Operating the Business After the Owner Dies

Customers, bankers, suppliers, competitors, and predators are all very interested in what will happen with the business now that the owner and president has died. What’s worse, the death of the owner may bring on some serious crises. Loan documents, franchise agreements, and other legal contracts often contain termination or re-negotiation clauses in the event of death of the majority or sole business owner. Can there be any worse time for the business to re-negotiate financing or defend its opportunity to continue a favorable franchise or distributorship relationship? And many relationships with key customers were dependent upon the personal contact with the owner. Now that the owner is dead, all those accounts are up in the air.

If your business loses key customers or distributorships because of the uncertainty following your death, it will be difficult to sell the business for an optimal price. Some distributorship agreements require pre-approved successors, in effect forcing you to plan for your succession. You should also plan ahead to make sure that customers feel comfortable dealing with at least one other person in the business--especially as you get older and the risk of your death or disability increases. When renewing contracts with franchisers and suppliers, ask for a modification of any clauses stating that the contract be terminated or re-negotiated upon the death of the owner. Perhaps you could amend them to specify re-negotiation three months after the death of the owner, to give your business a chance to get over the hump. There is no guarantee that franchisers and suppliers will agree to these changes, but you’ll never know unless you try, and the time to try is now.

What if You Become Disabled?

Don’t limit your estate planning to preparing for your death. Keep in mind the possibility that you might suffer significant physical or mental disability that could impair important decision making. Disability may even be worse than death, because you might not recognize the seriousness of your impairment. The law makes it extremely difficult for others to take away your freedom of choice and responsibility for making decisions. Great damage to the business can be done before you return to good health or control is transferred through legal proceedings that result in conservatorship. Ask your attorney what steps you can take now to avoid harm to your business if you should become disabled.

Control

Any prospective buyer will want to see a business that’s running smoothly. Make sure that the new leaders specified in your plan for succession are specifically granted authority to make decisions concerning the business immediately after your death or disability. The issue of control should be addressed through a will, living trust, or other appropriate legal document. Appoint one or more competent, experienced individuals or entities to make business decisions.

Value

If you’re anticipating sale of the business after your retirement or death, you may want to maximize business value to attract maximum interest from potential buyers. Let’s say you’ve been operating the business to maximize compensation and minimize taxable income. That’s fine, but annual earnings may suffer under such a plan. Even though the buyer may well adjust the profit potential in light of excessive compensation, you might want to bump the profits up if you anticipate selling the business.

In many cases, key managers and employees approach the family wanting to purchase the business. These potential buyers may ask the estate and surviving family members to finance the purchase price. A sale to an employee stock ownership plan sounds fine on paper until family members realize that financial security for the surviving spouse and the children depends upon future success of the business enterprise.

Business and Probate

As Emily Dickinson wrote, “Because I could not stop for Death-He kindly stopped for me.” But you and your employees don’t want your business to stop when you die. That’s why avoiding probate might be important where a business is concerned, since even relatively short interruptions in transferring title to bank accounts and other assets through probate can be devastating to a business that must pay its bills on time. Probate laws vary greatly by state, but in some states the people who take over from you might find they have to get probate court approval for major business decisions unless you have made adequate arrangements to avoid this. In those states, you might do well to arrange for the business assets to pass outside your will, usually through a trust or contractual agreement.