over will and a revocable trust so their half of the business proceeds would pass smoothly at death. Powers of attorney and healthcare directives rounded out the personal side.

The result

Within three weeks of Dan's stroke, the disability clause triggered. His partner bought Dan's interest at the formula value. Dan's family received a cash check funded by the disability insurance, with none of it going through probate. Dan's revocable trust held the proceeds for his family's long-term care and income needs.

The surviving partner kept full ownership of the business and continued operating. The twenty-two employees kept their jobs. The service contracts continued without disruption. The whole transaction completed without a lawsuit.

The full cost of the disability coverage over the two years it was in place was around $18,000. It paid out over $1.1 million. The math is brutal and it is why the policy has to be in place before the triggering event, not after.