A state of momentary confusion typically engulfs a loved one when notified that her husband or his wife has just been in a serious accident or has passed away. Suddenly the surviving spouse’s world is turned upside down and life-altering decisions must be made, especially when a family business is involved.

Consider the story of Amanda, whose husband Tory was hit by a drunk driver while riding his motorcycle. Even though she had worked in their business, she was unprepared to replace him as principal operator.

It was apparent that the business would soon unravel with no one in control of day-to-day decisions. Amanda quickly found that Tory’s will and life insurance were of little help. Each would apply only in the event of his death. Instead Tory’s durable power of attorney appointed Amanda as his personal representative to conduct business if he became incapacitated.

TAKING OVER

The family’s financial future depended on her working in his place. Somehow she and the employees had to keep the business operating. Her management style could be described as crisis control through trial and error as she learned from daily mistakes. There was no plan to assist her in running the business, only the legal temporary transfer of authority provided by the power of attorney.

A major fear of many spouses is what happens to them and their families if their husband or wife — the principal operator of a company — becomes unable to run a small family-owned company. The answer depends on many things, including what planning and preparation has been done before the triggering event occurs.

If there has been no planning, the fate of the business falls to state statutes that direct the appointment of the disabled owner’s personal representative. The ability to control management of the company can transfer with the appointment. There is no guarantee that a family member will be appointed to that position. A family’s future interest in the business remains in peril depending on the appointee’s success.

An adequately prepared spouse can be the key to a business’ survival. The spouse’s designation as personal representative in either a durable power of attorney or a will gives the person authority to represent the owner’s interest in a company. If the owner controlled the fate of their business, then the spouse can automatically succeed to that position, unless limitations have been made in the estate-planning documents.

In this case, however, the company’s fate depends on the successor spouse’s decisions. Often the successor spouse is placed in the owner’s position as a means of convenience, it never being expected that he or she would have to operate the family business. Little thought has been given to the spouse’s qualifications or ability to handle the burden.

KNOW YOUR OPTIONS

Spouses need to have some type of organized action plan just in case they have to assume control. A prepared spouse is aware of the options for running a business before a triggering event occurs. Options include: 

• Continue to personally operate the business
• Operate the business as an overseer, not involved in daily operations
• Elevate a designated employee to be chief operating officer
• Hire a temporary experienced manager
• Sell all or part of the business as soon as possible
• Exercise an operating, purchase or buy-sell agreement

Making the appropriate choice depends on many factors. Chief among them is the length of time anticipated for the successor spouse’s involvement. Will the spouse’s participation be short-term until the owner recovers? If so, how long should the company be operated with temporary leadership before implementing a permanent succession plan? And will a permanent plan mean different ownership and/or management?

In some cases the successor spouse may qualify to represent the owner’s interest but not have the necessary license and education to run the company. If necessary, a qualified manager with the necessary qualifications can be hired.

The potential successor needs to develop an action plan based on:

His or her:

• Management ability
• Availability
• Motivation
• Operating knowledge of the company

The company’s:

• Type of legal entity
• Size
• Number of employees (their knowledge and experience)
• Diversification of management
• Diversification of product or services

All businesses are not created equally. Entitlements and protections vary under state statutes, according to how a business was legally structured. For instance, ownership interest of a company started and continually operated as a sole proprietorship ends when the owner can no longer participate in its activity. Companies created and operated as a corporation, partnership or limited liability type of either have owner interests to transfer.

START TEACHING

Developing a successor spouse’s action plan starts with learning through dinner table discussions and reading trade magazines. The education should be broad in scope so options are understood. Detailed operating knowledge is not required because businesses change daily in response to demands. Instead the spouse needs to be prepared to make crisis decisions.

Consider what your first steps would be in implementing an action plan. Different triggering events require different responses. Before any options are exercised, the first step of an action plan should be to gather all available information about the company. Confidential disclosures, useful shortcuts, administrative details, operating mechanics, guidelines and overviews detailed in an operating plan would be valuable aids in decision-making. Using a trusted adviser for support and guidance could also be of tremendous importance. From whom and how a spouse obtains assistance should be part of the operating plan document.

When unfortunate events strike, a prepared spouse with an action plan can make the difference for a business’ continued operation and a family avoiding financial crisis.