Whilst it is morbid to think about, it is vital business owners have a plan in place for what will happen to the business if the owner dies. The considerations you need to make in this situation are like the considerations you would have in place for exiting your business, however there are a few other important areas that need to be addressed in the case of the business owner’s death. 

The number one thing you need to consider in this scenario is your business structure. The structure of your business—whether it is a sole trader, partnership, corporation, or trust—will influence how it is managed and transferred upon your death. Each structure has different tax implications and will necessitate a different type of succession planning, so it’s essential to evaluate which structure best suits your business and estate planning objectives. You should consult with your accountant to understand the implications of your specific business structure.

You also need to have a comprehensive will. This is crucial for ensuring your wishes regarding your business are carried out after your death. Your will needs to clearly outline how you want your business assets to be distributed in addition to who will assume ownership and management responsibilities of the business. You should work with an estate planning lawyer in conjunction with your accountant or financial advisor to ensure your will complies with relevant laws and effectively addresses your business concerns.

Another key area of consideration is business succession planning. Business succession planning is the process of putting plans in place to exit your business. As a business owner, you should look at having these in place long before you ever retire however you also need to consider how your death may impact your business succession plan. Without a clear succession plan in place, your business may face uncertainty, disputes, and financial challenges. You should also prepare potential successors within your business for ensuring a seamless transition of leadership and management responsibilities if this is applicable. Providing training, mentorship, and development opportunities to key employees can help shape them for future leadership roles and mitigate the impact of your absence on business operations.

Each of the above-mentioned areas are considerations that all business owners should be making when considering how they will exit their business, either by death or (hopefully) retirement. However, there are some areas that need to be addressed which specifically relate to the death or permanent disability of the business owner.

Buy-Sell Agreements

Buy-sell agreements, sometimes referred to as business continuation agreements, provide a process for the transfer of the business ownership in the event of a business owner’s death. These agreements outline the terms and conditions under which ownership interests can be bought and sold, helping to facilitate a smooth transition of ownership and minimise disruption to business operations. These agreements are particularly helpful if the business has multiple owners.

Key Person Insurance

Key person insurance is a type of life insurance policy for businesses on the life of the owner or a key business employee. In the event of the insured person’s death, the payout can be used to offset losses, repay debts, and fund the transition of ownership. This ensures the continuity of business operations.

Planning for what will happen to your business in the event of your death is a necessary aspect of responsible business ownership. By putting clear strategies in place you can protect your business and provide for your loved ones. You should discuss this with your Business Advisor to ensure that you have covered off on all issues that relate to your specific business and circumstances.