As the owner of a closely held business, the failure to adequately plan for the continuation of the business upon an owner’s death, can have disastrous consequences. There are adverse consequences: (1) to the business (e.g., loss of revenue, lack of continuity, loss of skills, credit risk, etc.); (2) to the surviving owners (e.g., disputes with deceased owner’s family, having an “unwanted” new partner, inability to move on with the business without distractions, etc.); and (3) to the deceased owner’s family (e.g., preserving the fair value of the business for the family’s needs, replacing a lost income, meeting estate liabilities, etc.). All of these issues can also apply when an owner becomes disabled and can no longer help the business.
One Solution: A Buy-Sell Agreement
It is not uncommon for surviving business owners to find that the heirs of the deceased business owner want to take on a role in the management of the business, even though the family members may have insufficient skills or experience to participate in the business, let alone, the management of the business. Perhaps, the surviving business owners want nothing to do with the deceased owner’s family because of the lack of trust or chemistry. Alternatively, the deceased owner’s family may be under pressure to raise cash to pay taxes, administration and probate expenses and the business interest is the only substantial asset available to be liquidated. In the case of a forced liquidation, the value realized may be significantly less than expected or required
What is clear is that regardless of whether the business is to be continued, sold to the surviving owners our outsiders, or even liquidated, the death of a business owner creates a need for cash. Only cash can:
Be used by the business owner’s executor to pay estate taxes, administration and probate expenses; provide surviving family members with the full and fair value of the deceased owner’s interest in the business; provide surviving family members with an adequate source of funds to replace the income stream lost; and ensure that at an extremely emotional time, the business will continue in an uninterrupted fashion.
A properly funded buy-sell agreement is required to avoid all of these issues, and more.