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Guest Blog: Things That Need to be Done When a Business Owner Dies

Succession
Today’s post is a guest blog written by Robert Deprez — Managing Director and Founder of Deprez Leadership in Chicago, which provides leadership transition advisory and interim CEO services to middle market companies. For additional articles and information on Deprez Leadership, visit www.deprezleadership.com.

The unexpected death of a business owner triggers a number of issues and challenges affecting virtually every aspect of the company. Unplanned succession usually negatively affects a business by draining emotional energy out of the employees and its leaders and causing a loss of focus.

There are many issues that need to be addressed quickly to maintain the continuity of the business, reduce fear, eliminate distractions and preserve the company’s enterprise value. The successor CEO and family often have no experience with most of these issues and therefore dealing with them exacerbates the emotional energy and distraction problems.

The purpose of this article is to give a high level overview to help focus the successor CEO, the family and Board on items that need to be addressed to mitigate the negative impact of the owner’s death.

The Emergency Successor CEO: Every organization needs a leader and the first order of business is to name a CEO.  In an ideal world the CEO position has been transitioned to a leader long before the owner’s death.  If the business owner dies unexpectedly, ownership and/or the board needs to determine who will be the interim successor CEO during the transition period.  Even if the succession plan names a successor CEO, consideration should be given to whether he or she should assume the position immediately or if an interim succession CEO needs to be brought in during the transition period. (See my article “Succession Plan Failure: Why the Successor CEO is Setup to Fail”.)

Getting Organized: The death of a business owner has far-reaching personal and business implications that must be handled in coordination with one another. The succession plan should lay out the goals which usually involve the ownership structure of the continuing business or selling it to monetize its value.  However do not falsely assume the succession plan will be successfully implemented unless the “transition action plan” is properly executed.

The second order of business is for the successor CEO and the family or the board to meet with the company’s trusted business advisors and executives to get focused by putting together the “transition action plan”. Each area of the plan (legal, financial and operational) requires specific expertise and compels each expert’s involvement from the beginning. (If the business is to be sold the expertise of an investment banker will also be essential.)  This plan must be detailed and should include:

  1. Specific items that need to be addressed
  2. List of information or data that is need for each item
  3. Persons responsible for making sure the item gets completed
  4. Persons who need to support, or be included in completing the item
  5. The target date when the item will to be completed or implemented.

Getting the “Transition Action Plan” together will aid in mitigating confusion and getting everyone focused thus preserving shareholder value.

Major Things to Address: To develop the transition action plan, I recommend breaking down the issues into 3 broad categories.

a. Operational and Management Issues
b. Financial and Tax issues
c. Legal, Ownership and Corporate Governance issues

Operational and Management Issues

The most important duty of the successor CEO involves dealing with the uncertainty and emotional distractions resulting from the death.  During the months following the sudden death of a CEO the challenge is keeping the company and its operating managers focused on the business.  There will be considerable demands made on his or her time that will require patience, empathetic communication and assured leadership.

The CEO will be required to handle a number of unusual and unique items. These include:

  1. Meeting with employees to address their concerns and insecurities about the future;
  2. Meeting with customers, suppliers and other business stakeholders to address their fears and uncertainties about the future;
  3. Ensuring bank loans, leases and other business contracts are modified or updated;
  4. Changing or updating business registrations and licenses that are affected;
  5. Providing information to the estate and tax team as necessary.

When the business is being sold it multiplies the complications for the CEO because nothing will be certain until the new buyer takes control. Not only will it require additional meetings but he or she should plan to implement “stay-on bonuses” to preserve employee continuity.

Financial and Tax issues

Estate and tax issues will be led by the company’s CPA firm and tax lawyers with the assistance of the company’s CFO. There will be a number of things that need to be done which will include:

  1. Gathering information of estate assets and liabilities including trusts, real property, stocks, bonds, debts due decedents, interests in business, interests in partnerships, life insurance policies, claims or judgments, rights and royalties, trust funds, household goods, personal effects, autos, boats, annuities and more;
  2. Valuation of the business and real property to support estate valuation issues;
  3. Preparing proforma financial statements which will be needed by the company’s banks and other creditors
  4. Preparing and filing US estate tax returns and forms;
  5. Preparing and filing individual and/or joint income tax returns;
  6. Identifying and gathering other information to support the filings;
  7. If the business is to be sold an extensive amount of due diligence information will need to be put together for potential buyers.

Legal and Corporate Governance Issues

The corporate and estate attorneys will need to ensure that ownership, legal and corporate governance issues are addressed. This will include a multitude of estate, ownership and control matters that must be addressed by the lawyer. Some of the items will include:

  1. Having Board and Shareholder meetings to change the officers of the corporation/board;
  2. Changing the registration with the Secretary of State’s office;
  3. Meeting with family to ensure appropriate reallocation of estate assets;
  4. Changing the title/ownership registration of assets including the company’s stock;
  5. Modifying the estate plans of the surviving family members;
  6. Establishing new trusts as necessary;
  7. Addressing other issues identified by the legal team.

It is clear that many issues surface which are unfamiliar to the business’ family and executives. It is no wonder that the financial performance and value of most businesses decline in the months following the death of the owner. By preparing a “Transition Action Plan” the distractions to the business and the successor CEO can be mitigated.

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I want to thank Robert Deprez for this important article. If anyone is interested in publishing a guest post on our blog on a topic that has some connection to estate planning or administration — finance, banking, investments, health, insurance, taxes, valuation, genealogy, family, real estate, general legal , etc. — call or e-mail me. We currently reach about 280 regular e-mail blog subscribers.
 
Jeff