What is Your Plan for Transferring Your Business When the Time Comes?

Understand that the legal structure of the business will dictate how the transfer will be carried out.  If the business is a sole proprietorship, the business may be transferred to a capable family member as a gift through provisions in the proprietor’s will or by a sale provided through a prearranged purchase agreement effective at death.  If neither of these are an option, then the business must be sold, merged, acquired, or liquidated.
 
If the business is a partnership, unless there is a written agreement to the contrary, the death of a partner automatically dissolves the business.  In the absence of a partner, the surviving partners have no rights to the purchase of the deceased partner’s interest.  The surviving partners may then act as liquidating partners.  Another option would be for the surviving partners to reorganize the partnership by taking heirs into the partnership, having heirs accept a new partner, selling the deceased’s interest to the heirs or buying out the heirs.

And finally, if the business is a corporation where the deceased has been active in the operation (pertains to a closely-held corporation), the family may retain stock interest.  If the heirs have a majority interest, they may choose to become personally involved in the management in order to receive income.

If the business is to continue, some or all of the following documents and/or agreements must be prepared with explicit details of how the transfer will be executed:
 

1. Covenant of Non-compete – Prohibits the transferor or shareholders of the company from competing with the transferee.
2. Consulting Agreement – Agreement between the company and transferor to provide consulting services on a full- or part-time basis.
3. Employment Agreement – An agreement for full- or part-time employment with salary and benefits.
4. Confidentiality Agreement – An agreement in which transferor/seller agrees to disclose certain confidential information relating to the company to the buyer.

Excerpted from, "The Start of Something BIG: Your Ultimate Guide to Writing a Dynamic Business Plan."