THE EXPERTS' ADVICE:RAYMOND, AS the founding member of an innovative company, invested time, effort and skill in its development, as well as finance

With the foresight of an entrepreneur he brought two partners on board granting a 23 per cent stake to Peter and 13 per cent to Philip, but leaving aside a profit-sharing agreement for the employees. Peter developed the customer base and his sudden and unexpected death as a bread winner and a corporate key player has inflicted serious losses on both family and business alike. The Hobson's choice open to Raymond and Philip is either to sell the company with consequent closure or purchase the shares from Peter's personal representatives at market value, which would necessitate onerous borrowings. Raymond's failure to elect for either option means Peter's executors may commence legal action to liquidate the enterprise in order to realise his shareholding for the benefit of his wife and children.

The executors of Peter's estate are not entitled to full market value nor do they possess a gilt-edged security. It is the essence of a private company that the right to transfer shares is subject to some restrictions set out in the articles of association and/or a shareholders agreement or other papers. A court is obliged to give effect to each word in a written instrument (unless that produces an absurd result) and mechanisms for determining the value of shares are normally put in place. Raymond must acquaint himself with all the documents relevant to the company's constitution before making a final decision and there should be something there to assist him unless the scripts are threadbare.

The difficulties are not all with Raymond. Peter's personal representatives are burdened with attendant risks in seeking to obtain market value for the shares. Section 81 (2) of the Companies Act 1963 permits a company to register as shareholders the personal representatives of a deceased member in a private company. This could be a short-term solution to be offered to the executors as the beneficiaries would then be entitled to a yearly dividend of the declared profits. However, they would not have the right to vote. Further, it is worth noting that where a minority stake in a private company is being sold the shares are usually valued at a discount on the basis that a substantially higher price will be paid for shares comprising a majority shareholding.

If agreement cannot be reached having had regard to these principles, mediation between the parties will be an option. Failing that arbitration might be considered as another option to be explored, the difference being that an arbitrator's decision is binding.

If the executors of Peter's estate are not agreeable to either mediation or arbitration or to any monetary offers made by the remaining shareholders of the company, they are entitled to bring an application to the courts under Section 205 of the Companies Act 1963 and related sections of company legislation on the basis that they are being oppressed as minority shareholders. The court then has the power to make an order directing the purchase by the other members of the company of the shares held by the executors. The court can also make an order under section 213 (f) for the official winding up of the company in circumstances where it finds it just and equitable to do so.

Raymond might be advised to open all these scenarios to the executors and also to look to a member or members of his remaining staff to purchase the interest on agreed terms and agree a new contract with such member(s). He could also seek a proficient person from outside his commercial enterprise to purchase the shares and agree an employment contract with this new shareholder.

It is prudent always to agree and execute a shareholders' agreement; to devise a mechanism for the valuation of shares to provide for a shareholder's exit; to obtain (and review) life policies on stakeholders and agree an assignment in the event of death. Professional advice should always be sought. It is imperative that, prior to embarking on any business venture, ground rules are agreed in writing, setting out what should happen in the event of death, illness or economic downturn.

- Vincent Crowley

Raymond's business has grown to be solid and has traded through some tough periods. As with many businesses, the principal is the expert in the field but has needed additional expertise to grow the business. This was recognised and the restructuring resulted in a clear demarcation of responsibilities fitting with personal strengths.

A critical business decision now needs to take place. Considering the growth of the company, its value has increased and prospects remain good. Raymond needs to get an independent valuation of the company and agree with Peter's estate the value of the 23 per cent stake. Thereafter Raymond has several options open to him. He could raise new equity through an investor, Business Angel or partner. He could increase the equity holding of both (or either) parties to an agreed level through the raising of additional personal funds. Raymond may be prepared to take on the full stake, or he could substitute the equity for debt in the business.

With the first option, it is preferable that any new investor would bring both funding and expertise into the company. As past experience proved, forming a good working relationship with this investor and formalising the structure of their involvement from the outset will form an important part of the equity agreement.

By substituting equity for debt, the business will have to approach the bank to review options. Without knowing the existing debt/equity structure of the business, we will look at this in a general way. The bank will generally look at a number of things: the ability of the business to service capital and interest over a period of time; experience, of which Phil and Raymond have plenty; security of contracts, past, present and future; market factors; and fall-back security (although the primary focus of the bank is the business's ability to repay the debt).

Raymond needs to put together a comprehensive plan showing the strategic direction of the business, expansion plans, risks and financial projections. All businesses need to have detailed business and financial plans, not only as a tool to secure funding but also as a roadmap for the future.

Many businesses are experiencing significant cash-flow issues. Debtors are taking longer to pay, creditors are looking for cash up front, sales are becoming more difficult, etc. Bank of Ireland continues to support viable businesses that can demonstrate their ability to trade through this current turmoil and has specifically set aside funds to do this. It is important Raymond can demonstrate the viability of the business with the introduction of new debt. Clearly, he has traded through other economic downturns and his track record will stand to him.

Succession planning in any business is paramount and with the untimely death of Peter, replacing him was going to take time, particularly as there would be a significant lead-in period. Proper succession planning will ensure continuity of all aspects of the organisation.

Raymond needs to implement effective succession plans to safeguard the long-term life of the business. Bank of Ireland, in conjunction with key experts, has developed a comprehensive guide (bankofireland.ie/html/gws/includes/ business/pdfs/succession_planning.pdf).

Given the investment in employees, Raymond's business must ensure it has a good staff-retention package. This does not have to be a profit-sharing arrangement but may include a rewarding pension scheme and/or life and disability plans for employees.

Finally the level of key-man cover held on the senior executives should be reviewed to ensure an adequate level of cover is in place.

- Damian Young