The US is built on small business, and for good reason. Owner/managers get control over their destinies, gain the freedom to create, and have the chance for significant upside if the business is sold. Often, small businesses have partners, multiple owner operators who share the responsibilities of management – in the trials, and tribulations, that go along with that duty.
Life happens. And so does death. But what happens to the small business if one of these partners, a critical part for making the engine run, passes away? There is no way to compensate for the emotional devastation, but we’re not here to discuss hiring family therapists. The owner/operator now departed has an estate, and with it (hopefully) heirs. Those heirs are generally entitled to the partner’s share of the business. Unfortunately, those heirs may attempt to assert their rights beyond ownership, inserting themselves into an organization that they do not understand. It’s not always bad, but it can be – disruption to the business from getting them up to speed on what is going on, dealing with the immediate injection of diverging ideas, and sometimes demands to generate a liquidity event so the heirs can go do something else. This issue can be avoided if the business has a plan.
There are two ways in particular a small, thriving business can protect itself in the event one owner/operator dies. The first is to make sure resources are available to find and train a suitable replacement; the second is to ensure that heirs to the deceased partner’s estate are compensated in accordance with the deceased’s wishes. And both of these needs depend on the value of the individual partner’s contribution to the firm, and the value of the firm itself.