Topics: Contingency Planning
As a business owner, you have many people who are dependent on you and your business, including your family members, employees, and customers. What would happen to them if you should die or become disabled? Could your business function without you? In a privately held business, the value of the business often represents a significant portion of the current owner’s wealth, which can make the risks of not having a contingency plan even greater. Premature death and the statistically more likely premature disability can have a tremendously negative impact on a business and the financial well-being of you and your family. Let’s look at why developing a contingency plan for your business is critically important and what you need to consider.
Understanding contingency planning
Business contingency planning is a risk management strategy that should be undertaken by all business owners. It protects against business disruption in case of unforeseen event by helping you and your colleagues prepare for and respond to an emergency situation. This plan should outline how your business will continue without you. Securing the necessary insurance will enable you to avoid the financial disaster that sudden, negative life events can cause.
A contingency plan should not be confused with an estate plan or an owner’s Will. All of these need to be in place for both the continuity of the business and to protect the family’s financial future.
At a minimum, a contingency plan should:
- Detail the owner's goals and wishes for who will own the business in the future.
- Identify who should manage the business in the owner's absence and if necessary, include a development plan to prepare the successor for this responsibility over time.
- Include important business information, such as the names of the owner's trusted advisors, including accountant, attorney, financial advisor, insurance agent, banker, business consultant, etc. and their contact information.
- Detail other key, confidential information and assets including bank accounts, safety deposit boxes, wills, etc. and passwords to access your accounts.
- Reference an executed shareholder or “buy-sell agreement” if there is more than one owner.
- Determine who can access liquid assets in the event of an emergency.
- Include all of the details for life insurance and disability policies, so benefits may be claimed.
Why you need a contingency plan
If you do not have a contingency or succession plan, you run the risk that your business will not be able to continue if you become incapacitated. This places you, your business, and everyone dependent on the business for their livelihood in great peril.
Additionally, and what many business owners don’t realize, not having a contingency plan in place can negatively impact your business’s value from the perspective of a potential buyer. Buyers are interested in acquiring businesses that are transferable, which includes a solid management team and independence from the owner. Developing a contingency plan, strong management team and a successor will ensure that your business can operate without you. This will not only protect you in the event that something happens to you, but it will improve your company’s value as well.
Topics: Contingency Planning
One common way to sell your business internally is to an existing partner. There are obvious advantages to this method since your partner possesses intimate knowledge of the business and there would be little disruption for the current employees. It can also provide for a continuation of your legacy and a smoother transition than other options. However, there are still things you need to consider about this transfer option.
What is your partner’s time line?
Many times, each partner assumes the other will be the transition solution, but neither has ever had this all-important conversation about transfer of ownership. The truth is your partner may be planning his or her own transition away from the business, especially if you both are similar in age. Even in cases where there is a difference in age, your partner may not wish to stay with the business once you leave. You may have started the business together, and your partner may feel that when you leave he or she will also. There are unique synergies in a partnership, and your partner may not be interested in going it alone. Most likely, you have different skill sets necessary for the operation of the company, and your partner may not possess your skills or be able to fill that void within the company. He or she may also be waiting to pursue other interests once you are ready to leave the business. While these conversations can be difficult, you need to have them.
Where will the funds come from?
This is not an issue unique to a partner buyout but merits mentioning here. If there has been a lack of sufficient financial planning, funds may not be available to purchase your partnership shares outright. Therefore, an earn-out, owner finance, or third-party financing may be required to fund your transaction. In addition, an internal sale option may not allow you to have immediate liquidity but will most likely be paid out over several years.
What about the sale price and taxes?
Taxes can dramatically reduce your net proceeds from any sale, even in an owner-financed scenario. Fortunately, there are strategies that can be used to minimize the tax burden, but require time and planning. How do you determine the sale price? Do you have a buy/sell agreement in place? Is it up-to-date? Most buy/sell agreements specify how the sale price will be calculated under different circumstances. Be sure you understand the details of this very important agreement. If you don’t have a buy/sell, your selling price will most likely be negotiated.
What is your contingency plan?
Having a partner can give you a false sense of security. Partners generally rely on each other, and the disability, illness, or untimely death of a partner can damage the business and eliminate your internal sale option. If you are planning your transition to be your partner and he or she is no longer willing, able, or capable to buy you out, what do you do? In our book, Cashing Out of Your Business, Your Last Great Deal, we discuss in more detail the necessity and importance of adequate contingency planning.
This internal sale option requires all partners to be involved and considered in the transition planning process for it to be successful. A comprehensive approach that independently considers each partner’s goals and objectives in an open and honest process is needed, along with ample time. Allowing sufficient time for developing and implementing a transition plan is often overlooked in a partner buyout. The familiarity with your current situation can result in complacency and an unrealistic sense of security, which can result in a less than beneficial outcome. Plan, plan, and plan some more, and don’t wait until it is too late.