Probate, trust, guardianship and inheritance litigation
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How to Save a Business After the Death of the Owner

By:  Jeffrey Skatoff, Esq.

The death of a business owner can have devastating consequences for the employees, customers, and family members of the business. What should you do when the business owner dies?

Should the Business Be Saved?

The first and most important question is whether the business can and should be continued.  Many businesses, especially service businesses, such as a professional practice, cannot realistically be saved, because the success of the business was based on the efforts of the owner.  In a medical practice, for example, patients will immediately go to other medical professionals, making continuity difficult.  Unless an heir of the owner is equipped to step in immediately upon the death of the owner, there is likely no one at the ready to take over.

Running any business is difficult.  If revenue disappears but costs stay the same, the business will quickly be out of cash, requiring the estate to fund the business while a plan is formulated and carried out.  How realistic is the plan to save the business?  How much would the estate have to pay to keep the business going while the plan is implemented?

There is no requirement for an estate to save a business or to fund it.  The estate can abandon the business, sometimes with court approval being necessary.  For a business with no value apart from the (deceased) owner’s personal goodwill with customers, clients or patients, abandoning the business will usually be the best option.  Don’t make the mistake of trying to salvage a business that really cannot be saved, because the estate will lose value as it funds the business in such a futile attempt.

First Step to Continue a Business After the Death Of the Owner

If the decision has been made to try and operate or sell the business, the very first step will be for the estate to gain legal control of the business.

In order for an estate to gain legal control over a business, the estate will need to be opened and a personal representative appointed.  This can take time, however – especially if there are any disputes about who should be put in charge of the estate.  A great solution can be for a curator to be appointed to immediately begin dealing with the business.  A curator is a person temporarily appointed to administer an estate and in most states has all of the same duties and powers as a personal representative.

In some states, a person can be appointed to carry out a limited set of duties, known as an administrator ad litem.  An administrator ad litem can be appointed to deal exclusively with the business, leaving all other aspects of estate administration to the personal representative.

If time is critical to saving the business (as it would be in most situations) a curator can be appointed in most states within a few days of receiving a death certificate – and some states will allow appointment before a death certificate is even obtained.

Why is it so important to move quickly with the appointment of someone to take control of the business after the death of the owner?  The following partial list of immediate concerns is why quick control is so important:

  • legal issues
  • bank accounts
  • employees
  • customers
  • communication with banks, employees and customers about the status of the business and its future

Gaining Legal Control of the Business and Its Bank Accounts

Money is the lifeblood of a business.  Once the bank learns of the death of the owner, if the owner is the only signatory on the bank accounts, the accounts will be frozen.  Payroll will not be able to be made, and critical vendors will not be paid.  The quickest way to shut down a business is to stiff the employees.

A bank will not allow anyone to access the accounts unless legally entitled to do so. If the business was organized as a corporation, and a curator has been appointed to temporarily run the estate, the curator, as the estate representative, would, as the new shareholder, elect him or herself as the sole director of the company, who would then in turn appoint him or herself as new president of the company.  Once paperwork satisfactory to the bank has been provided showing that the curator is the new president of the company, the bank should then allow the curator to access the company’s bank accounts.  The bank will certainly require the curator to sign a new signature card with the bank first, however.

Gaining Control of Digital Assets Upon The Death of The Business Owner

Most business have at least some digital / online presence.  Gaining access to passwords after the death of the business owner so that digital assets can be controlled must be done.  Some states, such as California,  have enacted the Uniform Fiduciary Access to Digital Assets Act, which permits an executor, administrator, trustee, or other fiduciary to have authority over a decedent’s digital assets.

The Digital Assets Act generally applies only to fiduciaries, meaning that fiduciary status is necessary to obtain authority, meaning that a fiduciary would need to be appointed by the court if the business owner did not have a trust or other directive.  It is always prudent for a business owner to have a plan for what happens to the digital footprint of the business after the death of the owner.

Selling the Business

Many business that have some value apart from the personal goodwill of the owner can be sold.  If selling the business is likely the best option, the very first step in the process – before anything else is done – would be to find either (i) a business broker, or (ii) the obvious buyer.

A business broker should be able to advise with minimal research whether the business might be salable, and if so how values in the industry are determined.  Because (i) business brokers are paid a commission only upon on a completed sale and (ii) business brokers should have current access to industry information, a business broker should be able to provide unbiased, realistic, and accurate information and advice.  If the business broker turns down the assignment, ask why – is it because the business is outside the area of expertise of the broker, or is it because the broker does not see a possibility of a transaction taking place.

Some business will have an obvious buyer, such as a friendly competitor in the same field.  While such a person might try to acquire the business on terms highly favorable to the buyer, such a transaction may very well end up being the only available transaction, or at least the one that can be executed in the real world.  And a friendly competitor who is familiar with the business should be able to act faster than any other potential buyer.

The Problem With Personal Guarantees

Vendors for large ticket items often require the owner of a business to personally guarantee obligations.  Commercial leases are the often the biggest and most important such item.  If a one-location business has a year or more left on a lease, there might not be an immediate issue.  But consider a business with one month left on its lease, where lease negotiations were taking place.  The landlord would want a personal guarantee from someone with some wealth to guarantee the new lease.  It is highly doubtful a non-family member would personally guarantee anything, especially a high dollar lease.  Should family members guarantee a new lease?  This is the type of issue that needs to be addressed before final decisions are made regarding trying to keep or abandon a business.

Even some businesses without a large ticket personal guarantee being imminent may require guarantees that no one is willing to accept.  For example, many restaurant supply business sell and deliver goods on credit, but require a personal guarantee from the owner.  It is critical to obtain a vendor list and discuss guarantees with vendors before any decisions are made to continue or abandon the business.

The Importance of Planning for What Happens To The Business Upon Death Of The Owner

Good planning can alleviate many of the problems created upon the death of the owner.  The best way to avoid these problems is to have a business partner with some equity in the business, coupled with a buy-sell agreement under which the deceased owner’s family can be cashed out under pre-set terms.  Adding an insurance component so that cash is available to fund the buy out makes the plan even better.  Of course having a business partner brings an entirely new set of problems, but for the (still) living owner instead of her heirs.

It is not uncommon for a business owner to decide against having partners and to accept the fact that the business dies with owner.  Leaving life insurance or significant assets for the business owner’s family at least can then minimize the financial harm to the family upon death.  Since most small business end up dying with the owner anyway, accepting this reality and planning for it can actually be the best plan of all.

Jeffrey Skatoff is a Florida probate attorney.  To have Mr. Skatoff review your case free of charge, please go to his website.

Probate attorney Jeffrey Skatoff handles probate, trust, guardianship and inheritance litigation.

Jeffrey H. Skatoff, Esq.

Probate, Trust & Guardianship Litigation

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