My parents owned an oil distributorship that delivered fuel and heating oil to homes. My mom handled the internal office operations. My dad handled the relationship side of the business. On a insanely thick foggy night, my dad missed seeing a road sign and instead of turning right his jeep wagoneer went into a lake. In seconds he was dead and so was the business.
What came after was a difficult time. My mother had to continue to run the business while devastated and in shock. I can only imagine what it was like to unlock that office door every morning, his absence ever so present, but she did it. At the time I was 17 and had no idea what she was dealing with. Now I do and I am inspired by the strength and tenacity she displayed.
If your husband owned a business interest you will be faced with greater complexity than many other surviving spouses. You may feel afraid and paralyzed. And, unfortunately, a business interest is something that must be dealt with quickly after your husband’s death. As the widow of a business owner, there are two tasks before you: a careful evaluation of the business and deciding what action to take.
CAREFUL EVALUATION
Here are the three things you must determine in order to evaluate your options:
- Determine the exact legal entity your husband owned & how much of it he owned. Typical entities include: sole proprietorships, corporations, limited liability companies (LLCs), or partnerships. If your husband owned 100% of the business than you are likely to be in sole control of what happens to it. If he owned less than 100% but more than 50% of the business, you will still be in control, but your control will be subject to the rights of the other owners.
- Determine if any buy-sell agreements already exist. Buy-sell agreements govern what happens if a business owner dies. These are most common when a business has multiple owners. The agreement will inform you as to what the other owners agreed upon for what should happen if one of them were to die. You will want to obtain a copy of the agreement.
- Determine the value of the business. If there is a buy-sell agreement in place, this will be relatively less complicated as a method for determining the value of your husband’s interest will most likely be in the agreement. Regardless, and especially if the agreement is older and has not been updated in years, seek the advice of an attorney who deals in business continuity issues to determine whether the value under the agreement is accurate in today’s figures. Most likely, your attorney will partner with a skilled business accountant to help value the business.
Compiling this information can take a little bit of time. That’s okay. Work with trusted employees to keep everything going. Take a little time to talk with employees and let them know about your process. They’ve lost someone too, and are also feeling grief and uncertainty. This will allow you a little breathing room as you move into making decisions.
DECIDING WHAT ACTION TO TAKE
With this information gathered, you are better prepared for taking action. Working closely with your advisors, consider the impact of continuing the business, selling, or closing.
A) CONTINUE THE BUSINESS
If you were involved in the business with your husband, you may be able to run it yourself. Alternatively, other business owners (if there are any), grown children, or key employees may be able to continue the business operations for you.
There is usually some disruption in running a business upon the death of an owner. This issue should be explored as soon as possible with all key people and be discussed openly and honestly to determine if it is possible to continue operations, at least for a little while. Although not an easy task, many times an existing business can provide significant income to a widow and her family.
TIP: Some businesses purchase so-called “key man” or “key person” life insurance to provide the business with cash to help with the loss of revenue or the need to hire new employees when a business owner dies. Have your attorney find out if your husband’s business has this kind of insurance and who the owner and beneficiary of the policy is.
B) SELL THE BUSINESS
Buy-Sell Agreement Exists:
If there was a buy-sell agreement in place prior to your husband’s death, your only option may be to sell the business as agreed upon.
Be aware that most buy-sell agreements state that the purchase price for your husband’s share of the business can be paid to his estate over a period of years. This is because:
1. There was not an adequate amount of life insurance purchased to cover the entire value of your husband’s interest within the company.
2. The value of the business has increased significantly, and the other business owners cannot raise enough cash to pay the entire amount at once.
3. It may be desirable from an income tax perspective to pay your husband’s estate over a period of time, because it may result in less total tax paid.
TIP: If you are going to be paid over a period of years, consult with your attorney and business accountant about the possibility of securing a promissory note with reasonable interest payments due on unpaid principal and if possible, secure the note with collateral. Keep the original promissory note in your possession to prove the debt is owed to you if there is ever a default.
Buy-Sell Agreement Does Not Exist:
When there is no buy-sell agreement, your husband’s business partners are the most obvious purchasers of his interest in the business. If the partners never had prior discussions about the death of an owner, then complex negotiations can begin. Unfortunately they may have different ideas than you do about what should happen to your husband’s interest and most importantly, the value of his interest. Seek expert legal and accounting help to deal with this issue.
Key employees are also sometimes interested in buying a business from an estate. You will want to negotiate on price and payment terms. The business value may need to be discounted in this situation as most key employees are aware they are so familiar with the area of the business, the customers, and the suppliers they can simply open their own competing version of the business without paying anything to an estate. The purchase price will need to compel them to want to acquire the existing business. If the full purchase price is not paid in cash immediately, incorporate this into your own personal financial planning going forward.
C) CLOSE THE BUSINESS
Many widows, after serious consideration and consultation with good advisors, come to the conclusion they are simply unable or unwilling to continue operating the business. This should never be a snap-decision when emotions of grief are running high. In general, I advise you do everything within reason to continue the business for the first year after his death or sell it, rather than close it. Although not an easy task, businesses can provide significant value to you and your family if it can be continued or sold rather than closed.
Closing a business may not be as simple as it sounds. In most cases, there are costs and debts that would need to be paid. For example, if the business leases space, most commercial leases require the lease continue to be paid even if the business vacates the premises. Common leases also require the business owner to personally guarantee the lease and this can become a liability of your husband’s estate. Other things to consider are payments due to suppliers, insurance companies, employee benefit plans, and sometimes contracts with customers that must be honored. Also, unresolved litigation involving the business will not terminate just because the business closes. Even if you close a business, you may be advised to continue its legal existence for a considerable period of time so that you have the legal structure to deal with any unforeseen claims against the business that might arise.
In conclusion, if business ownership is a part of your husband’s estate, take it one day at a time. Evaluate before making decisions. It is all about gathering information about the business entity type, any buy-sell agreements, and the value of the business today. With this information, you can move confidently into the decision making process of keeping, selling, or closing the business.
Even during your time of grief, try to stay as involved as you can in the discussions with your attorney and accountant regarding business continuation. Take meticulous notes during your conversations with them. Never hesitate to ask others to clarify anything you don’t understand. You are stronger than you know and you are capable of making the important decisions that are most appropriate for you.
Any opinions are those of Laura Amendola and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the developments referred to in this material. Raymond James does not offer legal advice. You should discuss any legal matters with the appropriate professional.
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