Ed Lynch, one of the founders of Pacific Foods, passed away in 2015. At the time of his death, Pacific Foods of Oregon, Inc. was one of the largest producers of organic soups and broths in the US. According to the terms of the buy-sell agreement in place, Pacific Foods was to buy back (redeem) his shares to keep the business in the family. While seemingly straightforward, the issue of what the company was worth, and thus the shares, resulted in a lawsuit.
Michael Lynch v. Pacific Foods of Oregon, Inc., et. al.
The method for determining the worth of the shares was fair market value at the time of Ed’s passing. Fair market valuation is a standard practice for setting a sales price and for tax valuations. It’s used to determine the value of a business based on what a buyer would willing pay, having done their research on the company.
Ed’s estate is now arguing it did not receive full fair market value on the redemption in 2015. The company was subsequently sold in July 2017 to Campbell’s Soup for $700M. The price was significantly more than the valued used in 2015 for the buy-sell agreement. The estate is now claiming the surviving co-founder low-balled the value and is owed $250M.
While I do not have all of the facts, I believe that Ed’s estate will have a hard time proving there was an intent of misrepresentation of the purchase / redemption price. The company and its shares have been valued annually for a number of years. This created a stronger basis for the price paid on the redemption of Ed’s shares. However, unless there was prior knowledge of intent, the company likely could not have anticipated Campbells’ offer two years later being so high.
Granted, most small business owners running a local, family owned business are not likely to find themselves in court arguing over $250M. The points the case highlights, though, are extremely important:
It always comes down to money
Proper planning is essential.
While there was a buy-sell agreement in place, how it was written may have prevented this filing of this case. This could have included better definitions for calculating the basis for valuation (the consideration of goodwill, brand recognition, potential future value, etc).
As a small business owner, make sure you plan if you are no longer able to operate it. Illness, death and disputes can occur at any time and without warning. This becomes more important if you have specific wants, significant assets or partners.
Chris Brown specializes in estate, tax law and tax planning