Corporate Buy-out on Owner's Death
Business Purchase - Business Sale - Equipment - Leasing - Financing - Amalgamation - Rollover - Expanding into Canada
Contact Neufeld Legal PC at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com
The untimely death of the business owner can necessitate the sale of the busines by the executor / personal representative of their estate, with a business sale also being necessitated when the designated successors (heirs) are unwilling to assume control and responsibility for the business. The complexity associated with buying or selling a business is only exacerbated by the owner's death, given the significant additional legal, financial, and emotional considerations, together with the lack of the preparation and planning that has been undertaken in advance of the required sale.
The particulars of such a business transaction will depend heavily on the business's legal structure and whether a succession plan was in place. The deceased owner's estate, managed by an executor or personal representative, is responsible for the business and its assets.
Legal and Administrative Considerations
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Business Structure: The legal entity of the business is exceedingly consequential to the process that is to be undertaken.
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Sole Proprietorship: The business ceases to exist upon the owner's death, as the business and the owner are legally one. The business' assets and debts become part of the owner's personal estate and are subject to the probate process. A buyer can only acquire the business' assets, not the entity itself. The buyer must then establish a new business.
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Partnership: If the partnership had a written partnership agreement, the agreement could specify what transpires, with the existence of a buy-sell provision establishing the methodology for the surviving partners to deal with the disposition of the deceased partner's partnership interest. Without an agreement, the partnership may be legally dissolved, and the assets liquidated.
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Corporation: The business entity continues to exist after the owner's death. The deceased owner's shares become part of their estate. The executor or personal representative steps in to manage the company until the shares can be transferred to the deceased owner's heirs or are sold. The business's operations can continue, provided there is a clear plan for management.
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Succession Planning: The existence of a succession plan is crucial. A well-drafted plan, including a will and buy-sell agreement, can prevent legal disputes and ensure a smooth transition. Without a plan, the business's fate is left to applicable provincial intestacy laws and the surrogate court, which can be a lengthy and costly process.
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Executor's Role: The executor is responsible for managing and safeguarding the business during the transition. Their duties include:
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Maintaining business operations.
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Paying employees and vendors.
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Securing business assets.
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Obtaining a business valuation.
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Executing a sale or transfer of the business in accordance with the will or court order.
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Financial and Tax Considerations
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Valuation: A professional business valuation is essential to determine the fair market value, although appropriate consideration must be given to the delay that the valuation might have on the business being sold (without appropriate leadership and direction), together with an appropriate discount as this was not a planned sale. This valuation affects the sale price for a buyer and is critical for the executor (personal representative) of the estate to calculate taxes and distribute assets fairly among heirs.
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Taxes: Upon the owner's death, the estate may face significant tax liabilities.
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Deemed Disposition: Federal tax legislation takes the position that the deceased is considered to have "sold" all their assets at fair market value just before death, which can trigger a capital gains tax.
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Income Taxes: The executor (personal representative) for the estate must file final personal and business tax returns, and any income generated by the business after death must be properly reported.
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Funding: A buyer will need to secure financing to purchase the business from the estate. A buy-sell agreement often includes life insurance policies that provide the funds to buy out the deceased owner's share. Without such a provision, the buyer may need to seek a loan, or such other payment arrangements as might facilitate the sale of the business.
Buyer's Perspective
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Due Diligence: Thoroughly investigate the business's legal and financial status. Verify who has the authority to sell the business (the executor or heirs). There can be no complacency with respect to due diligence, from legal and financial, to operational and commercial.
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Negotiation: The sale may be driven by the estate's need for a quick liquidation, which could present a buying opportunity. Although, the executor (personal represenative) and their professional support team (lawyer, accountant, business broker) may overvalue the business and demand too much from a business that may have lost its core, and may be shedding important personnel and/or contracts. However, be prepared for potential delays due to the probate process.
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Re-establishment: If purchasing a sole proprietorship, the buyer must be prepared to handle all the administrative tasks of starting a new business.
Seller's (Estate) Perspective
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Seek Professional Advice: Engage a team of professionals, including a lawyer, accountant, and business broker, to navigate the complexities of the sale.
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Maintain Value: The executor should work to keep the business operational and profitable during the transition to preserve its value for a potential sale.
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Communicate: Keep employees, customers, and vendors informed to maintain confidence and minimize disruption.
For knowledgeable and experienced legal representation when initiating, or being subjected to, a corporate buy-out, contact corporate business lawyer Christopher Neufeld at Chris@NeufeldLegal.com or 403-400-4092 / 905-616-8864.
