What Happens to Your Business When You Can’t Run It?

The call came on a Thursday morning.

David was 58. He'd built a mid-size manufacturing company over thirty years. Over the weekend, he'd had a stroke. He was alive — but he couldn't speak, couldn't sign documents, and couldn't make decisions.

His family was at the hospital. His business was in free fall.

His two adult children disagreed about what to do. His wife held power of attorney for personal matters. The operating agreement said nothing about what happened when the sole managing member couldn't manage.

The bank needed signatures for a pending credit facility renewal. A key vendor needed contract approval. Payroll was due Friday.

Nobody had authority to act. And nobody could agree on who should.

I've seen versions of this story more than once. The tragedy isn't just the medical crisis — it's that the business wasn't legally ready for one. And in almost every case, the gap wasn't hard to fix. It just never got addressed.

The gap most family businesses don't find until something forces it

Most family business owners I work with have done their personal planning. Wills, trusts, powers of attorney — they've had those conversations and they have the documents.

What they often don't have is the business entity equivalent.

An operating agreement, shareholders' agreement, or partnership agreement is a separate legal universe from your personal estate plan. And incapacity provisions are among the most consistently overlooked sections in those documents — not because owners don't care, but because nothing has gone wrong yet and the business is running fine.

Until it isn't.

Here's what the gap typically looks like when it surfaces:

The operating agreement doesn't define incapacity. Without a clear definition, there's no trigger. Does incapacity mean a court-appointed guardianship? A physician's certification? Sixty days of absence from management? If the document doesn't say, the family is left arguing about whether the owner is actually incapacitated — sometimes while the owner is still partially involved and resistant to stepping back. That argument happens in real time, while the business is waiting for someone to make a decision.

There's no named successor. Many operating agreements vest broad management authority in a single managing member. What they don't do is name who holds that authority when the managing member can't. The result is a leadership vacuum at exactly the moment the business needs someone to act.

The personal estate planning documents don't fill the gap. A durable power of attorney may authorize an agent to act on the owner's behalf in many contexts — but whether that agent can exercise the owner's rights under the operating agreement depends on what the agreement itself says. Many agreements are silent on this. Some contain provisions that arguably block a power-of-attorney agent from stepping in at all. The documents that were supposed to work together don't.

What the operating agreement should actually say

None of this is complicated to draft. It just requires someone to think through it deliberately before anything happens — which is exactly when most business owners aren't thinking about it.

At minimum, a well-drafted operating agreement should address five things.

A clear definition of incapacity. Who determines it and how. A common approach is written certification from one or two licensed physicians confirming the member can't perform their management duties. Some agreements add a time-based trigger — an inability to participate in management for 90 consecutive days, for example. The specific standard matters less than having one.

Interim management authority. Who steps in, with what authority, and for how long. Can the interim manager make distributions? Enter contracts above a certain dollar threshold? Hire or terminate key employees? These questions need answers in the document — not in a family meeting held under pressure.

A buy-sell or redemption trigger for permanent incapacity. If the incapacity is permanent, what happens to the owner's interest? A mandatory buyout provision protects the business by ensuring active leadership and protects the owner's family by establishing fair value in advance. Valuation methodology and payment terms should be specified now — not negotiated during a crisis.

Coordination with personal estate planning. The agreement should expressly authorize a power-of-attorney agent or trustee to exercise the member's rights under the agreement during incapacity. Without that language, a family member holding a valid durable power of attorney may be locked out of the decisions they need to make.

A dispute resolution mechanism. When family members disagree — about whether the owner is incapacitated, about who should lead, about what the business should do — the agreement needs a path forward. Mediation, arbitration, a designated tiebreaker. Something that moves the business forward before the dispute reaches a courtroom.

Why this is harder than it looks for family businesses specifically

Death is unambiguous. Incapacity isn't.

It can be partial. It can be temporary. It can be contested by the owner himself, who may believe he's still capable of running the business when the people around him aren't sure. That ambiguity is exactly what fractures families — and the legal documents need to be specific enough to function inside it.

For a family business, this isn't just a legal question. It's a legacy question. The owner who spent thirty years building something doesn't want it paralyzed by a gap in the paperwork. The family members who depend on that business — whether they work in it every day or not — deserve to know what happens and who decides.

The good news is that these provisions aren't difficult to get right. They're just easy to postpone when the business is healthy and the owner is active and everything feels fine.

That's precisely when they should be addressed.

Three questions worth asking today

Pull out your operating agreement. Look for answers to three questions.

Does it define incapacity — specifically enough to function as a trigger?

Does it name who takes over, and with what authority?

Does it work with your personal estate plan, or around it?

If the answer to any of those is no — or if you're not sure — that's the gap this post is about. And it's a gap that's considerably easier to close on a Tuesday when nothing is wrong than on the Tuesday when something is.

Does your operating agreement cover this?

Adam Witkov is an equity partner at Michael Best & Friedrich LLP. He serves as outside general counsel to growth-stage businesses in healthcare, manufacturing, and family-owned companies across Wisconsin.