How Can a Business Be Saved After the Owner Dies?
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. How does the business move forward if this tragic circumstance occurs?
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 an insurance policy has been set up specifically to facilitate the buyout. Working with an experienced attorney or accountant when establishing the business generally helps to ensure that there is a plan in place, whether there’s a partnership or not. Unfortunately, that is not often the case.
The absence of the driving force behind a business affects employees, customers, and 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 and options available to you, and how best to approach the many issues that will arise.
The first decision: whether to save the business or not
The initial reaction to the death of a business owner may be to try to keep the business going. However, that is not always the best nor the 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. For instance, continuing to run a medical practice with a new physician will result in some patients staying on, while the majority are likely to move to another practice. 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.
Deciding whether to preserve and continue a business requires planning, realism, and perhaps most important of all, capital. 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.
who is in charge?
The first step in the process is ensuring there is a clear understanding of who the decision-maker is. If the owner held the business in his or her own name, the Estate will likely be the new owner. In that case, the Executor of the Estate would become the personal representative of the estate. If Trusts are involved a Trustee may be the lead. It’s important to work with legal counsel to review relevant documents to ensure there is an understanding of who can work on the deceased owner’s behalf.
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 will freeze all accounts once they learn of a business owner’s death. This may result in bills not being paid and employees not receiving paychecks. These limitations will lead to services or goods not being provided to the business’ customers. Once legal control of the business has been established, whether permanent or temporary, 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 personal representative name themselves the new president – in the interim, inform the bank of the change and provide a new signature card.
control of the business' digital assets
Today’s business environment is heavily reliant upon a digital, online presence. As such, the executor, administrator, or other decision maker of the affected business will need to gain access to passwords, so that they can control and make decisions relating to those assets.
Laws are being passed in several states to facilitate the transfer of this information, including in the state of 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 the court has recognized as having obtained authority from the deceased business owner in the absence of explicit instructions. This shows the importance of having guidance from an attorney or accountant, early on, in the establishment of a business, to pre-address issues and avoid potential problems in the event of the death of a business owner.
selling the business
If the decision is made to sell the business, it is essential that an outside entity such as a valuation expert is engaged to provide reliable, data-driven information on the business’ value. It would be prudent for the personal representative to familiarize themselves with the concepts involved in a valuation.
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 might be unwilling to do business with a new individual. This is particularly true for items or services that are capital-intensive or involve incurring 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 signing a new lease or purchasing a new piece of equipment might best be delayed until after the larger decision regarding disposition 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 in the event of their death, it is possible that they assumed or intended that their business would die with them. Even if that is the intention, it is helpful for business owners to make those intentions clear by documenting them. Consider it the final gift to your heirs.
If you’d like to review your current business plan with one of our advisors, please contact RBI member CRAY KAISER.