The complete guide to losing a spouse who owns a business

There’s no way to be fully prepared for a major life change such as the passing of a husband or wife. Most people don’t even know where to start. This article is an easy, clear guide to what you should do after losing a spouse who owns a business. We’ll cover:

• Business basics – what forms a business usually takes
• What a business valuation is
• What happens when a business owner passes away
• The parties typically involved in a business transaction
• Steps to take after losing a spouse who owns a business
• The legal documents that govern businesses
• What your options may be for your deceased spouse’s business

Before we get started, we are financial advisors in Utah. We’ve written the following blogs about financial tips for widows that you may enjoy:

Financial planning for women

Estate planning basics for women

The complete guide to losing a spouse who owns a business

Social Security Survivor Benefits

What if you lose a spouse who owns a business?

Before we get to the discussion of what to do if a business-owning spouse passes away, let’s talk about the basics of business structure.

There are many different forms a business could take; we’ll cover the four most common ones.

• A business is a sole proprietor if it has one owner. The owner is also the operator of the business. All profits are awarded to the owner, and all losses and liabilities are the responsibility of the owner. Taxes are paid by the owner, not the business.
• A partnership business has two owners. It’s important to note that partnership agreement should be in place to outline the percentage of ownership that each partner has. Although taxes are filed separately by each partner, the business’s finances are reported as one single entity. Both partners share the profits, and are held responsible for the debts of the business.
• Corporations also go by the name “C Corp.” A C Corp is totally separate from its owners. Taxes are due on the profits of the business. Corporations, unlike other types of businesses, can sell shares of stock.
• Limited liability corporation. This business structure protects the owner from liability. That is an important difference from being a sole proprietorship or a partnership.

What you need to know:

What we’ve outlined is a high-level overview of some of the types of businesses that it’s possible to have. You don’t need to know all the details about them – that’s for your legal or business contacts to handle – but you should know what type of business your spouse had, how it is taxed, how profits and liabilities are managed, etc.

This will come into play later when we talk about what to do with a business you were left by a spouse, what happens to the business, etc.

Know the value of the deceased spouse’s business

When deciding what to do with a business that has been left to you after losing a spouse, it’s important to understand how business valuations work.

A business valuation is a numerical value that represents what a business is worth. It’s important to conceptualize this because you will be faced with the decision of what to do with the company (buy, sell, or continue to run it).

How is a business’s worth determined? There are a few different ways.

#1 Net Assets

Under this method, a business’s worth is determined by the value of its net assets.

• An asset is anything of value that the business holds, whether tangible (such as cash, inventory, or equipment) or intangible (such as trademarks, patents, etc.)
• A liability is any type of debt or obligation that is due.
• Net assets are the business’s worth, equal to the assets of the business minus its liabilities.

To make a simple analogy, let’s imagine you owned a house that you wanted to put up for sale. The house is worth $550 with a mortgage of $215k. Under the net assets method, the value would be the equity in the house, or $335k ($550 -$215k).

#2 Market value

Some businesses are assessed a value based upon what other comparable businesses in the market are selling for. Much of this determination is made by looking at its net profits, or the amount of income left over after all expenses have been paid. A professional such as an accountant, business broker, appraiser, or investment banker will look at the business’s periodic income and expenses, and try to gain an understanding of what its profits look like on an ongoing basis.

An analogy would be if you owned a house on a street and wanted to assess its worth by the market value method, you would get a sense of what the other houses on the street similar in makeup are selling for, and assign a multiple to it relative to the others on the street.

What you need to know:

If you find yourself in a situation of having lost a spouse who owns a business, you’ll be relieved to know that you won’t need to be responsible for valuing your deceased spouse’s business. However, you should be aware of what a business valuation entails.

The value of the business has a big impact on the sale price, if you decide to divest of it. This could have a large impact on your standard of living and your family’s wellbeing. Make sure you get an objective and fair assessment, and if need be, ask for a second opinion. Also, the data gathering process (while exhausting) is of critical importance. Leave no stone unturned, and take your time when compiling all the necessary information to determine the value of a business left to you by a spouse.

After you lose a business owning spouse…

Our next topic is to discuss what typically happens after a business-owning spouse passes away.

Remember we were talking about business types, a few sections back?

If your spouse who passed was a sole proprietor, the business will simply have ceased to run after he or she passed. The operations cease and assets of the business are passed to the beneficiary in accordance with the business owner’s will.

But what if it was a different type of business, let’s say a corporation, for example. Here’s where it gets a bit more complicated. The executor of the deceased person’s estate now owns the business.

That’s a bit more complicated.

Why?

If your spouse owned a business that is structured as a corporation, and he or she passes away, you could potentially become the new owner.

Are you ready for that?

Most people aren’t. That is precisely why we encourage anyone who has lost a spouse who owned a business to know what actions they’ll need to take if they find themselves in such a situation. So, let’s talk about them!

Steps to take

If you are left with a business after losing a spouse, here are the steps to take.

#1 Assemble a team

The parties usually involved in the sale of a business are the following:

Employees

The people who work at the company headed up by your spouse who passed are very important. They may be the ones who continue its legacy, were the company to go on. They also may play a role in helping you gather important information about the company’s operations and or financial status. The people are the business’s largest asset.

Business broker or investment banker

A business broker or investment banker is called on to help someone buy or sell a business. They are skilled in valuing businesses and negotiating deal terms. To do so they will need access to the company’s financial data.

Accountant

Accountants are tax experts. They will help you determine what the tax implications are of any decisions regarding the business, whether you decide to sell it, donate part of it to charity, or retain your interest. The accountant may also be involved in bookkeeping for the business and have important records you will need.

Attorneys

An attorney’s role is to assist with any documentation involved. They may help you interpret the bull/sell agreements, the business’s legal charter, employment contracts, etc. and decide the best course of action from a legal perspective for any decisions you make.

Financial advisor

A financial advisor is someone who helps a person achieve their financial goals such as retirement or sending kids to college. The financial advisor will work with you to figure out how to manage the sale of the business in concert with your financial objectives. At Rock House Financial we are often the quarterbacks to help coordinate your team and keep every moving towards the goal.

#2 Obtain all important documents

After the death of a spouse, there is an inundation of paperwork of all kinds. For many people, this can be the most overwhelming part of losing a spouse. The documents you’ll typically need to gather after the loss of a spouse who owned a business may include the following:

• Articles of incorporation or organization
• Business charter
• Buy/sell agreement
• Employment contracts
• Vendor contracts
• Rental leases
• Title and deed documents
• Company bylaws (if a corporation)
• Operating agreement (if an LLC)
• Non-disclosure agreements
• Non-compete agreements
• Financial statements (checking account statements, income statements, balance sheets)
• Tax returns
• Merger/acquisition agreements
• Insurance policies
• Licenses
• Company policies/handbook

Don’t be intimidated! This is a process, just take it one by one. You won’t have to do it all alone; feel free to call on the support of the parties mentioned in Step 1 in gathering all the documents.

Case study: Jan

Jan’s husband, Justin, was young and had just gotten his business into a stable place that was providing steady income to the family. He very unexpectedly died with only a very small life insurance policy and several debts from the business. Justin’s business was based entirely online, and Jan did not have any of the passwords. She knew very little about the business, yet it was vitally important as an asset to help her pay off debts and provide some income for her and her children.

The task of gathering documents was a formidable one, at a time when Jan was already facing a great deal of emotional turmoil.

Fortunately, there was one 1099 contractor who worked with Justin; her name was Marta. A couple years earlier, Justin had a business partner, Austin, who sold out his part of the business to Justin to pursue a different venture.  Marta and Austin helped Jan get access to email and websites, reset passwords, and keep the business running and income flowing. After several months, Marta offered to purchase the business.

Jan receives monthly payments to support her and the family. She is grateful for his hard work building the business, which continues to support their family after his death.

#3 Value of business

After you assemble the team and gather the documents, you’ll have the inputs you need to ascertain a value for the business.

This step is of high importance.

It may seem like just a number on a piece of paper, but it’s way more than that.

The proceeds from the sale are likely critical to your financial wellbeing. They may be used to fund your kids’ education, pay off large debts such as a house or other real estate, or form the nest egg for your retirement. The income from the business may not be there anymore; this may be all you have to go on. Don’t take this step lightly, and make sure you are working with people you trust. If you feel anything is off when coming to the value of a business left to you by a spouse, get a second opinion.

Make decision: continue, close, or sell

So, you’ve assembled the team, gathered the documents, and obtained a value for the business of your spouse who passed away. What’s next?

There are three major ways you could go from here.

#1 Continue the business

You could continue to run the business. You’ll retain your ownership stake, but may possibly have to hire some type of manager or executive to make decisions and run the show, should you so desire.

This is a serious undertaking so be sure to ask yourself if you are emotionally ready to commit your time, resources, and mental energy.

Case study: Kathy

David and Mike were business partners. When Mike passed away, his wife, Kathy, decided to step into Mike’s job and became partners with David. Mike had been the customer service and face of the business with clients. And while Kathy had many skills, she didn’t have the passion for the business or knowledge base that Mike had.

Over time the business started to lose clients as they didn’t receive the same level of service they were used to. Finally, Kathy decided to sell the business but for much less if she had sold after Mike’s death because at that point, the income of the business was lower. It had also created bad feelings with David, who had once been a close family friend.

This vignette illustrates the importance of being true to the end clients of the business when you lose a spouse and need to make a decision about what to do with it. Perhaps if Kathy had an advisor or coach to question her about her true commitment to ensuring the service quality of the business, she would have made her decision with the interests of the end client mind in mind much sooner, and the situation may have had a rosier ending.

#2 Close down the business

As mentioned before, if your spouse was a sole proprietor, the business will close down automatically. You may have come to the realization that you aren’t game for keeping the business alive, or perhaps the value you’d gain from selling it isn’t enough to make you want to go that route. In either case, you could decide to close down the business, sell off its assets, and call it a day.

#3 Sell the business

You may choose to keep the business going as a viable entity and sell off your interest. To do this, you’ll have to find a buyer for your stake, whether you own the whole entity or just part of it.

It’s rare for people to feel motivated to face the sale of a business after losing a spouse.

While we’re not experts in selling businesses, we would advise you to proceed with caution. There’s nothing that says you have to accept the first offer you get. There are many aspects of determining if the buyer is a right fit for you and it doesn’t have to do just with the money.

• Culturally and personality-wise, are they going to match you and your spouse’s values?
• Are the employees going to be happy, and most of all, what about the customers?
• Think about the legacy that your spouse would have wanted to leave. Does the buyer line up with that? Most of all, do they embody those ideals?

Case study: Carol

When Carol’s husband, Jeff, was a sole proprietor who became afflicted by cancer. It was almost totally disabling and the treatments were intense.

Carol stepped in and took over the business, she spent a lot of time learning and getting coached by Jeff from his bed. This kept their income stable, while Carol learned  a new trade, taking care of him and their home concurrently. When he passed away, she continued the business. However, after several years she realized she was not as excited about running the business as she had initially thought. She sold the business and reinvested those profits into a business she was passionate about.

Selling your spouse’s business

There are many different ways to arrange the sale of a business after losing a spouse. One of the major considerations when selling is how you will be taxed. You may decide to take a lump sum or sell it in parts, recognizing each section in different years, so that the tax impact is spread out over a period of years. Here’s where you want to make sure that you call on the support of your team, especially the attorney, business banker, accountant, and financial advisor.

If you are charitably-minded, consider gifting part of your business stake to a charitable vehicle such as a Donor Advised Fund (DAF) or Charitable Remainder Trust (CRT), before you execute the transaction. As this counts as a charitable donation for tax purposes instead of a business sale, no taxes are due. The DAF or CRT then sells the donated portion of the business and invests it, with the proceeds being gifted to a charity of your choosing. You get the double tax benefit of the charitable deduction and you avoid the realization of the taxes on the sale of the business.

Case study: Peggy

Peggy’s husband retired early from his corporate job, as he had built a large real estate portfolio that gave them income, performing all the upkeep and property management himself.

When he passed away, Peggy had no desire to be a landlord on her own and decided to sell several of the properties that required more upkeep. The sale of the properties would allow her to pay off debts and do some traveling with her grandkids.

However, she had anxiety about the tax burden for selling the properties, which would be quite significant. Peggy paid tithing regularly to her church, and donated to other charities that were meaningful to her.

Rock House Financial was able to help her donate a property to a Donor Advised Fund (DAF) before selling. She received a large charitable deduction to offset the sale of the other properties. She did not have to pay tax on the gain on the property donated to the DAF, reaping a double tax benefit. She regularly pays her tithing and donations to charities out of the Donor Advised Fund

Conclusion on what to do after losing a business-owning spouse

We hope that our article on what to do if you lose a spouse who owns a business has been helpful, and that is has provided you with some peace of mind in a tumultuous time

The guidance we’ve provided here in general in nature and cannot be construed as a recommendation specific to any one person. It all depends on your situation, so please contact us if you’d like to discuss your plan to get started on a financial strategy for handling the loss of a spouse who owned a business.

Thanks for reading, and before you go please check out our podcast for widows.