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By: Wilmington Trust
An example of what can happen when you fail to properly plan for the successful continuation of your business after your death.
Mr. and Mrs. Smith are both 55 years old and they own a family business. Mr. Smith runs the business. One of their three children is an employee of the business. Mr. Smith dies very unexpectedly. The next day, the business opens and there is no plan in place for who is going to run the business. Mrs. Smith is now the owner of the business, but she has no understanding of the business and does not want to be involved.
Meanwhile, the customers of the business are considering looking for a new supplier because they are unsure of whether the business can continue to meet their needs without Mr. Smith. The child that works for the business wants to run the business, but has no authority or ownership. The children that have nothing to do with the business are concerned about the situation and are attempting to convince Mrs. Smith to sell the business as quickly as possible, which could result in a value well below the value of the business right before Mr. Smith died.
This example is often a reality for many business owners. If they have not planned for the proper transition of the management and ownership of the business, the business will be in limbo. These problems can be solved with proper planning during the business owner's lifetime.
A management succession plan can be implemented, whereby a successor can be chosen to manage the company in case a situation such as the one described would occur. There would then be guidance as to what to do and the successor would have authority to step in and run the company if necessary. The bank, customers, and family members will have greater confidence in the ability of the business to succeed.
A business ownership succession plan can also be implemented, whereby a new owner can be chosen. This could be the child employed by the business, another employee or group of employees, or even a competitor. The ownership succession plan will ensure that the family is not stuck with either owning a business that they do not want to own and run, or having to sell the business at a fire sale price to unload it. Often buy-sell agreements are used to provide the legal documentation and financing to effectuate a sale of the business.
The death of a business owner does not have to mean the end of the business and problems for the family. Proper business succession planning is a necessity.
Updated: January 1, 2013
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.
© 2013 Wilmington Trust Corporation.