In my opinion, most business owners delay succession planning until they are much too close to their exits. For long-time business owners, it is difficult to imagine and emotionally adjust to the idea of life without their businesses. I am not advocating that all business owners run out tomorrow to find a buyer or successor, but I would recommend beginning that planning process three years to five years prior to exit. In the meantime, I would urge every business owner to implement a comprehensive continuity plan.
The major difference between a succession plan and a continuity plan is that a succession is based on proactive efforts and planning. A continuity plan comes into play when you have to react to an unfortunate and usually unexpected life situation. A continuity plan should be viewed as a necessary part of risk management for any business. Preparation and risk mitigation is vital to the protection of clients, employees and owners from unexpected events and misfortunes.
A buy-sell agreement is the legal document most often used for both succession and continuity plans. Often, we hear the term buy-sell agreement and think of it in terms of succession. However, a buy-sell agreement can and should also be executed as part of a continuity plan to provide protection in the event of an owner’s untimely death.
If a business owner is not at the point of considering succession, he or she will still benefit greatly from minimizing risk in the business by establishing a continuity plan. When developing a continuity plan, consider these five “Big Ds”:
Death: If an owner of a business passes away, it is very likely that he or she will need some type of legal agreement to ensure that family members receive the value in the firm, and that the business can continue. Of course, this is a reality that no one wants to face, but is inevitable for all of us. If it happens sooner than expected, it is wise to be prepared.
Disability: More families are actually put in financial risk from disability then from death. People who become disabled frequently lose their income potential, and care for the disability is often an increased household cost to the family. It is important for individuals to have disability coverage and also for business partners to have a plan for disability. In some cases, disability plans could be funded from cash flow rather than insurance, but this is only the case in very specific situations – usually insurance is the primary protection in the event of a disability.
Divorce: The big D in the marriage world also creates complications in business ownership. When a business partner goes through a divorce, any assets become fair game. This includes ownership in a business. It is a prudent practice to protect the other business partners from someone's personal life issues. Often, we see spouses signing acknowledgement agreements that they will honor the continuity plan. We also see people signing prenuptial agreements to protect the business, regardless if there are any other prenuptial arrangements.
Discontent: This is a nice way of saying that two or more business owners no longer feel like working together. This situation can occur due to a number of reasons, like a disagreement or a separation in a previously shared vision for the business. When business owners are just starting to build a working relationship, they are often reluctant to discuss the consequences of and a plan for the possibility of a broken partnership. Even though most of us avoid the awkwardness of ruffling another’s feather, in the long run it’s a good idea for all partners in a business to ask and answer the question, “What if we don’t see eye to eye in the future?”
Drugs: An employee’s substance abuse can be devastating for a business; and when it is an owner that becomes addicted, it can destroy an entire company quickly. If an owner becomes substance dependent, it is important to have a plan before the issue derails the lives of others.
Most owners of new businesses are focused on marketing, operations and the financials. Rarely do partners start their business thinking about and planning for all of the negative things that can happen in their personal lives that could impact the business. However, some fairly simple measures can be taken to ensure the continuity of business and protect partners from themselves and each other in the unlikely event that one of these “Big D's” becomes a reality.
These five “Big Ds” represent a good start when planning for the unexpected. It’s not unusual for a business owner without a partner or key employee to ask a competitor to serve as a backup continuity partner. Whatever the strategy, a continuity plan is simply good risk management for any business.
If you’d like to discuss some effective ways to prepare for the five “Big Ds”, give me a call or email me.
Jason Wheeler is currently the CEO and a Wealth Consultant at Pathfinder Wealth Consulting. Pathfinder specializes in comprehensive financial, estate and tax planning services, investment management, and risk management (insurance) for business owners and successful executives. Jason Wheeler offers securities and advisory services through Commonwealth Financial Network®. Member FINRA, SIPC, a Registered Investment Adviser. To learn more about Pathfinder Wealth Consulting, visit www.pathfinderwc.com. Jason can be reached at [email protected] or 910-793-0616.
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