How Family-Owned Businesses Should Handle Liquidation

Family-owned businesses are unique in the world of commerce. These businesses may have started simple, then grown over the years to become local, regional, or even national powerhouses. Family businesses may be passed down from generation to generation.

When a business owner dies or becomes disabled and is no longer able to handle business operations, family members are often confronted with difficult decisions. This is especially true when there are no heirs to pass a business down to, or they are uninterested in continuing operations. Business liquidation may become the only option available. In this guide, we will discuss the concept of business liquidation insurance, when it is appropriate, and how to make smart decisions concerning the final disposition of a business interest.

Liquidating a Business: Tough Decisions Ahead

As mentioned earlier, family-owned businesses are often multi-generational affairs. The business is handed down to subsequent generations. What if, however, the business owner dies and doesn’t have a trusted family member to pass the company down to? What if surviving heirs are not interested in carrying on business operations? What if the owner becomes disabled and cannot carry on the duties he or she needs to complete to keep the business running? What if no other outside buyer is interested in purchasing the company from surviving heirs? These are difficult questions, and raise the possibility of very tough decisions. In these cases, a business liquidation may be called for.

Let’s dig a little deeper and explore two scenarios that may make a liquidation the only outcome, particularly when the current owner dies or becomes disabled:

  • The continued success of a business and its operations are entirely dependent on the unique skills and experience of the current owner.
  • There is no succession plan or successor management system in place – no capable/trusted family member, co-owner, trusted senior employee, or outside buyer interested in purchasing the business.

Faced with the sudden death or disability of the current business owner, there are two potential scenarios of a business liquidation: forced or planned.

A Forced Liquidation

Without a successor plan in place, if a business owner were to die or become disabled in some way as to not be able to continue business operations, a forced business liquidation can be the only recourse. This is often the case when surviving heirs inherit business interests and are disinteresting in continuing. In a forced liquidation, public knowledge of the potential liquidation of the business can create incredible pressure on those who are left with the operation. This pressure can lead to unpleasant results, including:

  • Business assets being sold at a fraction of their actual value
  • Loss of income, either of the disabled owner or his/her family that depends on it
  • Loss of any “goodwill value” that may have eased the sale of the business operation
  • Difficulty in recovering debts owed to the company (accounts receivable)
  • Demands by creditors, particularly in debt settlements
  • Forced liquidation of other personally-owned assets to cover any business debts incurred by the death or disability of the owner

The major takeaway of a forced liquidation is that in this situation, the value of the business can be greatly reduced. The value of a business is always unpredictable, but a forced liquidation further complicates the picture.

A Planned Liquidation

Smart business owners know that nothing lasts forever. For business owners without heirs, or with family members or business partners that may not wish to continue the business operation after the owner dies or becomes disabled, strategic planning for future liquidation is a logical move.

There are two major components to consider when planning for a future liquidation: Authority and Time.

Authority: while a business owner is still alive or able to conduct business without disability, he or she generally has the authority needed to sell the business or its assets. This authority includes who the business can be sold to, how much to sell the business or its assets for, and when the sale might take place. For the purposes of a liquidation, it is critical that the executor of the owner’s wishes have the same decision-making authority. This authority is often granted in a well-drafted will.

In the will, specific details must be included. These give the executor the power to decide how and to whom the business is sold, how much to sell the business and/or its assets, and what form of payment will be accepted in the sale. The will should also include provisions for the timing of the sale; executors should be given the power to decide to continue operating the business until it can be liquidated in an advantageous manner. Finally, personal liability provisions included in the will should protect the executor from any personal liability, covering reasonable actions taken in the continued operation and eventual sale of the business and its assets.

Time: a disabled owner or the executor of the owner’s wishes after death still needs adequate time to make decisions about the future of the business and its liquidation. Here, there are two scenarios that must be considered in the planning stage. The first scenario is the owner’s death. In that event, the deceased owner’s estate must have sufficient funds available to buy the time needed to liquidate the business assets in a manner that is advantageous to the surviving family’s financial interests. Funds may be needed to pay estate settlement costs, estate taxes, and to provide an income for surviving family members. Without sufficient funding for these costs set aside, the executor may be forced to move too quickly in liquidating the business, potentially losing significant value, not to mention market leverage.

In the second scenario, the owner becomes disabled. Here again, adequate liquidity in finances makes it possible for the owner to sell the property at a fair market value rather than being forced to move too quickly. Income for expenses and for family needs buys the time necessary to liquidate the business assets in an orderly manner.

Business Liquidation Insurance

In our next article – part two of this series — we will discuss the option of business liquidation insurance and how it can protect the value of business assets in the case of death or disability of the owner. This generally takes the form of life insurance to provide funding needed for orderly and fair liquidation of the business interests.

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