This Notes is about agreements to buy small businesses when the owner dies. If the owner of a business should die, a contract with someone to buy the business at his death may make the difference between the continuance of the business or its death. Haste is important, because the business may be seriously injured or die before a buyer can be found.
In the last Notes, I mentioned some of the issues involved in valuation of a small business. Before you can make an agreement with someone to continue a business, you must determine the fair value of the business.
Funding the purchase of the business is a key issue. If the prospective purchaser of the business can pay cash, the arrangement is quite simple. However, very often when the business owner dies, it is impossible to locate a purchaser with sufficient cash.
Sometimes it is possible for the purchaser of the business to pay for the business out of the cash flow. In that case, the purchaser will provide a mortgage or lien on the assets to assure the payment of the amount due to the estate. An arrangement of this type is risky because the purchaser may run the business into the ground. In that event, the estate can foreclose on the assets, but the business may be worth nothing.
It may be possible to buy insurance on the life of the business owner. This insurance can be owned and paid for by the prospective purchaser, (who is often an employee or business associate of the business owner) and the death proceeds will be used to buy the business from the estate. A contract must be drawn, stating the terms of the sale and also dealing with what happens to the life insurance if the arrangement is cancelled.
An agreement to continue a business on the death of the owner must be prepared with great care, and the client's accountant should be part of the process. Use of a form prepared for another case, or some other agreement which is not tailored to the exact circumstances of the case will lead to trouble.
We will be happy to work with you on estate planning or business continuation matters.
