By Scott Bushkie
A sudden death or disability is a tragedy we hope never to face. But planning for those tragedies is a necessary part of life. If we don’t, we leave behind a legacy of stress and confusion for those we care about most. If you own a business, a contingency plan is critical for the sake of your family and for everyone else who depends on your organization.
A contingency plan prepares your business so that someone can step in, assume control, and continue operations as quickly as possible. What’s more, it provides assurances to customers, employees, and lenders, helping ensure those stakeholders stick around so your business can survive, and hopefully even thrive, after you’re gone. Planning components to consider:
Key decision makers: If you die, who will make decisions in your absence? With planning, you can designate a trustee who will operate the business and have control over financial concerns. As part of this plan, you can identify key people who should be consulted in continuity decisions, customer contracts, hiring and firing, etc.
Without a plan, your spouse or family members may be mired in uncertainty, mourning your loss while out of their depth in how to run a business. Perhaps worse yet, the courts may appoint someone to take charge, overseeing or even liquidating your business.
Vision: If you are no longer able to run the business, a decision will have to be made to either sell the business or to designate someone as general manager so the business can continue providing income to your family on a long term basis.
If the plan is to sell, provide instructions for who will make all final decisions regarding the sale and who should represent your business. Ideally, your plan will include a current estimate of business value and the essential information a business broker or investment banker would need to market your business.
Financial issues: If you have a loan or large line of credit, you should review your contingency plans with your banker. Your lenders have an obligation to their stakeholders, but knowing you have a written contingency plan in place will give them greater confidence in your business’s ability to fulfill its financial commitments.
Other financial considerations include maintaining your salary or providing other cash distributions to your family. These may provide for your medical care, in case of disability, or simply ensure your family has adequate support until longer-term arrangements are made.
Life insurance: If you own your business as part of a partnership, you’ll likely want a buy-sell agreement that’s funded with life insurance. These policies are designed so that the proceeds can be used to buy out your ownership interest if you die. Your family gets a share of the business value without threatening the business’s future.
In order to plan correctly, you’ll need an accurate estimate of value on the business. Secure an estimate every two to three years and update your policy accordingly. Otherwise, your business partner and your family could be faced with an uncomfortable conflict, leading to, at best, a prolonged payment tied to the performance of the business, or worse litigation.
Employee retention: Just like your lender has a responsibility to their stakeholders, your employees have a responsibility to their families. A continuity plan ensures that salary payments continue as scheduled and helps minimize employee anxiety over their jobs.
Identify the key employees you want to reward and those who would be critical to maintaining business operations. Draft a plan that provides stay bonuses or other incentives to keep those employees in place.
If you envision the business will be sold after your death, consider incentives based on a percentage of the purchase price. That way, employee success is tied to yours; the more your estate makes in a sale, the more they do too.
Give them some money at time of sale and the balance a year or so down the line, as this will give the buyer confidence they have a good team who will work for them and enhance the overall value.
We don’t like to think about the worst. But life is precarious. If the worst happens, you can either leave behind mass chaos, or an organized plan, devised according to your wishes, that makes the best of a tough situation.
Some might say that failure to plan is an act of arrogance or rash risk-taking. But I prefer to think about the positive aspects of contingency planning, and the care and courtesy it shows to the family and valued employees I hope never to leave behind.