Most companies in the US are small businesses, owned by either a single person or a couple of individuals. What happens when the sole owner or an individual owner dies? Did they have a will? Were there provisos in the management agreement (should it be an LLC/Partnership) that defines continuity?
Without one, the company will remain in limbo for an extended period until the will is probated, and if no will, that time will be extended as different interests vie for rights to the estate. What will your business do?
Even if there is a management agreement, you may not be out of the woods. Who drew up the agreement? Who checked your agreement? Does the agreement cover all contingencies?
When a management agreement failed
I consulted as the CFO for a family-owned business that had a management agreement. The family members met with their attorney in “secret” and created a management agreement with proviso should one of the members of the Limit Liability Corporation die. They signed the agreement and gave it to me to file a copy in the company filing cabinet in a sealed envelope.
They didn’t ask me to comment on the draft. They didn’t ask our public CPA firm to comment. They knew better. As you can probably realize they left something out. It was a small issue, but it cost the surviving partner a tremendous amount of time, energy, money and strained familial relationships.
The member who died, died intestate. The management agreement, as far as the LLC was concerned spelled out distribution of the deceased members equity. For those who have sold or purchased businesses, a valuation was necessary to determine that dollar amount.
Simple, you say? It should have been. The agreement has a formula to ease the calculation. The formula was logical, well defined, and well…incomplete. As Sheldon Cooper of the Big Bang Theory would say “Bazinga!” The joke was on the membership and the attorney for missing this crucial element. One that a third set of eyes (financial) would have caught.
Their algorithm for valuation only covered increasing sales/revenue over time. It never dawned on them that the company could go into a slump, for whatever reason. That caused the valuation to be way too high, and hence the legal fights over “what was the true valuation”.
Moral of the story
The ownership of any company (especially privately owned) need not only Last Wills & Testaments, but where applicable, Management Agreements. The sections dealing with business assets needs not only written to protect the wishes of the individual but double-checked for both permutations and the law of unintended consequences.
Don’t put off for tomorrow what can be started today, especially in these times.
