Estate Attorneys' Guide to Handling Complex Business Assets in Probate

When the Deceased Owned a Business: Why Complexity Multiplies

Most probate estates are straightforward: a house, some bank accounts, retirement accounts, maybe an investment portfolio. The executor locates assets, pays debts, and distributes what remains to heirs.

Business ownership changes everything. When the deceased owned a family business, a professional practice, commercial real estate, or a partnership interest, probate administration becomes exponentially more complex. The business is often the estate’s largest asset. It generates ongoing income. It may have employees depending on it for their livelihoods. It may have contractual obligations that do not pause for probate.

The attorney managing a business-owning estate must balance competing demands: ensuring the executor has legal authority to continue operations, protecting the business from deterioration during probate, handling valuation and tax implications, managing shareholder or partnership agreements, and facilitating eventual business transition or sale.

This guide addresses the estate attorney’s role in managing complex business assets during probate.

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Understanding the Types of Business Assets Families Own

Individual Proprietorships and Sole Proprietorships

An individual proprietorship is the simplest business structure: the deceased owned the business as an individual, no formal entity.

Characteristics:

• No separate legal entity (the business is the person)
• All business assets are estate assets
• All business debts are estate debts
• Executor has immediate authority to continue operations (though may need court approval for significant decisions)
• Business income and expenses reported on the estate’s income tax return (Form 1041)
• Simple to value: business value equals fair market value of assets less liabilities

Probate implications:

• Executor can continue operating the business immediately after death
• No partnership or shareholder agreements to navigate
• Asset identification is straightforward (business equipment, inventory, accounts receivable, etc.)
• Income during probate is subject to estate income tax
• Potential for business disruption if key employees leave or customers defect

Attorney’s role:

• Ensure executor understands they have authority to continue operations
• Inventory all business assets (equipment, customer lists, intellectual property, cash)
• Coordinate with business’s accountant or bookkeeper to maintain operations
• Arrange for business insurance to remain in force
• Consider whether business should be sold during probate or transferred to heir

NC statute reference: NCGS 28A-13-3 (Executor Powers Regarding Business)

Partnerships and Limited Partnerships

If the deceased was a partner in a partnership or limited partnership, the partnership agreement likely controls what happens at death.

Characteristics:

• Partnership interest is an estate asset
• Partnership agreement specifies what happens upon death of partner (buy-sell agreement, forced sale, redemption, etc.)
• Partnership may continue with remaining partners or may dissolve
• Partner’s income and business debts flow through to personal/estate tax return

Probate implications:

• Partnership agreement may require estate to sell partnership interest to remaining partners
• Buy-sell agreement may specify purchase price or valuation method
• Partnership may have life insurance policy funding the buy-sell agreement
• Executor may need to enforce the agreement or negotiate modifications
• Partnership interest may be illiquid (difficult to sell to outsiders if buy-sell fails)

Attorney’s role:

• Locate partnership agreement immediately after death
• Review buy-sell agreement for death provisions
• Determine purchase price (is it specified in agreement, or must it be appraised?)
• Coordinate with remaining partners and partnership counsel
• Ensure partnership maintains life insurance on key people to fund buy-sell
• If partnership interest must be sold, manage the sale process through probate

NC statute reference: NCGS 59 (Partnership Law)

Limited Liability Companies (LLCs)

LLCs are the most common business structure for small and medium-sized businesses. The deceased’s membership interest is an estate asset.

Characteristics:

• Membership interest is an estate asset
• Operating agreement specifies what happens at death (buy-sell, redemption, transfer to heir, etc.)
• LLC continues if agreement allows; may dissolve if agreement specifies
• Member’s income flows through to personal/estate tax return

Probate implications:

• Operating agreement likely contains death provisions (buy-sell agreement)
• Remaining members may be required to purchase deceased member’s interest
• Valuation may be specified in agreement or may require independent appraisal
• LLC may have life insurance to fund buy-sell agreement
• If membership interest is transferred to heir, heir becomes new member (may not be desired)

Attorney’s role:

• Immediately locate operating agreement and any buy-sell agreement
• Review what happens at death: is interest purchased, transferred, or does LLC dissolve?
• If purchase agreement exists, coordinate purchase price and timing
• If purchase fails or agreement is ambiguous, negotiate with remaining members
• Consider whether heir should become LLC member or whether interest should be sold
• Coordinate with business’s CPA on tax implications

NC statute reference: NCGS 57C (Limited Liability Company Law)

Corporations and Closely-Held Stock

When the deceased owned stock in a corporation (particularly a closely-held, family corporation), the stock is an estate asset subject to probate.

Characteristics:

• Corporate stock is an estate asset
• Shareholder agreement may control what happens at death (buy-sell agreement)
• Corporation continues after shareholder’s death (separate legal entity)
• Shareholder’s death does not interrupt corporate operations
• Dividends paid to estate or heir based on stock ownership

Probate implications:

• Stock valuation can be complex (closely-held stock may have no ready market)
• Shareholder agreement may require surviving shareholders to purchase deceased shareholder’s stock
• Executor becomes shareholder until stock is distributed to heir or sold
• Executor may need to vote stock at shareholder meetings
• Estate may receive dividends from corporation during probate
• If stock is distributed to heir, heir becomes shareholder

Attorney’s role:

• Locate and review articles of incorporation and any shareholder agreement
• Determine stock ownership percentage and voting rights
• Review shareholder agreement for death provisions (buy-sell, redemption, etc.)
• Obtain stock certificates and verify they are in deceased’s name
• If buy-sell agreement exists, coordinate valuation and purchase
• Consider valuation for estate tax purposes (Form 706)
• Determine whether stock should be distributed to heir or sold

NC statute reference: NCGS 55 (North Carolina Business Corporation Act)

Professional Practices

Attorneys, physicians, dentists, accountants, and other licensed professionals often own their practices as sole proprietors, partnerships, or professional corporations.

Characteristics:

• Business operations tied closely to personal reputation and professional license
• Cannot be continued without proper succession planning
• Often highly valuable but difficult to sell
• May have non-compete or non-solicitation agreements
• Employees may be key to practice value

Probate implications:

• Practices may have limited viability without the original professional
• Key employees may leave upon death
• Client or patient relationships may be difficult to transfer
• Professional license restrictions may limit who can own practice
• Without succession plan, practice may deteriorate rapidly during probate

Attorney’s role:

• Determine whether the deceased had a succession plan
• Review any buy-sell agreements with other partners or practice owners
• Assess whether practice can be continued short-term (employ replacement professional, maintain continuity)
• Consult with practice management specialist about valuation and sale
• Communicate with employees about future of practice
• Consider whether heir or partner should purchase the practice

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Valuation: How Much Is the Business Worth?

Business valuation is one of the most complex issues in estates with business assets. Valuation affects estate tax liability, can determine whether estate taxes are owed, and directly impacts the value distributed to heirs.

Valuation Methods

Fair Market Value Standard: The IRS defines fair market value as the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.

Common valuation methods:

1. Income Approach: Business value based on its earnings potential

   • Discounted cash flow (DCF): Project future cash flows; discount to present value
   • Multiple of earnings: Use industry-standard multiplier of earnings (e.g., 3x EBITDA)
   • Capitalization of earnings: Divide normalized earnings by capitalization rate

2. Market Approach: Business value based on comparable sales

   • Comparable company analysis: Compare to recent sales of similar businesses
   • Industry multiples: Use average valuation multiples for the industry
   • Market transaction prices: Base valuation on actual arm’s-length sales

3. Asset Approach: Business value based on asset values

   • Net asset value: Assets less liabilities
   • Adjusted net asset value: Adjust assets to fair market value less liabilities
   • Liquidation value: What would assets sell for if liquidated quickly

Which method to use? This depends on business type, available data, and circumstances. Most business valuations use multiple methods and average the results.

Professional Valuation Requirements

When does the estate need a professional valuation?

• Estate tax requirement: If estate exceeds $13.61 million (2024 threshold), Form 706 must be filed and includes business valuation
• Estate value close to threshold: If business represents substantial estate value, professional valuation ensures supportability
• Dispute likely: If heirs will disagree on value, professional appraisal provides defensible valuation
• Complex business: Family businesses, professional practices, and other complex entities warrant professional valuation
• Tax planning: If trying to reduce estate tax, appraisal may support valuation discount

Who performs the appraisal?

• Certified Business Appraiser (CBA): Member of American Society of Appraisers; meets education and experience requirements
• Accredited Senior Appraiser (ASA): American Society of Appraisers credential; signifies advanced expertise
• Chartered Financial Analyst (CFA): Investment and valuation specialist
• Industry specialist: Some appraisers specialize in specific industries (restaurants, medical practices, family businesses)

What does a business valuation cost?

• Simple business valuation: $3,000-7,000
• Complex business valuation: $7,000-15,000+
• Additional appraisals for different purposes: $2,000-5,000 per appraisal

The cost varies based on business complexity and appraisal depth required.

Valuation Discounts

For closely-held businesses, appraisers often apply “discounts” to the calculated value, reflecting the reality that minority stakes in closely-held businesses are less valuable than their pro-rata share of total business value.

Common valuation discounts:

• Minority interest discount: Minority shareholders have no control; discount 20-40%
• Lack of marketability discount: Closely-held business stock has no ready market; discount 20-40%
• Key person discount: Business value depends on specific individual; discount if that person’s value cannot be transferred
• Lack of liquidity discount: Difficult to convert to cash; discount 10-30%

Example: A family business is appraised at $1,000,000. If the deceased owned a 20% minority stake, a 30% minority interest discount would apply:

• Pro-rata value: $1,000,000 × 20% = $200,000
• With 30% discount: $200,000 × 70% = $140,000

The difference ($60,000) represents the discount for lack of control.

Disclaimer: Appraisal discounts are legitimate tax planning tools when properly applied. However, the IRS challenges aggressive discounts. Any appraisal claiming large discounts should be prepared by a qualified appraiser and well-documented.

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Operating Agreements, Buy-Sell Agreements, and Succession Planning

Operating Agreements: The Blueprint for What Happens at Death

Operating agreements (or shareholder agreements for corporations) are the governing documents that specify what happens when an owner dies or becomes incapacitated.

A well-drafted operating agreement addresses:

• Ownership restrictions: Can membership interest be transferred to an heir, or must it be offered to remaining members first?
• Death provisions: Upon owner’s death, what happens? Do remaining members buy the deceased’s interest? Does the business dissolve? Does the interest pass to the heir?
• Valuation: How is the deceased’s interest valued? Specified price, formula, third-party appraisal?
• Purchase mechanics: If remaining members purchase, how is payment structured? Lump sum, installments, life insurance funding?
• Timeline: How quickly must purchase occur? Days, weeks, months?
• Dispute resolution: If parties disagree on valuation or purchase terms, how is it resolved?

What happens if there is no operating agreement? Most state laws (including NC) specify default rules for what happens when a member or shareholder dies. These default rules are often undesirable (interest may pass to heir whether remaining members want them as new partner, or business may dissolve). This is why drafting is critical.

Buy-Sell Agreements: The Death Insurance for Businesses

A buy-sell agreement is a contract specifying that at an owner’s death, the remaining owners (or the business) will purchase the deceased owner’s interest at a predetermined price.

Why buy-sell agreements are critical:

1. Certainty: Owner knows interest will be purchased at death; family is not left with illiquid asset
2. Valuation: Avoids disputes; price is predetermined
3. Liquidity: Family receives cash instead of illiquid business interest
4. Business continuity: Remaining owners can continue without widow or heir as new partner
5. Tax planning: Buy-sell can be structured to minimize estate taxes

How buy-sell agreements are typically funded: Most buy-sell agreements are funded with life insurance on the owners. Here is how it works:

1. Business purchases life insurance on each owner
2. At owner’s death, life insurance proceeds are paid to business
3. Business uses proceeds to purchase deceased owner’s interest from estate
4. Estate receives cash (life insurance proceeds); heir does not become owner

This solves the liquidity problem: without life insurance, business might need to make installment payments over years, creating financial stress.

Critical issue: Confirming that life insurance is still in force. Many owners fail to maintain insurance as business grows or circumstances change. Attorneys should verify that:

• Life insurance policies still exist
• Premiums are being paid
• Beneficiary is correctly named (business, not individual, typically)
• Coverage amount is adequate to fund buy-sell

Common Gaps: What Happens When Succession Planning Is Missing

Many small business owners die without having a buy-sell agreement or succession plan. This creates multiple problems:

Problem 1: Widow becomes unwanted business partner The operating agreement may specify that the deceased’s interest passes to the heir. Widow suddenly becomes a member of the business, often without wanting to be. Remaining members are stuck with widow as partner, which may be dysfunctional.

Problem 2: Illiquid asset The estate has a business interest worth $500,000+, but cannot easily liquidate it. Widow may need income but cannot sell the asset. Family forced to negotiate terms with remaining business partners who have leverage.

Problem 3: Business deterioration Without a clear succession plan, business may suffer during probate and negotiation period. Key employees leave, clients/customers defect, operations decline.

Problem 4: Disputes and litigation Without clear terms in operating agreement, disputes arise over valuation, purchase timing, and conditions. Family and business partners end up litigating, spending tens of thousands on legal fees.

Solution: A well-drafted buy-sell agreement with life insurance funding prevents all of these problems.

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Executor Authority and Court Approval for Business Operations

What Authority Does the Executor Have to Continue Business Operations?

When the deceased owned a business, the executor’s first question is typically, “Can I keep the business operating, or must I sell it immediately?”

The answer depends on the will, court approval, and the nature of business operations.

NC Statute - NCGS 28A-13-3 (Executor Powers Regarding Business):

The statute grants executors certain powers regarding business operations:

• Executor may continue the business without court approval if the will authorizes it
• If the will is silent, executor may petition the court for authority to continue
• Court may grant authority if continuing the business is in the estate’s best interest
• Court may impose conditions or limitations on continued operation

Practical application:

• If will says “continue my business”: Executor has clear authority; can continue immediately
• If will is silent: Executor should petition for court authority before making major business decisions
• If beneficiaries disagree: Court approval provides protection for executor’s decisions

When Court Approval Is Needed

Court approval is particularly important for:

• Major business decisions: Hiring/firing key employees, taking on significant debt, selling assets
• Ongoing operations: If business requires substantial ongoing investment or management
• Disputes among beneficiaries: If some heirs want business sold and others want it continued
• Complex businesses: Professional practices, corporations with multiple shareholders

Petition for authority: Executor files a petition with the probate court requesting authority to continue the business. The court reviews the petition and may grant authority with or without conditions.

Protecting the Executor: Managing Business Risk During Probate

Operating a business during probate creates liability risk. Executor is personally liable if business decisions harm the estate or breach fiduciary duty.

Risk management strategies:

1. Obtain court approval: Court approval for business continuation provides protection if decisions are later challenged
2. Document decisions: Keep detailed records of business decisions and the reasoning
3. Use business insurance: Ensure all business insurance (general liability, workers’ compensation, directors and officers) remains in force
4. Hire professional management: Consider hiring interim manager or business consultant to manage operations
5. Segregate business operations: Keep business finances separate from estate finances
6. Consult advisors: Get input from business’s accountant, CPA, and any business partners
7. Report to beneficiaries: Keep beneficiaries informed of business operations and financial performance

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Coordinating With Specialized Professionals

Assembling the Team: Attorney, Accountant, Business Advisor

Estates with significant business assets require a coordinated team of professionals:

Attorney’s role:

• Manage probate and fiduciary responsibilities
• Review operating agreements and succession planning documents
• Petition court for business continuation authority
• Coordinate with other professionals
• Ensure compliance with NC probate law

Accountant/CPA role:

• Maintain business financial records during probate
• Prepare business tax returns (Form 1040, Schedule C for sole proprietor; K-1 for partnerships/S-corps)
• Prepare estate tax return (Form 706) if estate is large
• Advise on tax planning to minimize estate/income taxes
• Value business for tax purposes (supports IRS defense if audited)

Business advisor role (if needed):

• Value business for sale or estate planning purposes
• Advise on business continuation vs. liquidation
• Help find buyer if business is to be sold
• Assess business viability and market conditions
• Advise on professional management during transition

Coordinator: The attorney typically coordinates the team, ensuring information flows between professionals and decisions are made systematically.

Communication Framework: Attorney, Executor, Professionals, and Family

Clear communication is critical when multiple professionals are involved. Recommended communication structure:

Attorney-Executor meetings: Monthly (at minimum) to review progress, discuss decisions, address issues

Professional team meetings: Quarterly to align on strategy, share information, discuss any conflicts or concerns

Family updates: Quarterly or semi-annually to keep heirs informed of business status and estate administration progress

Documentation: All significant decisions documented in writing; copies provided to interested parties

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Tax Implications of Business Ownership in Probate

Estate Tax Valuation and Business Discounts

If the estate exceeds the federal estate tax threshold, business valuation directly affects estate tax liability.

Example: Assume a family business is appraised at $2,000,000.

• Estate value without business: $1,000,000 (below federal threshold; no estate tax)
• Estate value with business: $3,000,000 (above federal threshold; triggers estate tax)
• Estate tax at 40%: ($3,000,000 - $13.61M threshold) × 40% = $0 (still below threshold in 2024)

The federal estate tax threshold is currently $13.61 million (2024), but is set to drop to ~$7 million in 2026 unless Congress acts. Valuation becomes increasingly important as threshold changes.

Valuation discounts reduce estate tax:

If the same business receives a 25% valuation discount (for lack of marketability, minority interest, etc.):

• Appraised value: $2,000,000
• With 25% discount: $2,000,000 × 75% = $1,500,000
• Estate tax savings: ($2,000,000 - $1,500,000) × 40% = $200,000

Professional valuation that properly applies discounts can save tens of thousands in estate taxes.

Income Tax During Probate

Business income earned during probate is taxable. How it is taxed depends on business structure:

Sole proprietorship:

• Business income flows to estate (Form 1041, Schedule C)
• Estate pays income tax on business income
• Estate is separate taxpayer during probate

Partnership/S-Corporation:

• Business income flows through to estate and partners/shareholders (Form K-1)
• Estate pays portion based on ownership percentage
• Business continues to file partnership or S-corp return

C-Corporation:

• Business pays corporate income tax (separate entity)
• Distributions to estate treated as dividends
• Estate pays income tax on dividend

Tax planning opportunity: CPA and attorney should coordinate on whether to distribute partnership/S-corp income to beneficiaries (passes income tax to beneficiaries) or retain in estate (estate pays tax). This depends on tax brackets and individual circumstances.

Step-Up in Basis

When someone dies, inherited assets receive a “step-up” in basis to fair market value on the date of death. This provides significant tax benefits.

Example:

• Decedent purchased business for $100,000 (basis)
• Business worth $500,000 at death (fair market value)
• Heir inherits with stepped-up basis of $500,000
• If heir immediately sells for $500,000, no capital gain (basis = sale price)
• Without step-up, heir would inherit $100,000 basis; sale for $500,000 would trigger $400,000 capital gain

NC tax implications: North Carolina generally follows federal step-up basis rules. Estates should be valued at death specifically to capture step-up basis benefit.

Note: Some assets do not receive step-up basis (retirement accounts, certain deferred compensation). Coordination with CPA is important to ensure proper basis calculation.

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Common Scenarios and How to Handle Them

Scenario 1: Family Business with No Succession Plan

Situation: Decedent owned 100% of family manufacturing business worth $2M. No buy-sell agreement. Operating agreement silent on death. Spouse and two adult children are heirs.

Challenges:

• Who will manage business during probate?
• How will business be valued?
• Will children buy-out spouse, or vice versa?
• What if children disagree on business’s future?

Attorney’s approach:

1. Obtain court authority for spouse (executor) to continue business operations
2. Hire professional appraiser to value business fairly
3. Facilitate family meeting to determine whether business should be continued, sold, or restructured
4. If children want to buy-out spouse: arrange financing, facilitate purchase
5. If business is to be sold: hire business broker, market business, facilitate sale
6. If decision is unclear: petition court for guidance on business operations

Timeline: 6-12 months typical for resolution (valuation 1-2 months, family decision 1-2 months, transaction 3-6 months)

Scenario 2: LLC with Buy-Sell Agreement But Life Insurance Lapsed

Situation: Decedent was 50% member of consulting LLC. Operating agreement includes buy-sell agreement requiring surviving member to purchase deceased member’s interest at $800,000. Life insurance policy funding buy-sell has lapsed (premiums not paid for 3 years).

Challenges:

• Surviving member cannot fund $800,000 purchase without life insurance
• Estate holds illiquid LLC interest
• Surviving member may not want heir as new partner
• Deadlock potential if parties cannot agree on modified terms

Attorney’s approach:

1. Obtain copy of operating agreement and buy-sell provision
2. Determine surviving member’s ability to purchase (cash on hand, bank financing available?)
3. If surviving member cannot fund full purchase, negotiate modified payment terms (installments, reduced price, etc.)
4. Document all negotiations in writing to avoid future disputes
5. If parties deadlock: petition court for resolution or mediation
6. Eventually: either surviving member purchases interest, heirs purchase surviving member’s interest, or LLC is dissolved and assets divided

Timeline: 3-9 months depending on negotiation complexity

Scenario 3: Professional Practice with Key Employee Management

Situation: Decedent was practicing attorney with solo law practice. Office manager and paralegal have worked for firm 15 years. Practice generates $400K annual revenue. Heir is not a lawyer.

Challenges:

• Practice cannot continue without licensed attorney
• Key employees may leave if uncertain about future
• Clients may leave if they lose relationship with original attorney
• Practice has no succession plan

Attorney’s approach:

1. Immediately communicate with employees; assure them regarding continuity
2. Explore options: (a) hire replacement attorney to continue practice, (b) merge practice with another firm, © sell client base to another attorney, (d) close practice orderly
3. If continuing practice: negotiate employment agreements with key employees to prevent departure
4. If merging or selling: work with practice management advisor to value practice and find buyer
5. If closing: communicate with clients, facilitate transition to new counsel
6. Protect client files and maintain professional obligations during transition

Timeline: 3-12 months depending on chosen path

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Using Afterpath to Manage Business Asset Complexity

Afterpath, the NC probate platform, can help organize the complex information associated with business-owning estates.

How Afterpath helps with business assets:

• Asset inventory: Document all business assets (equipment, inventory, accounts receivable, intellectual property) with valuations
• Timeline tracking: Track business appraisal completion, buy-sell agreement negotiations, and sale timeline
• Document storage: Store operating agreements, buy-sell agreements, business valuation reports, and related documents in one secure location
• Professional coordination: Use Afterpath’s communication portal to coordinate between executor, attorney, accountant, and business advisor
• Deadline management: Track statutory deadlines (inventory filing, final accounting) while managing business-specific deadlines (appraisal completion, offer acceptance)

Afterpath tip: When creating an estate file in Afterpath, create a separate section for complex business assets. Document the business structure, key contacts (CPA, business advisor, remaining owners/partners), valuation approach, and timeline for resolution.

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Key Takeaways for Attorneys Managing Business-Owning Estates

When a client owns a business, probate complexity multiplies. Understanding business structure, valuation, succession planning, and tax implications is critical to managing these estates effectively.

Key principles:

1. Early assessment: Immediately determine business structure and whether succession planning documents exist
2. Valuation priority: Obtain professional business valuation early; this document is foundational for tax planning, inheritance distribution, and family negotiations
3. Court authority: Petition for court authority to continue business operations if continuation is desired
4. Professional team: Coordinate with business’s CPA/accountant, and business advisor if specialized expertise is needed
5. Tax planning: Work with CPA to minimize income and estate taxes
6. Communication: Keep executor and beneficiaries informed; manage expectations around timeline and complexity
7. Documentation: Document all business decisions, valuations, and family discussions; this protects executor and supports audit defense if IRS challenges estate tax return

Afterpath integration: Use probate management platform to organize the complex information associated with business assets and coordinate among the multiple professionals involved.

For executors managing an estate with significant business assets, this complexity is your signal to hire an experienced estate attorney and to involve accounting and valuation professionals early. Your attorney and professional advisors will guide you through the process of business valuation, succession planning, and transition.

Visit Afterpath to organize and track all elements of your business asset probate, from initial valuation through final resolution.