What Happens When a Business Owner Dies Without a Business Succession Plan?

What Happens When a Business Owner Dies Without a Business Succession Plan?

What happens when a business owner dies without a business succession plan? What happens in the case of a divorce or another life event? What if there isn’t a shareholders’ agreement, a buy/sell agreement, or some type of business succession plan in place? 

If a business owner dies

If a married business owner dies in a community property state like California, the ownership, let’s say they’re a 50% owner, might have been community property and in some cases, it could just go directly to the spouse. Imagine that your business partner dies and suddenly their spouse becomes your 50% partner. 

Or perhaps they had a trust or a will that said ownership of the business is going to be transferred from them to their 19-year-old son who doesn’t know anything about the business. That can be a problem. 

Divorce can pose similar challenges

Those are issues that can happen with a divorce as well. Imagine somebody gets a divorce and the spouse who’s not involved in the business possibly wins in court and gets assets including ownership of the business. Suddenly the partner that you had in the business is no longer there, and their spouse might be the one who has ownership and can vote on how the business is run. 

How to protect yourself

But there are ways to protect yourself against having someone that you don’t want involved in the business becoming an owner or manager. So, typically, what’s done is a buy/sell agreement or a shareholders’ agreement, which are agreements between the owners that are put in writing and cover certain events, such as death, disability, incapacity, and retirement. 

These are all things that can happen. Sometimes, someone wants to sell to a third party, or they just want to walk away from the business. These are things that need to be thought about and prepared for because it’s like a business divorce. You need to plan for them because these things happen and they happen frequently.

When people try to wing it

People tend to say, “Oh, we’ll figure it out,” but it typically ends up in court and costs everyone way too much money. And in the meantime, the business could go down the drain. So you want to make sure that you have something in place that says what’s going to happen if one of the partners gets hit by a bus, gets Covid and dies, or gets stuck in a hospital.

“What if we can’t communicate with anyone for three months or one of us is on a ventilator? What’s going to happen to the business? Who’s going to control it, operate it, or own it?” These things are covered in business succession plans, which are usually ancillary to someone’s estate plan. 

So when business owners do their living trust or their will, these are the things they should be thinking about as well. What will happen to the business? They should also plan for an orderly transition to new owners, whoever they might be. And that’s what a business succession plan will do for you.

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