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The Montana Estate Lawyer

Monday, April 22, 2013

What if a business owner dies in the middle of an ownership transition process?

As part of our Business Exit Planning Process, we plan for what would happen if the business owner died in the middle of the transition process.  We'll design a plan so, that if transition to a new owner is to be over a five-year period and the owner is killed in a car accident in year three, the plan will still work.

It's easy to picture what would happen without planning.  Key employees loyally attend the owner's funeral on Monday.  But they are sending out their resumes on Tuesday!  If key employees leave, the family will be left with a business that might be sold for pennies on the dollar.

We can avoid that unfortunate result with proper planning.  With a business owned by several people, we will make sure that there is an agreement among the owners that will protect the family of the deceased owner - while not burdening the remaining owners with an impossible payment obligation.

Particularly if there are no co-owners, it's crucial that key employees not jump ship.  We can address that problem with a "stay bonus" program.  The Company buys life insurance with a death benefit large enough to pay key employees' salaries - plus a substantial bonus - for one to two years.  We then tell the key employees that, if something happens to the owner, there will be enough to pay them their normal salaries plus a bonus of, perhaps, 50%.  The bonuses might be paid every 90 days.  

Thus, the key employees know the Company has money to pay their salaries, and they know they can earn a big bonus if they stay during a transition period.  They may leave after a new owner takes over, but they'll remain long enough to give the deceased business owner's family some breathing room to arrange a sale - and not at a fire sale price.

Many business owners think they're too busy to plan for their exit from their business.  But by taking the time to go through our planning process a business owner can do something for his family that may benefit them for generations.


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