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What happens to a small business after an owner’s death?

On Behalf of | Jun 24, 2024 | Business Law

Creating and growing small business can be a point of pride for an owner. Their hard work and dedication to customer satisfaction are likely what led to the company’s success. As such, many business owners want their companies to persist even after they die. They feel a sense of loyalty to their customers, employees and community. They also perceive the business as being a major part of their legacy.

Some people include terms addressing a business in their estate plans. They want to bequeath ownership of the business to a specific person. Doing that is certainly important, but it does not ensure that the company continues successfully operating after the current owner passes. What might potentially happen to an organization when an owner dies?

The business could be at risk of closure

No matter how dedicated employees might be to a company, no one can work at an organization without effective leadership. The death of an owner often leads to a power vacuum. There is no one to assume the responsibilities that they previously had to the business. In the time it takes to find a replacement and properly train that person, the business could decline to a point where continued operations become unrealistic.

There’s also the potential risk of a family member who inherits the business choosing to sell it off or liquidate its resources rather than investing the time and effort necessary to keep the company operating. The creation of a succession plan can protect a business against that worst-case scenario.

What does succession planning entail?

A succession plan is a way of communicating expectations for a company’s future operations and new management after someone dies. Typically, succession plans either identify candidates or necessary qualities for someone who may take over a leadership position.

From applicable degrees and appropriate employment history to an outline of daily tasks, there are many details that an owner can include in the succession plan to ease a transition when they leave their position. Succession planning can be beneficial not just in cases where people die but also in scenarios where they become incapacitated and cannot operate the company due to health reasons.

Creating a viable succession plan and integrating it into a broader estate plan is a smart move for someone worried about the continuation of a business’s operations when they can no longer lead their organization. A succession plan helps protect a business from closure and financial challenges when someone in the position of leadership can no longer do their job.

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