When you’re in the midst of building or growing a business, the last thing on your mind is what happens if the owner suddenly dies.
If the business was established as a partnership and the surviving partner has equity in the business, then a buy-sell agreement can provide a quick solution, particularly if there is an insurance policy that’s been set up specifically to facilitate the buyout. Those who worked with an experienced attorney or accountant when setting the business up generally have the good fortune of having a plan in place whether there’s a partnership or not, but that is not always the case.
The absence of the driving force behind a business affects employees, customers, and the family members who may have relied on the organization for income. If you find yourself in this unfortunate situation, you need to know the steps available, and how best to approach the many issues that will arise.
See Relax Tax’s Debt Guide at relaxtax.com/debt
The First Decision: Whether to Save the Business or Not
Though the knee-jerk reaction to the death of a business owner may be to try to keep the business going, that is not always the best or smartest answer. Every situation is different, and decisions need to be made from a practical standpoint rather than an emotional one.
If the business owner was a professional and the entire entity was dependent upon them, their strengths, skills, and personality, then no amount of good intentions is likely to save the business. Imagine trying to continue to run a medical practice with a new physician. Though some patients may stay on, the majority are likely to move to another practice in order to ensure the continuity of their care. The exception to this would be where there was already a partnership, or an heir of the business owner is able to assume their responsibilities in a way that makes the clientele comfortable. But even that transition represents a risk, as the time between the death and resetting the business is likely to be filled with costs for which revenue is not being generated.
Making a determination about whether to preserve and continue a business requires planning, realism, and perhaps most important of all, cash. Unless the estate has the funds available to keep things afloat while a new plan is agreed to, the challenges are likely to mount.
In the absence of a contingency plan with funds set aside to support it, the business owner’s estate is free to decide to walk away from the business. In many cases the value of the operation may have rested almost exclusively on the deceased individual’s popularity and relationships with clientele, and when that is the case the decision is clear, though often painful. Walking away from a business can feel like a second death, and it is easy to feel compelled to try to save the owner’s creation – but doing so can lead to financial losses that make the death feel even more painful.
See this related post from Chris Lipper: Community-Centered Environment on Helping Business Owners
Chris does very best is coaching small business owners, startups to about 20 million dollars in revenue, and the way he does it is by community. He has a community of small business owners that work together and helps each other. Every month, they conduct multiple “bus meetings” for different size companies. With these meetings, Chris wants complete honesty where people take off their armor, ‘you're not there to network, you're not there to save face’.
Step One to Preserve a Business After the Owner’s Death
If, after reviewing the advantages and disadvantages of trying to preserve the business, you make the decision to either sell it or find a way to continue operations, the estate will need to switch legal control of the business over to a dedicated personal representative of the estate.
If the selection represents a challenge due to differing opinions, the court can appoint a curator to step in temporarily. Most states allow this person to assume all of the business and estate responsibilities that a permanent representative would have, while others assign an administrator ad litem who has powers limited to making business decisions. In the latter scenario, a separate individual would be assigned to overseeing matters surrounding the estate.
When time is of the essence in preserving a business, the court can appoint a curator extremely expeditiously: In some cases, a death certificate will not have been issued and a curator will already have been appointed. Though this may seem overly hasty, and maybe even disrespectful, there are legal issues, customers, employees, and other administrative tasks involving bank accounts and financial institutions that require continuity.
See this related post from Drew Deraney: Implementing an Expense Management Process Can Increase Profitability
The decision-makers need to figure out how to allocate their capital to pay expenses so they can pay salaries, buy inventory, cover rent, and run their operations. In fact, of all the things a business owner must do, is not running out of money is the most important priority.
Control of the Business’ Bank Accounts
One of the most important things that a newly assigned curator will take charge of is the business’ bank accounts, especially if the deceased owner is the only signatory. Banks will not allow checks to be written or withdrawals to be made without an authorized person’s signature, and they will freeze all accounts once they learn of a business owner’s death. This means that bills will not be paid, employees will not receive paychecks, and those limitations will lead to services or goods not being provided. Once legal control of the business has been established, whether permanently or temporarily, the bank needs to be made aware of the new person’s identity and must be provided with legal documents that prove their authority. This may involve having the curator or estate representative name themselves the new president so that they can inform the bank and provide a new signature card.
Control of the Business’ Digital Assets
Today’s business environment is heavily reliant upon a digital, online presence, and that means that the curator, executor, administrator, or other decision maker will need to gain access to passwords so that they can control those assets. Laws are beginning to be passed to facilitate the transfer of this information, including in California where a Uniform Fiduciary Access to Digital Assets Act has been passed. This new legislation provides authority over digital assets to those who are fiduciaries of a business. Fiduciaries are those that the court has recognized as having authority in the absence of explicit instructions from the deceased business owner. This is another example of how having guidance from an attorney or accountant early in the establishment of a business can pre-address issues and head off potential problems.
Selling the Business
If the decision is made that the business is to be sold, it is essential that an outside entity such as a business broker is brought in to provide reliable, data-driven information on the business’ value. Business brokers do receive a commission on completed sales, and many people are concerned that they might boost the value in order to increase their commission. But commissions are only provided once a sale has been complete, and an unrealistic number is unlikely to attract a serious buyer.
When working with a broker, ask them how they arrive at the value that they assign. Their research should be based on industry information. If a broker expresses disinterest in handling the sale, it’s a good idea to quiz them as to why — in some cases the issue may be a lack of familiarity or available information to fulfill the assignment, but in other instances they may not see the sale as a legitimate possibility, and therefore not worth their time. Their explanations can provide you with valuable insight.
There are some scenarios where there is an obvious prospective buyer. This may be a competitor or an individual who has long worked alongside the deceased owner. This is often the easiest and most sensible option, as well as the one that is most likely to deliver favorable, uncomplicated terms. Working with a friendly buyer can expedite the process and alleviate stress.
Be Aware of Personal Guarantee Issues
After the death of a long-time owner, many vendors and creditors become gun-shy about doing business with a new individual, and this is particularly true for items or services that represent significant expenses. The problem is often addressed by asking for a personal guarantee from the new owner – but offering one may not be a good idea. Making long-term decisions and commitments is generally not advised until the disposition of the business has been resolved, so issues such as whether to sign a new lease or to purchase a new piece of equipment is better left until after that larger decision has been made.
If you are the heir to a business owner who did not leave explicit instructions about what to do with their business and the topic has never come up, there’s a good chance that they assumed or intended that their business would die with them. Even if that is the case, it is helpful to spell those intentions out, and especially to take out an insurance policy that will help carry survivors through the time it takes to shut the business down or close it.
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Do you have some questions? Dennis Harabin at Relax Tax can answer them!
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