How to Prepare for the Sudden Departure of a Business Owner

Dealing with the death of a business partner or co-owner is difficult enough, but it can be made considerably worse by a vague, outdated, or otherwise disorganized estate.

Even with a basic succession plan in place, providing a proper valuation for a business can be difficult if there is no available market to determine its worth. This can make estimating estate taxes particularly problematic and stressful for the co-owners or partners of the business and the heirs.

Among the simplest ways for business owners to alleviate some of this stress include (1) regularly updating their wills and keeping their beneficiary designations current and (2) to create a buy-sell agreement that outlines the steps taken in the event of death, incapacitation or sudden withdrawal.

The Role of the Business Advisor CPA

While the services of a legal professional (an attorney) are necessary to validate and ensure the proper legal procedures are followed, CPAs often play a key role in assisting with the execution of an estate by serving in a fiduciary capacity, This can include preparing and planning for the appropriate payment of federal estate and state inheritance taxes or serving as a financial advisor.

CPAs who also serve as business advisors have the advantage of helping closely held business owners wade through the numbers related to the execution of the estate and assist in setting up a buy-sell agreement outlining what happens in the event an owner involuntarily withdraws from the business.

Buy-Sell Agreements

Buy-sell agreements serve as contracts between owners that establish rules and restrictions applicable to changes in ownership. They help alleviate the valuation problem by setting the value of the business ahead of time. This can prevent expensive and distracting disagreements with the IRS over value and provide greater certainty that the federal and state estate tax obligations will be accepted and settled in the event of the death of an owner or co-owner.

The Nonfamily Ownership Test

It’s important to note that these agreements exist primarily for non-related co-owners of a business and must pass a 50% nonfamily ownership test. That means that for the valuation portion of the buy-sell agreement to be valid, the succession of ownership must not exceed 50%.

For example, if three people own an equal share of the business, one owner passing it to an outside heir won’t present a problem. If two of the owners are related, however, and one passes his stake of the company to the related owner, the price stipulated in the buy-sell agreement cannot be used to set the value.

Planning for Succession

In many instances, a business may represent the largest asset held by an estate. The sudden departure of a business owner can have a profound impact on many fronts, including key roles in the day-by-day operations. It can also call into question the future viability of the business. Well-thought-out plans for an owner and his or her estate can help ensure that the business can satisfy all tax obligations, survive a major disruption, and meet the financial needs of the estate without triggering a sale.

It’s never too early or too late to establish a succession plan for your business. Get started today by giving us a call and speaking with one of our business advisors.

Let’s start a conversation.