What Plans Should Be Made For What Happens To The Business After An Owner's Death?

If family is to continue the business

A business may be transferred to a capable family member as a gift during your lifetime or through provisions in your Will and/or Trust, or by a sale provided through a prearranged purchase agreement effective at death.

If there will be a sale, either the beneficiary needs cash or you need to make arrangements for the beneficiary to pay the purchase price over time. When setting a price, anticipate a decrease in income while the business adjusts to your no longer being there.

Consider writing a Business Ethical Will to help your heirs understand and continue your vision for the business. (See Business Ethical Will).

Buy/Sell agreement with a key employee

A buy-sell agreement can be between a key employee and a sole proprietor. The agreement obligates the key employee to purchase the interest of the deceased owner. Such an agreement :

• Creates a guaranteed market for your business interest.
• Keeps your heirs from interfering.
• Establishes the value of the business for estate tax purposes.

• Can provide liquidity for your heirs.

Be careful.  Buy/sell agreements can have vastly different provisions.  One may look like another, but there's a lot to consider, including provisions dealing with disability.

Sale to a new owner

The death or disability of an owner can be fatal to a business. Your skills, reputation and management ability help to make the business successful. Without these human life values the business may only be worth the liquidation value of the tangible assets, rather than the value of a going business with goodwill.

If your business is dependent on you, you are likely to maximize value for your beneficiaries if you sell while you are alive. An alternative is a sale arrangement which takes effect at your demise. You get to run and own the business until then -- subject only to whatever limitations are written into the agreement.

Consider writing a Business Ethical Will for the new owner. (See Business Ethical Will).

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