Estate trustees must be proactive when overseeing a business

May 30, 2017
Financial services Liquidity Financial consulting

Knowing how to avoid failure is an essential element of business survival. This particularly rings true in Estates where an Estate holds the shares in an operating business where the deceased was the sole owner and essentially the “mind and management” of the company. As is characteristic with most entrepreneurs, much of the business knowledge that led to the success of a particular company remains with the entrepreneur and upon the entrepreneur’s death, gets buried with the deceased.

Depending on the capabilities of the estate trustee(s), panic may set in as to how they will deal with such an asset. Do they have the skillset to maintain or increase the value of an operating business? Do the beneficiaries have the knowledge and desire to assume it? Further, unless there is discretion in the will to retain the business, an estate trustee must look to sell the business within a reasonable period of time, with a view to obtaining the best price available.

Estate trustees need to be proactive in overseeing a business’ operations and preparing the business for sale by ensuring that they have, among other things, the following:

  • Someone in charge to run the business. Upon the death of the entrepreneur, the impact on the business cannot be overstated. Not only will there be angst and uncertainty amongst the business’ employees, but customers and suppliers will need to be assured that their needs will continue to be met. As a result, the estate trustee will need to ensure that competent management is at the helm, the board of directors is properly consummated, and needs to decide whether the estate trustee should join that Board.
  • Current financial informationWhile it sounds basic, information must be timely for management to make decisions quickly in response to changing circumstances. Successful companies instill a discipline of requiring periodic financial statements, cash flow projections (to allow them to compare actual performance to budget), aged accounts receivable and payables listing and other financial information. By comparing different financial periods and carrying out of financial ratio analysis, a company can spot trends and be alerted to problem situations before they have an impact on the business. Cash flow forecasting identifies future cash requirements that need to be anticipated so that they can be dealt with before they occur. Estate trustees must ensure that they are receiving timely financial information on the business’ operations, and equally important, that the information is in a format that they understand.
  • Management depth. Once the initial shock wears off, assessing the depth and quality of the management team must be done to ensure the team has the capabilities and capacity to continue operations. The “right” management depends on many circumstances, one of which is the stage at which a business is operating. From experience, a one-person rule, an unbalanced administrative team or weak finance function could prevent the business from effectively addressing inherent challenges. Good employees will leave a business that is in flux or one that fails to provide them with challenges and responsibilities. The estate trustee will need to assess employee turnover, particularly at management level, to determine if there are issues that need to be addressed.
  • A Handle on Liabilities. An organization’s liabilities must be reviewed to ensure that they are being paid. These obligations normally include amounts relating to government creditors, trade creditors, operating lines of credit and term loans. Of particular concern are payments on account of source deductions and HST, which, if unpaid, can be assessed personally to the director.
  • Insurance coverage. All insurance policies must be reviewed forthwith to ensure that the business is adequately covered in the event of a business loss or catastrophic event. An investigation into whether the deceased had a key man life insurance policy will also need to be considered.
  • Maximizing shareholder value to position a business for sale. If the decision is made to sell the business, steps will need to be undertaken to maximize the value of the business, including making the opportunity more attractive to potential purchasers. Matters to be considered by the estate trustee include available historical financial information, the identification of buyers, income tax planning to optimize the after-tax proceeds from the sale for both the company and the estate, and the timing and time period for the sales process.

Maintaining or enhancing a business’ value is an inherent responsibility of estate trustees. Without the proper skill set, the estate trustee may find that it is easier said than done!


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