Episode 429: What to do When a Business Owner Dies Pt. 2

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When a business owner suddenly passes away, it raises the following questions about the company’s future:

• Will the business continue to exist, and in what form?
• Who will oversee the business’s affairs and decision making?
• How will clients and employees be retained?
• How can the business be guided through management and ownership uncertainty?

If a business owner dies with a will and succession plan, preserving the business may be as simple as pivoting to the next in line, whether that’s a vice president, a partner, or a family member who has an interest in the organization.

This guide is for those instances when a business owner dies without a clear transition plan in place. If this is the case, you’ll need to act fast to ensure the business can be preserved.

When a Business Owner Dies It Is Important to Act Quickly

Whether the business will be captained by someone else or liquidated, it’s important for everyone involved to move quickly. Why? There are a few reasons, including:

• Client and customer retention – When a business owner dies, the resulting uncertainty may compel clients to terminate their relationship with the company and seek services through a competitor. By sorting through the company’s affairs quickly, you will maintain confidence among existing clients.
• Employee retention – A business owner’s death can create a great deal of uncertainty among employees. If the company’s operations are sidetracked, it will also sidetrack payroll and benefits. The longer this goes on, the harder it will be to retain essential people. By implementing employee retention measures right away, you can prevent extended downtime due to labor shortfalls.
• Equipment and facility upkeep – Retaining customers and employees are the pressing matters, but some businesses also rely on equipment, which may deteriorate without constant upkeep. When a business owner dies, these assets will decline in value and condition if new ownership doesn’t act promptly.

If the business and its assets are to be sold off, any heirs and partners will want to maximize the company’s value. If the business is to be preserved and operated by a new person, retaining as much of its value as possible is also the priority. In both cases, you’ll need to move quickly to keep the company intact.

First, Determine the Nature of the Business and Who Has an Interest in It

Whether the plan is to liquidate the business or continue operating it, the first thing to do is to determine what kind of entity the business is, and who has an interest in it.

Regarding the first point, business entities may be classified as a sole proprietorship, a partnership, or a corporation. If the business was a sole proprietorship, there may be no succession plan, or anyone empowered to step into the decedent’s role.

If the business was a partnership or a corporation, you have some options. For instance, if the business was a general partnership, then another partner may be able to assume management duties and ensure there is no interruption in production or operation. If the entity was a corporation, shareholders may be able to quickly appoint a new head if the bylaws allow for it.

Once the entity’s classification is clear, you’ll need to speak to family members and employees to determine who has an interest in the business. It’s important to establish early on who is interested in running the business and who wants to liquidate its assets. If there are disagreements, it’s highly recommended that any heirs or beneficiaries bring in an attorney to mediate the process.

If No One Is In Charge of the Business, an Administrator Will Be Needed Quickly

If the business was a sole proprietorship or if there is no other acting head of the organization, an administrator must be designated right away. In some organizations, the bylaws may allow shareholders to immediately appoint a new person to take charge – a vice president, for example – but if no immediate appointment is possible, no one may have decision-making power over the company. This may lead to a long decision-making lull between the owner’s death and a new management team.

The goal is to get a business administrator appointed as soon as possible. This is done by opening a probate case for the decedent’s estate and business. As part of the case, the probate court will designate an administrator (if one hasn’t been named in a will). Once an administrator is in place, they can move quickly to retain employees, smooth over client relationships, and make essential operational decisions.

A Few Steps to Take Once the Business Can Be Managed

Once the probate case is open, and an administrator is in place, operations can be brought back online or asset liquidation can begin. From here, there are a few important steps to take, including:

• Implementing employee retention measures – If the mission is to retain the business or sell it to another person who wishes to operate it, you’ll need to retain critical employees. This means incentivizing employees either through promotions or bonuses. Both can be used to keep important workers on staff.
• Prioritizing the things that drive the business – By the time an administrator has control of the business, there will likely be multiple areas of the company that need to be addressed. However, you will need to be time-efficient by first addressing the departments most responsible for profitability. This could be your operational department, your salespeople, your marketing department, your accounting team – and you will need to identify which of these departments are vital for the short term and ensure they are working as needed.
• Determining what court orders are needed to either manage or liquidate the business – Whether the plan is to sell or operate the business, any administrator will need permission from the court to execute certain decisions. If there is a dependent administrator in place, they will need court orders for just about every transaction. To ensure none of these important matters are held up in court, anticipate the court orders you will need and get them handled before they cause roadblocks.

After a Business Owner Dies, a Trusted Attorney Can Help Preserve the Organization

Businesses are difficult enough to run when the managing principal is alive, and when they pass away, the situation can quickly grow in complexity.

If you have an interest in a business where the owner has recently died, an estate planning or business attorney can provide valuable, timely guidance on how to protect the company. They can also provide insight on what to do if you plan on running the business, plan on selling it to another would-be owner, or if you are expecting to liquidate. Our firm has experience in each instance and can recommend the most efficient, most effective approach.

 

By Harold "Hap" May, P.C. on April 12, 2024   /   The Legal Play Podcast   /   Leave a comment