I was putting my eight year old son to bed the other night when he asked me “Dad, what happens if you die?” I wasn’t ready for that one.
Who is? But I explained to him that his mother and I had put some measures in place that would take care of he and his sister if the worst ever did happen.
Is there a father alive who hasn’t lost sleep wondering what would happen if he died and left a wife and kids behind? We’ve all seen that tragedy unfold right before us – one minute things are great and the next, well, you know.
Nobody likes to think about it, but when the kids are involved, you have to. Take me for example. I am 46 years old, married with a wife and two kids, mortgage on the house, car payments, the whole suburban nine yards. The bills come rolling in rain or shine. My kids are eight and ten years old, so we have a lot of living to do. We also have a lot of spending to do, and that is the point. I am also at the age when my contemporaries are starting to have real health problems, even fatal ones in a couple of cases, I am sorry to say. Who knows when my number will be up.
So I am thinking about the question my son asked me. What happens if I die? Of course, I have the usual life insurance and all that. It’s enough to pay off the house and cars, etc. But there was one thing about this question that really bugged me – and I mean a LOT. What is the value of the business I am building and how could that value be realized for my wife?
My wife knows what I do for a living, and she understands the business. But she does not work here day to day, and would not want to if I died. So, what will she do in that case? Will she get fair value for the business in a situation that might be perceived as a fire sale? Furthermore, if someone isn’t minding the business everyday, the whole thing will start to fall apart and eventually disintegrate altogether. So, here I am day in, day out, building a merchant portfolio that can’t easily be turned into cash for my wife if I die. Is that smart?
Well, in a word, no, it’s not. And here’s another reason. My business partner who also owns part of the company stock would not want my wife as a major shareholder when she is really not in a position to contribute to the future of the business. Since I am the majority shareholder, my wife could force the sale of the entire business, and he might lose his job as a result. The whole arrangement makes no sense – it’s not fair to either party, my wife or my partner.
So my partner and I devised a different arrangement. Our spouses have agreed to sell the stock they would get back to the company in the event my partner or I die. The company pays for a life insurance policy on each of us. The proceeds of that policy will be used to fund the stock buyout.
My wife gets cash, and the company gets the stock back. My partner takes over the business. That way, everybody can move on without any lingering issues. This plan makes sense to me, my business partner, and our spouses. It also made sense for our kids. Illiquid stock certificates in my business are not going to pay their bills. They are going to need cash, and lots of it.
This is a great way of unlocking the hidden value of our asset base in the event of death. For now, and the foreseeable future, it’s OK with me if the merchant base we are building is not something I can easily sell. As long as it pays the bills, that’s great. After all, I am only 46, and I would like to work here for a long time to come.
There are lots of ways to set this up. We chose life insurance, because it fit our needs best. (Full disclosure: my company, Calpian, has done this for ISO’s who have the same concern. We have set up plans for ISO’s which call for us to cash out the merchant base in the event of the untimely death of the ISO owner. For non-portable merchant bases, this is a great alternative.)
How will you turn your hard work into cash if the worst happens? 
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