We often spend so much time building and growing our businesses that we forget to plan for the unexpected.
And preparing for the unexpected matters to those who take over the shares of your business when you’re no longer around.
Just like matters when it comes to your Final Will & Testament, the what-if’s aren’t fun for anyone to discuss BUT they are necessary. In this article, we’ll explore the scenarios of business ownership in the event of death, delving into the impact and potential outcomes of having or not having a shareholder agreement.
Scenario 1: You Have A Shareholder Agreement That Enforces
Whether a closely held company or a company traded on the open market, every business has stock. One scenario when it comes to your stock is around having a shareholder agreement in place. A shareholder agreement is an enforceable agreement that dictates exactly what will happen to your shares of stock, when, and for how much.
But not all shareholder agreements are written to cover the event of a death (or disability) of a shareholder. It’s clearly an event that can happen, but too often shareholder agreements are silent on the matter, and may not enforce the transition of stock.
Like all matters when it comes to planning for your business, a thorough plan provides clarity and helps prevent potential conflicts amongst surviving family members, partners, or shareholders. Here’s how this well-drafted agreement can make life after your unexpected passing smoother:
Transfer of Shares to Beneficiaries
With a shareholder agreement, the process to transfer the shares of your business is as clear as day. This often involves a buy-sell provision, where the remaining shareholders or the business itself have the option to purchase the deceased shareholder’s shares. The agreement might also specify a fair valuation method, preventing disputes over the value of the shares.
Business Continuity
Your shareholder agreement also outlines how control and decision-making powers are transitioned, ensuring minimal disruption to the business operations. This can be particularly crucial for maintaining stability, productivity, and cash flow as well as reassuring your clients, employees, and other stakeholders involved. A smooth transition of control makes all the difference in maintaining the business value that you worked so hard to create prior to your exit.
Remember, keeping those key employees in place after your exit (no matter what that looks like) is ultimately how your business remains as stable as it once was.
Financial Protection For Your Beneficiaries
A shareholder agreement ensures that the person(s) that you want to and should benefit financially from your business…do. The funds received from the sale of your business shares can provide financial protection for the named beneficiaries within your agreement. With some much time and energy poured into your business, your beneficiaries will receive a fair value for all your contributions.
Now, if you already have this agreement in place, GREAT. It may have been created when your business was formed. Think about how long ago that was – how much has changed since then?
Just like your Will – this agreement should be revisited overtime or when life events occur to ensure the terms still agree with what is best for your business.
Scenario 2: Not Having a Shareholder Agreement
Now, without a shareholder agreement, the situation becomes much more complex for those in your life after your death. If your shares are part of your general estate, the shares will flow via your Will, assuming there is one. And if you’re married, the shares will go to your spouse, making them the new owner.
This could be great or could be detrimental for your business but it’s typically the default option if no other exists. Now, there are a few questions when it comes to this:
- Does the spouse want the business?
- Is the spouse capable?
- Can the spouse legally run the business?
If the answer is no to all of the above, a few things may be true for your business.
Uncertain Future
With a default roadmap, if you will, the fate of your shares after death may be uncertain. Now, leaving your shares to your spouse might seem like the best option but it can actually be quite risky. That’s because someone not suited to run the business poses a risk for an uncertain future and potential disputes. This can lead to disagreements among surviving family members, disputes over the valuation of the shares, the distribution of assets, and the control of the business. If there are children in the business (or out of the business) they may want equality when it comes to these shares.
These conflicts can be time-consuming, emotionally draining, and detrimental to the business itself by threatening the continuity of the business.
Risk to Business Continuity
Like we discussed in scenario #1, a shareholder agreement ensures the continuity of your business. With this uncertain future, and distraction to say the least, clients may lose confidence, employees may become anxious, and the overall stability of the company could be at risk.
In addition, the business value that you worked tirelessly to maximize before your exit, may be forever altered. Sometimes this might look like a “fire sale.” A fire sale means the new shareholder, potentially your spouse, is selling the business as quickly as possible at a heavily discounted price in order to get the responsibility off of their plate.
A fire sale will undoubtedly not be on the seller’s terms and will not be for its maximum value.
So, while you think letting your business shares flow through your Will makes the most sense, a proper Buy/Sell Agreement avoids the need to offload the shares with no regard for the business’ true value.
Plan For The Unexpected In Your Business
Planning for your business is not just about the present; it’s an investment in the future wellbeing of your business…and your loved ones.
If you did in fact establish an agreement when you started your business, it might be worth revisiting to ensure your Buy/Sell Agreement accurately reflects your business today:
- Your business value
- Your partnership(s)
- Triggering events, and
- Appropriate funding
To start exploring more ways to protect, grow, and exit your business, talk with an experienced business planning professional at Consolidated Planning.
2024-168734 Exp. 2/2026
Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. The information provided is based on our general understanding of the subject matter discussed and is for informational purposes only.
This material contains the current opinions of Andy Brincefield and Consolidated Planning only. These are not the opinions of Park Avenue Securities, Guardian, or its subsidiaries.
