PLANNING FOR BUSINESS SUCCESSION

     Often we do not think about how to transfer our business ownership along with our other assets when we die. If you are a business owner, you may not have contemplated what would happen to that business if you were to die or become incapacitated. Do you have a transition plan in place? Who would take over ownership and/or operations? Consider the following situations.

     Robert and Donald each owned their own business. Robert was a sole proprietor, while Donald was the sole shareholder of a small corporation. Each had a staff of 5 employees. Robert managed all aspects of the business including daily operations. Donald was the president of his corporation but also had named one of his employees as a vice-president who handled the management of the business along with Donald.

     Robert and Donald each had a heart attack and was hospitalized. None of Robert’s employees knew enough about the business to run it during Robert’s absence. Robert was too ill to direct his employees from his hospital bed so business virtually stopped until Robert recovered. Donald, on the other hand, had a vice president who was capable and authorized to run the business as always while Donald was in the hospital.

     Robert and Donald each had a second, fatal heart attack within a year. Robert still had no one capable of running the business after his death. As a sole proprietor, Robert was the business. Because his heirs knew nothing about running the business, and because Robert made no provisions to transfer it to anyone else at his death, the business was shut down and the assets were finally distributed or sold through the probate of his estate.

     Donald had taken the precaution of setting up a Buy-Sell Agreement with his vice president. The employee was able to purchase the business from Donald’s estate for an established price. Because it was a corporation, it continued to operate as before under the vice president’s management until the sale was completed. Donald’s heirs did not have to worry about disposing of the business assets.

     Had Robert, even as a sole proprietor, had someone in place knowledgeable enough to run the business in his absence, and someone designated to take over at his death, the business would not have had to be liquidated but could have continued to operate even during the probate of Robert’s estate. Such planning would have made it easier for Robert’s heirs since they would not have been burdened with finding buyers for the assets, Robert’s personal representative would have merely transferred the business to a previously selected successor at an already established price.

     Business owners should not ignore the possible consequences of failing to plan for business continuation or transfer. Ownership interests in businesses are like any other asset, they must be transferred to someone or some other entity when the owner dies. While probate is generally required to accomplish the transfer, the owner can designate who will take ownership of the business interest by setting forth the terms of transfer in a Buy-Sell Agreement. Otherwise, the business interest will pass to the spouse, children or other heirs, of the deceased owner. While this may be desirable in some cases, often the owner may have a business partner who does not want to be in business with the spouse or children of the deceased owner. Or, the spouse or children, who may know nothing about the business, do not want the business interest and would rather sell it. A Buy-Sell Agreement can make it easier on everyone involved, the owner, those remaining in the business, and the deceased owner’s surviving family.

– «» –