What happens to your business if you die before you sell it?
Owners have a will and no plan for the business itself. Here is what actually happens, why the value falls so fast, and the small amount of work that prevents it.
General information only, not financial, legal or taxation advice. Tony Pope holds Queensland Office of Fair Trading licence 4963575.
The short version
- A will decides who inherits the business. It does not decide whether there is still a business to inherit.
- Owner dependent businesses lose value fastest, because the thing the buyer was paying for has gone.
- Bank facilities, leases and key contracts often contain clauses triggered by the death of a director or guarantor.
- The fix is not complicated. It is a document that tells someone what to do in the first fortnight.
This is not a comfortable subject and it is one of the few genuinely urgent ones.
A large share of the owners I meet have a will. Almost none of them have anything that tells a grieving family what to do about the business on the Monday morning.
Those are different documents solving different problems. The will decides who inherits. It does nothing at all about whether there is still something worth inheriting by the time it is read.
Why the value falls so fast
Every business sale involves working out how much of the value walks out the door with the owner. When the owner leaves in an orderly sale, that transfer is managed over a handover period. When they leave suddenly, it is not managed at all.
The businesses that suffer worst are the ones where:
The relationships were personal. Customers dealt with you. Suppliers extended terms because of you. A referral network sent work because of you. None of that transfers to an executor.
The knowledge was in your head. Which jobs are quoted and at what margin. Which customer is slow but good and which is slow and a problem. What the real cost of that contract is. Where the pricing flexibility sits.
The licence was yours. In trades, in health, in transport and in several other sectors, the business operates under a licence or registration held by a person. If that person dies, the business may not be permitted to keep operating until a replacement is in place.
Nobody else can sign. Sole director companies are the sharpest version of this. If you are the only director and the only signatory, the business cannot pay a wage, order stock or answer a bank until somebody is appointed. That takes weeks, and the business does not stop consuming money while it waits.
The clauses nobody reads
Have a look at three documents.
Your bank facility. Some contain an event of default triggered by the death of a guarantor. That does not mean the bank will act, but it means they may.
Your lease. Commercial leases frequently have provisions dealing with the death of a guarantor and with assignment. If the landlord's consent is required to assign, and the guarantor is deceased, that negotiation happens at the worst possible moment.
Your major contracts. Some contain change of control or key person clauses. Some allow the other side to terminate. Worth knowing which.
None of these is a reason for alarm. They are a reason to know what they say, because an executor discovering them for the first time under pressure has fewer options than you do now.
What actually helps
The single useful thing is not a legal document. It is a short, plain, current file that answers the questions somebody will have in the first two weeks.
- Who to call first. Your accountant, your solicitor, your bank contact, your insurance broker, by name and number.
- Where the records are. The accounting file, the bank logins, the payroll system, the customer list, the contracts.
- Who can sign, and how they get appointed if nobody can. This one sentence is worth more than the rest of it.
- What has to happen in the first fortnight. Payroll dates, BAS dates, the jobs in progress that cannot stop, the customers who must be called.
- Who to talk to about selling it, if that is the intention.
Keep it with your will, tell your family it exists, and update it once a year when you do your tax.
Insurance is a separate question
Key person insurance, buy sell agreements and life cover funding a share purchase are all real tools and they are worth advice from someone licensed to give it. What they do is provide money. Money is useful and it is not the same as continuity.
A business that receives an insurance payout and has no one able to run it still fails. Deal with the operating problem first.
If there is a partner
If you own the business with someone else, there is a further question: what happens to their half.
Without an agreement, the deceased partner's share passes under their will, which can mean you are suddenly in business with a spouse, an adult child, or an estate that wants to be paid out. A buy sell agreement, funded properly, deals with this. It is one of the things I would put ahead of almost everything else on this list if you have a co-owner.
The point
An owner dependent business is a discount at sale. On the owner's death it is closer to a cliff.
The work that fixes it is the same work that lifts the price in an ordinary sale: write things down, spread the relationships, make sure someone else can do what you do, and make sure someone can sign.
You get the benefit either way. That is what makes it worth doing this month rather than one day.
Common questions
What happens to a small business when the owner dies?
Control passes according to the structure. For a sole trader the business assets form part of the estate and the executor deals with them. For a company the shares pass under the will while the company continues to exist, which means somebody has to be appointed to run it. For a trust the deed decides, and the appointor provision matters more than the will does.
Can my family sell the business after I die?
Usually yes, but often for considerably less, and after a delay. Value falls where the business depended on the owner for relationships, technical knowledge or licensing. It falls further where nobody knows the passwords, the customers or the terms of the key contracts.
What is the single single useful thing to prepare?
A short written document that says who to call, where the records are, who can sign, and what has to happen in the first fortnight. It is not a legal instrument and it does not replace a will. It is the thing that keeps the business running long enough for the will to matter.
Keep reading
All notes on selling a business · All seller guides · What is my business worth?
Check it yourself
Primary sources, none of them affiliated with me and none of them endorsing this site. Where anything here differs from an official source, the official source is right.
Links open on external government and industry websites. The full list sits on licensing, registers and official sources.
Ask what it is worth
Free, in writing, and nobody finds out you asked. Tell me the trade and the suburb and I will do the rest.
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If you would rather not put anything in writing yet, ring 0431 124 128. Prefer to pick a time yourself? Book a time in my diary.
Thinking about selling?
Thirty minutes, on the phone or in person, at a time that suits you including evenings. You will get a straight read on where the business sits today and what would move the number. It costs nothing, there is no obligation, and nobody finds out you asked.