Death and disability are two conversation-killers that we need to talk about. Today.
The survival of your business and financial security of your family depend on the actions you take before either of these awful events occurs. Once you make a plan, I assure you that:
- You, your employees and your family members will sleep better at night.
- You will take enormous steps toward creating a business with value to a buyer or successor.
Estate Planning Isn’t Business Planning
For most business owners, the income we earn from our companies supports our families. If we become disabled or die, that income stops, unless we’ve purchased the proper amount of disability or life insurance and linked it to a carefully conceived estate plan. If we’ve done that, our families are protected.
But what have you done to protect your business?
If you own your business with someone else, your remedy begins with executing a buy-sell (or business continuity) agreement. Of course, we assume that to create that agreement you work with a certified valuation analyst (or other consultant who specializes in valuing businesses) to establish a current business value and set up realistic models to project future business cash flow. Accurate projections are key to the decisions you make about which formula you and your partner will use should either of you die or become disabled before choosing to retire. Keeping that document up-to-date with changes in your company (ownership, value, etc.) is critical if it is to operate as you intend.
If you own your business alone, however, protecting your business does not depend on a buy-sell agreement. Without a partner to purchase ownership, sole-owners must make other arrangements for the continuation (or orderly liquidation) of their companies.
But all of us—sole-owners and co-owners alike—have more issues to think about and plan for than the effect our deaths/disability will have on the cash flow of our companies. Namely,
- Who is going to replace our talents?
- How do we assure employees and customers that our death or disability isn’t the death knell for our businesses?
Treat yourself like the key employee that you are.
Think of yourself as a key employee for a moment. Like a key employee, you bring invaluable skills and talents to your company. Perhaps you are the primary rainmaker, innovator or manager. Whether you have a co-owner or not, someone will have to step up and assume those responsibilities.
As a co-owner, you and other owners can purchase enough life insurance on each other to cover the cost of bringing in someone to replace the talent of the departed or disabled owner. Ideally, you are already working to create a business with value to an eventual buyer/successor by building a management team. As you do, you are simultaneously “insuring” your business against the loss of any one owner’s talent.
As a sole-owner, the loss of your talent poses an even greater threat to your business, yet your solution begins in the same way: a solid management team capable of running your company successfully without you. That “without you” part applies to your death, disability or the transfer of your business to a buyer. Since buyers require successful management teams, the time and effort you put into creating one benefits you no matter how you exit.
But there are a few additional steps you can take to protect your business.
When It Happens, It’s Too Late.
Ten years before “Bev” and “Rich” walked into my office for an unscheduled visit, we had successfully transferred their remodeling company to their son “Doug.” During those years we had lost touch: the couple retired to their vacation home, and Doug decided that he didn’t want us to design a business continuity plan.
“So, how’s retirement treating you?” I asked. “I guess you haven’t heard,” sighed Bev. Rich continued, “Three weeks ago, Doug fell while inspecting a new roof on a job. He broke five vertebrae and the doctors aren’t at all optimistic about a full recovery.”
The story both shocked and saddened me. I knew Doug, though I hadn’t worked with him. He was a gregarious guy, a great manager and a hard worker.
Bev picked up the story. “Since the accident, Rich has kept the current jobs going, but with him being 75, the employees know this isn’t a permanent fix. Last week, two of Doug’s best foremen quit and went to work for other companies. Can you believe that?”
Yes, I could. These two foremen had families to support and, as much as they liked Doug, they probably weren’t confident about his return, much less the ability of the company to survive.
“Without them, we don’t have the manpower to start or complete two big commercial jobs set to start in 10 days,” explained Rich. “And unless I step up, Doug’s bank isn’t going to extend the credit we need to do the job.”
Other than my sympathy and a listening ear, I could only offer to help the couple liquidate the company’s assets, if that’s what Doug chose to do. It was too late to purchase business overhead insurance. It was too late to create a management succession plan that named the person most qualified to keep the company going.
The one bright spot was that Doug had enough individual disability insurance to keep his family afloat. I hoped that Bev and Rich would take comfort in that as they liquidated the business that they’d built from scratch.
Finding The Few Bright Spots
There was another bright spot that Bev and Rich weren’t aware of. While Doug had not told anyone what he wanted to happen to his company should he die or become disabled, his injury did not prevent him from doing so. That’s not always the case.
Doug could tell his parents (parents who understood the business) which advisors they could consult about transferring the company’s assets. He could tell them which friendly competitor they might talk to about acquiring the assets. He could tell them if there were companies that had expressed an interest in acquiring the company prior to his accident.
Not all owners are as “lucky” as Doug so we recommend that owners put in writing all of this information, including which employees are capable of continuing operations and making financial decisions. If you’d like a form to help you do that, call us. We’ve got one.
Business Overhead Insurance
Whether you are a sole- or co-owner, having business overhead insurance in place—in addition to individual disability insurance—can help prevent situations like the one Doug faced. Doug discovered that while his individual disability insurance helped his family, it did nothing to keep his business running.
That’s the job of business overhead insurance. For a limited time—usually no more than 12 months—proceeds from business overhead insurance provide cash to your company to keep it running. During that time a key employee may assume ownership or you can sell the company to a new owner.
Build a Customized Continuity Plan for Your Business Now
We don’t know if death or disability will ever trigger your business continuity plans, but we do know that the actions you take to plan for these events will pay huge dividends as you create a valuable company.
As all owners and businesses are different, so too are business continuity solutions. The best way to ensure the continuity and success of your business without you at the helm is to put in place a plan customized to your particular situation.