Many business owners are good at contingency planning in their business. They plan for disasters hitting their physical facilities, computer networks, and perhaps the departure of key people. Surprisingly, few business owners plan for the departure of the most important person in the business and the one thing that is certain– their own eventual death or disability. Generally speaking, owners have more pleasant endings in mind when they think of exiting their businesses.
Without continuity of leadership, a business will likely fail. If ownership transition for a business is uncertain, business continuity is seriously threatened. The business owner’s death can have a significant effect upon the company’s ability to maintain its financing, relationship with its customers and vendors, its bonding status, and other key business partners.
The balance of power, particularly in a closely held business, can be very fragile. The loss of a company leader can leave a void that results in power struggles, employee turnover, managerial mistakes, lost customers, and lost profits. Even a vital and profitable company can unravel quickly when its leader is unexpectedly removed from the mix.
To minimize the chance of panic or power struggle in the business, emergency plans should be created to account for the sudden absence of leadership. Responsible individuals, such as corporate officers and board members, should be made aware of and empowered to implement the plans should the unthinkable happen.
The contingency plan should include the following:
Management – who should be responsible for day to day management of the organization as well as the oversight of management (typically the board of directors)
Compensation – develop a stay bonus plan for key managers for the transition period
Disposition of the business – should the business continue to be run by management, and if so, for how long? Should the business be sold to the management team, employees or third parties?
Advisors – list the key advisors to assist in the disposition of the business including exit planning professionals, investment banker or business broker, attorney, and accountant
Possible buyers – maintain a list of people of who may have contacted you over the past few years that have expressed an interest in the business
Goals – list the primary and secondary goals of the disposition, such as your financial legacy, keeping the business in town, preference regarding the business name, employment of key people, etc.
While no one likes to think about their own death or disability, a well crafted contingency plan can help provide stability and success for the business as well as peace of mind for the owner’s family.