Strategies for Selling Business After Owner's Death
No one wants to think about their demise. But when you’ve spent a lifetime building a business, you probably have strong opinions about what should happen to it after you’re gone. And when your hope is that the business will continue to operate, you’ll need a plan to make sure it does.
Why Your Small Business Needs a Succession Plan and an Estate Plan
Succession plans and estate plans work in tandem to determine what happens to your business when you die.
A Succession Plan Protects Your Business
Business doesn’t stop because of the death of its owner. There are employees to consider, bills to pay, and decisions to be made. As a practical matter, a succession plan keeps the business running until new management can be put in place or a sale can be executed. Even when you expect your heirs to sell the business to an outside party upon your death, someone will have to keep the lights on until the sale is executed so your company doesn’t lose value.
In addition to providing for the interim management of the business, your succession planning should consider the likely scenarios if you were to pass away unexpectedly.
If you expect family members to take over the business, your succession plan should designate the family members who will assume leadership of the business and include details about financing a transfer of ownership if you’re not passing down the business.
Likewise, if you expect your heirs to sell the business to key employees, your succession plan should designate the employees who will take control of the business and the way they’ll finance the buyout.
Your succession plan must not only designate a successor, it should also designate responsibilities and authorities as well as provide for training, development, and support.
If your family members or key employees aren’t interested in running the business, your succession plan should earmark someone able to temporarily assume the reins and spearhead the sale process.
Estate Planning Protects Your Heirs
As you’ll see in the next section, having a will is a crucial element in planning for your business after your death. Without a will, your beneficiaries might have to jump through hoops to gain control of your business. Some states require that certain business types be dissolved if the owner dies without a will.
Estate planning can also help reduce estate taxes for your heirs and avoid or minimize probate procedures.
It’s a good idea to engage an estate planning lawyer who can guide you on preparing your will, state laws that apply to your situation, and the best way to structure assets you wish to pass down.
The way in which you structure your assets can determine whether your estate must go through probate, a court-supervised process for passing down assets.
If a business owner dies without a will, a probate court will distribute assets according to state intestacy (inheritance) laws. Even when you have a will, probate might be required to implement its provisions.
What Happens to a Small Business When the Owner Dies
State laws and the type of business structure broadly set terms for distributing ownership when an owner dies. Whether a business can be sold upon the death of an owner varies depending on the business owner’s will as well as the business structure and state laws.
Sole proprietorships. When you are a sole proprietor, you and the business are one and the same. A sole proprietorship ceases to exist when its owner dies. Your business and its assets become part of the estate, and you’ll need a will that designates the beneficiaries who’ll receive them. Without a will, your business assets will be distributed according to state probate laws.
Partnerships. When your business is structured as a general partnership, a limited partnership (LP), or a limited liability partnership (LLP), the partnership agreement will determine what happens to the business. The partnership agreement might require the surviving owners to buy out the deceased’s shares. It can also be written so that your heirs take control of your ownership interest (another good reason to have a succession plan or risk putting control into the hands of someone who’s not qualified or unable to get along with the surviving partners). Selling the business won’t be possible unless the surviving partners agree or the partnership agreement requires the company be sold.
Limited liability companies (LLCs). Many states require single-member LLCs to be dissolved upon the death of the member, unless the company’s operating agreement and your will provides for a successor. While members of a multi-member LLC can transfer their interest to an heir, some states won’t allow the heirs of a deceased member to participate in the company’s management unless the operating agreement provides for it.
Corporations. Rules for corporations are similar to those for LLCs. Your company’s articles of incorporation must provide for distributing your shares, and, if your will doesn’t designate someone who’ll inherit your shares, state rules will apply.
Do You Need a Buy-Sell Agreement to Set Your Business Up for Sale?
A buy-sell agreement is an enforceable, legal contract that spells out the way in which a partner’s share of the business can be assigned or transferred in the event of death or other situations like retirement.
Buy-sell agreements are usually used to allow the surviving partners (or members, in the case of LLCs) to buy back the shares or interest of the business owner who has died. A buy-sell agreement can also be used to allow a new owner, such as your heir or your estate, to buy out the surviving partners if your operating agreements allow, or to prevent the surviving partners from selling their ownership interest to outside investors.
Depending on your plan for the business, you’ll want your buy-sell agreement to identify the buyer, spell out the terms of a sale, and set a sale price for the ownership interests.
Selling a Small Business After the Death of the Owner
Once state requirements, the terms of the will, and the provisions of any operating agreements have been met, selling a business after the death of the owner is no different from any other business sale.
The person who assumes control of the business will have to:
- Prepare it for sale by collecting any debts owed by customers, paying off business debts the business owes if they’re not included in the sale, cleaning up the books, and organizing all documents.
- Establish a valuation for the business using a multiple of earnings, market comparison, or an asset value method if the assets will be sold off.
- Market the business.
- Negotiate with prospective buyers.
- Close the sale by completing due diligence, allocating the proceeds of the sale, and creating a purchase and sale agreement.
Keep in mind that when a family member or loved one is in charge of selling the business, they probably won’t have the same familiarity with it that you have, and will likely benefit from the assistance of a business broker.
A business broker will have knowledge of the industry and an understanding of how your business stacks up against competitors. Business brokers can use their expertise to value the business and set a sale price, identify likely buyers, and negotiate the sale.
Your successor will also benefit from the assistance of an attorney who can help manage due diligence and create a purchase and sale agreement, and an accountant who can help with purchase price allocation.
Final Words on Planning for an Owner’s Passing
Uncomfortable as it may be, you should approach planning for your death the same way you approach any other business planning. The more you’re able to anticipate and account for what will happen between family members, business partners, and heirs, the more assurance you’ll have that your wishes will be carried out.
Small business owners who have an estate and succession plan in place are better prepared for unexpected events. The passing of a business owner adds an extra layer of complexity to the business selling process, underscoring the importance of having a comprehensive exit plan that reflects the owner's interests.