The Problem of Business Owner Death

How do I protect my family from being forced to sell it at a depressed value if I die or get sick?

Many business owners want to run their businesses for the rest of their lives.  This is praiseworthy.  It reflects the fortitude that we hard workers hope to maintain in our older years.  In what some interpret as an anti-retirement poem, Dylan Thomas wrote:

  • Do not go gentle into that good night, 
  • Old age should burn and rave at close of day; 
  • Rage, rage against the dying of the light.

However laudable this goal is, it generates a problem:  If the owner dies or suddenly becomes ill, their family might be forced to sell their business.  Without its owner at the helm, the business might deteriorate quickly, resulting in the family being forced to sell at a depressed price.

Inadequate Solutions

  1. One costly solution is life insurance, but that may be unavailable to business owners of advanced age.  It is also gambling against the casino.
  2. A 76-year-old business owner suggested he might create a fund of $100,000 that would be spent on an outside consultant who would manage his business upon his death until the business were sold.  The cost of incentivizing a qualified consultant to immediately drop their current work and to ensure a successful sale may be substantial.

Recommended Solution: “Business Will”

A “Business Will” encompasses legal documents that would execute the following steps on a contractually greed-upon timeline initiating upon the earliest of (a) your authorization, (b) your designee’s authorization if you are alive but unable to give authorization, and (c) your death:

  1. A key employee would be instructed to perform any tasks necessary during the first 30 days after initiation (including communicating with stakeholders).
  2. Your firm’s accountant of record would make a defined set of determinations about your firm’s current state (e.g. its annual profit) and gather a defined set of documents and information.
  3. Our firm would receive the information compiled by your accountant and insert it into an otherwise complete set of marketing materials describing your business.
  4. Our firm would insert some of that information into the seller representations section of an otherwise complete set of business sale agreements.
  5. Our firm would share the updated marketing materials, business sale agreements, and an auction agreement with all parties on a pre-existing list of interested and qualified parties.
  6. The first N of those parties to (a) sign the auction agreement and (b) pay a four-figure deposit into escrow would participate in the auction, which would be private.  If N parties did not pay their deposits by a certain date, then some parties would be offered an inducement fee contingent on their being one of the top losing bidders.  The auction would proceed if at least M parties paid deposits by a certain date (M<N).  The auction would be subject to a reserve price based on a formula.
  7. Upon the close of the auction, (a) the winning bidder would place a large, non-refundable deposit into escrow; (b) all profits accrued between that date and closing would belong to the buyer but remain in your firm’s possession until closing; (c) the buyer would be authorized to be interim manager of your firm; and (d) they would receive a set of prepared operating instructions.
  8. Due diligence, financing and closing would proceed on a normal timeline.


Upfront Fees

  • Generation of valuation model: $1,500
  • Generation of marketing materials (approximately 60 pages): $1,000
  • Identification of an initial set of interested parties (replacements might need to be found in the future): $3,000
  • Attorney time: $150/hr if you use the attorney with whom we normally work (estimated 10 hours: $1,500)

Total upfront fees = $7,000

Annual Fee

  • Annual fee for checking that interested parties are still interested: $125/yr

Total annual fees for 23 years = $2,875

Sale Fee

  • Fee upon sale: 6.7% of the first $1m of purchase price, 5.4% of the second $1m of purchase price, 4.0% of the third $1m of purchase price, 2.7% of the fourth $1m of purchase price, and 1.3% of any amount of the purchase price exceeding $4m.  At a purchase price of $3.75m, the success fee would be $180,900

Estimated total fees, including upfront fees, 23 years of annual fees, and sale fees: $208,775 at a purchase price of $3.75m, which is 5.5% of the purchase price.

Benefits of the "Business Will"

  1. Less Uncertainty.  Your family will know as much as possible about what will happen to your business in the event of your death.
  2. Lower Decision-Making Burden.  In the event of your death, your surviving family members are not required to make any decisions.  Without a Business Will, even if an M&A advisor is hired, your family members will need to make many decisions, such as whether to accept an offer.  Note that (a) they might make incorrect decisions (possibly guided by a solely self-serving M&A advisor), (b) they might have a family conflict about what is the right decision, and (c) making these decisions might cause stress at an emotionally distressing time.
  3. Higher Purchase Price.  Due to the unavoidable inadequacy of countervailing evidence, business buyers believe that the magnitude of a business’s decline in value after the death of its owner is directly proportional to the time that has elapsed since the owner’s death.  Therefore, the market value of a business ceaselessly declines as more time passes after its owner’s death (assuming its financial performance remains unchanged).  Because the Business Will minimizes the time between owner’s death and business sale, it helps to maximize sale price.
  4. Less Loss of Cash Flow.  Because the winning bidder would earn your firm’s profit starting from the date of the auction’s closing, they will have a better incentive to manage your firm well than a consultant hired as an interim manager.  Consequently, less current or future operating cash flow would be lost.  
  5. Zero Expense for Interim Manager.  You and your estate will not be financially responsible for the expense of an interim manager because all expenses after the close of the auction would accrue to the buyer.
  6. Lower Lifetime Fees.  The above structure saves you or your estate approximately $50,000 in business sale fees, relative to Next Bridge Advisors’s normal sale fee and after accounting for an annual cost of capital applied to the upfront fees.