What to do with an Inherited Business

When you lose a loved one, there are a lot of things to think about. From handling funeral arrangements and final expenses to preparing estate tax returns, the list can seem endless. When your loved one owned a business, it can be even more complex and oftentimes decisions need to be made quickly for the business to remain operational. So, what are some steps you can take to make sure the business that your loved one worked hard to build isn’t lost?

Get Organized

While typical assets are accounted for in a will or trust, there are other documents that may affect the disposition of a business after the owner passes away. If the business was structured as a Limited Liability Company, a C or S corporation, or a partnership, there may be an operating agreement in place. Operating agreements typically layout how a business will be managed and may include management after the death of an owner. If the business included one or more partners, there may also be a buy-sell agreement in place which may have buyout provisions for survivors in the event that one of the owners passes away.

If you’re unsure what was put in place, you can check your state’s Secretary of State website as well as recent business tax returns to see how the business may have been incorporated. It will also help to connect with other professionals who may have helped with the administration of the business. The business attorney that helped setup the business should be able to help you track down any of the documents you’ll need and can give you a good idea of how you’ll be able to manage or sell the business.

It’s also smart to connect with the accountant and bookkeepers. If the owner handled the accounting, it makes sense to hire one. Getting the books reconciled and up to date will help whether you are going to keep the business or sell it.

Ongoing Operation

Running a business is a complex and often very personal process. Two companies, even in the exact same industry, can have very different operations. Before deciding to keep the business open, it’s important to recognize whether you or other beneficiaries have the necessary skills and insight to maintain the operation.

If you decide to run the business, it will be worthwhile to get everyone on the same page as soon as possible. Meeting with the estate planning attorney, the business attorney and the other beneficiaries as quickly as possible will help you figure out the next steps for legally and fairly maintaining the business. For example, the operating agreement may name a single successor to manage the business, while the trust or will allows for equal ownership among all the beneficiaries. Understanding who is in charge of making decisions and how the business income should flow to individuals will be critical to ensuring successful operation and avoid disputes later.

If there isn’t a named successor and there are multiple beneficiaries, it is highly recommended that a consensus is reached on how decisions will be handled. Naming a single decision maker for day-to-day operations, or multiple decision makers with a clear organizational structure will prevent operations from getting bogged down and limit disputes. If an agreement can’t be reached it might make sense to consider selling.

Selling

If you decide you no longer wish to run the business, figuring out how to liquidate is the next step. There are two ways to liquidate, an asset sale and a stock sale.

The first is an asset sale. If the business was completely dependent on the deceased to run, without any ongoing value beyond that person’s work, then it’s likely that an asset sale is going to be the best approach. Some examples of this type of business are an independent realtor, a contractor, a dental or medical practice and a solo law practice. Asset sales are just what they sound like, the sale of the assets and equipment of the business.

In addition to the tangible items, like computers and desks, intangible things can be assets as well. If the business had a known brand, or intellectual property, those things can be sold. A client list may be an asset as well, especially if the clients have long term contracts or if the clients do regular ongoing business. How sticky the clients are, whether through a contractual obligation or through a particular loyalty to the business, will determine how much they are worth to a prospective buyer. For example, a financial advisory practice with set fees paid regularly will have a higher value per average dollar of revenue generated, a dental practice with long term clients may have a little less as it’s easier for clients to switch, while a real estate agent will have even less.

If the business does not require the owner to continue to operate, selling the operations of the business, also known as a stock sale, will likely yield greater value to the beneficiaries. Since a stock sale of a business can be a lengthy process, naming someone to oversee operations while you find a buyer can keep things running smoothly.

Understanding how to value the business is the next step and can be difficult, even for owners familiar with the industry. Similar looking businesses can sell for wildly different prices, based on the underlying financial condition and operations. There are experts that can provide business valuations, but ultimately a business will only be worth what a buyer is willing to pay. Connecting with your accountant or a business broker can be helpful in figuring out the right price and finding a buyer.