We recently met with the family of a business owner who passed away unexpectedly and left an ongoing business to his wife. The business did not have a management team in place and over the probate period, which took about a year, the employees could not keep the business running sufficiently. Additionally, the employees racked up significant business debt, putting an additional burden on the bereaved spouse.
This is not an isolated case. Over the last few decades, we have encountered several situations where the heirs of a privately held business reached out to us to find a new successor well after the business had deteriorated.
Probate, the legal process of distributing a deceased person’s assets and settling their debts, can be a challenging and lengthy process. While many small legacy businesses face numerous hurdles in their journey to success, navigating probate can pose unique challenges that threaten their very survival. Here we will review some of the reasons why small businesses often struggle to endure the probate process and discuss potential solutions.
Time Delays and Operational Disruption:
Probate proceedings can take months or even years to complete, leaving small businesses in a state of limbo. During this time, the business legacy may experience a lack of clear direction, resulting in operational disruptions and potential financial instability. Without prompt decision-making and leadership, small businesses may struggle to maintain day-to-day operations, leading to a decline in revenue and customer confidence.
Lack of Business Expertise among Executors:
Executors, the individuals responsible for managing the deceased’s estate and distributing assets, are often family members or close friends who may lack the necessary business acumen. Small businesses require specialized knowledge and experience to handle financial matters, legal obligations, and operational challenges. In the absence of a capable executor, the business may suffer from poor decision-making, financial mismanagement, and inadequate representation during probate proceedings. In the most recent situation the widow, close to 80, has neither the knowledge nor the desire to manage the business.
Uncertainty Surrounding Ownership:
Probate introduces uncertainty regarding the ownership and control of the small business. Potential heirs, creditors, and other interested parties may contest the distribution of assets, leading to lengthy legal battles. Disputes over business ownership can paralyze operations, create internal conflicts, and deter potential investors or buyers, ultimately diminishing the business’s value and potential for survival.
Burden of Estate Taxes and Debts:
Small businesses often rely heavily on the personal assets of their owners, which can include properties, investments, or personal savings. Upon the owner’s death, these assets become part of the probate estate and are subject to estate taxes and outstanding debts. The burden of these financial obligations can be overwhelming for small businesses, especially if they lack sufficient liquid assets to cover these expenses. In some cases, the business may need to be sold or liquidated to satisfy these obligations, leading to its ultimate demise.
Lack of Succession Planning:
Many small businesses fail to adequately plan, including the possibility of the owner’s death. Without a solid succession plan in place, the business may face difficulties in transferring ownership to the next generation or identifying a capable successor. This lack of preparation can create uncertainty, disputes among family members or employees, and a lack of continuity, which can significantly impede the business’s chances to survive probate.
- Establishing a comprehensive estate plan that includes provisions for the smooth transfer of business ownership.
- Appointing a capable executor who possesses business expertise or seeking professional assistance from accountants, attorneys, or business advisors.
- Exploring alternative business structures, such as trusts or partnerships, that can bypass probate or facilitate a smoother transition of ownership.
- Securing adequate life insurance or establishing a buy-sell agreement to provide funds for estate taxes or outstanding debts.
- Educating small business owners on the importance of succession planning and encouraging them to develop contingency plans for unforeseen circumstances.
- Develop a management team within the company.
The probate process can be a significant obstacle for small businesses, jeopardizing their ability to survive and thrive. Time delays, lack of business expertise among executors, ownership disputes, financial burdens, and the absence of succession planning all contribute to the challenges small businesses face during probate. By recognizing these issues and implementing proactive measures, such as comprehensive estate planning and seeking professional guidance, small business owners can increase their chances of successfully navigating the probate process and ensuring the continuity of their businesses beyond their lifetimes.
Businesses are legacies resulting from an owner’s hard work, innovation, and perseverance. They supply great value to the owner and owner’s family, provide jobs, deliver goods and/or services to customers, and generate economic wealth to their communities. If you own a business, speak to someone who can help you let your amazing legacy carry on.
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Legacy Venture Group