What happens when a business owner dies?

What happens when a Business Owner dies, becomes disabled, or suffers a major health trauma?  #1

OPTION 1 Remaining shareholders buy out the affected owner’s interests.

The problems here are:

Determining the price.

  • What is a fair price?
  • When do you set the price?
  • How often should it be reviewed?
  • How will a tragic event affect the price?
  • Is the price fair and acceptable to all parties?

Raising the money,

  • Are there sufficient cash reserves in the business?
  • Can the surviving shareholders raise the necessary capital?
  • What is the cost of borrowing?
  • Will the affected family agree to payment terms or do they need the money now? Remember that they are now probably without meaningful income. How do they pay the mortgage, put food on the table and pay for education?
  • Is insurance an option? If so, who should own the policy/ies? – pros and cons.
  • How can the insurance proceeds be quarantined from predators?

Agreeing to terms of payment.

  • How long can the payments be spread?
  • What is the interest rate?
  • Are there any tax implications?
  • When should the transaction take place? (How long after the event?)
  • What are the triggers to initiate the share transfer? (Death is fairly straight forward, but how do you decide on a disability or major trauma and provide certainty of outcome?)

Strained negotiations and legal delays may make it difficult to reach a mutually acceptable position.

  • Affected families generally want income, while surviving shareholders want to grow the business, leading to expensive and often unpleasant and protracted legal disagreements.
  • How can you avoid disagreements?
  • How can the interests of all parties be protected?

If there are no other buyers, the parties may feel that they are paying too much or receiving too little respectively.

  • Values must be determined while there is a level playing field, and be set in a robust Business Continuity Agreement to provide a fair and mutually acceptable settlement.

What will happen if the deceased/disabled owner has given a Personal Guarantee to support a business loan?

  • Personal guarantees are normally Joint and Several, which means that all signatories are responsible for 100% of the debt. Personal guarantees survive death and are a prior charge on the estate, which cannot be probated until personal guarantees are released by the financier. This can delay probate for months or even years and can result in personal assets being put at risk of having to be sold to satisfy a financier’s demands as well as very expensive legal costs.

How can you be sure that your business, your family and your personal assets are not adversely affected by these and other risks?

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