The Predicament

When a business owner dies, the heirs want continuing financial security after the loss of the deceased salary and benefits. Finding a satisfactory solution to the dilemma can be difficult.

• The family may be forced to sell the business quickly and they may have to sell at a discount or during market conditions that make the business less attractive. In other cases, the business may be worth very little without the proprietor or partner.
Or,
• There are surviving owners who want to retain control of the business without intrusion by the deceased owner’s heirs. They will want a prompt transfer of the deceased owner’s interest at a fair price. They’ll also want to retain the loyalty of support of employees, creditors and customers after ownership has been transferred.
• The deceased owner’s heirs, on the other hand, may feel they have to either retain the family’s interest in the business or prompt a sale of the interest at an attractive price in order to preserve their financial security.

Potential Problems

If there’s been a lack of preparation as to what is to happen should an owner die, unhappy consequences are likely to result.

• There’s the real possibility that conflicts and even litigation might arise between the deceased owner’s heirs and the surviving owners.
• Inevitably, delays will occur in the transition to successor ownership.
• There’s the potential that customers will be lost, especially if the transition is protracted. Employees may leave if future vitality of the business is in question.
• Loss of creditor confidence can damage the business, even to the point of forcing its liquidation.

The Solution

A properly designed and funded buy-sell agreement among the owners is the first step in assuring the legitimate concerns of all involved parties — sellers, buyers, employees, customers and suppliers — are satisfied.

A formal, written agreement:

• Establishes a fair price for the business.
• Assures that the terms of the sale, set in advance, are reasonable and agreeable to all parties.
• Is usually acceptable to the IRS for estate tax purposes if the value is fair and reasonable. If the owners are related, a professional appraisal of the business should be performed. Professional legal counsel should be sought for advice on this subject.

The result: With the legitimate concerns of all parties involved addressed in a properly designed and funded buy-sell agreement, a whole string of tough problems are solved to the benefit of sellers, buyers, employees, customers and suppliers.

¹ American National, SM&R and its registered representatives do not give legal, tax or accounting advice. You should consult your attorney, tax advisor or accountant concerning your specific situation.