Business Continuity for Sole Owners

Dying Too Soon

By Maurie Cashman

Do you have a business continuity plan should you die unexpectedly? As Jack and Suzy Welch ask: “If there’s one question that every leader must ask, it’s: Am I alone here?” This is a key questions and one that you should be giving consideration to not only on a day-to-day basis but also in the context of long range ownership transition planning. If you are “alone at the top”, you need to take the advice of the Welch’s. However, in order to make this truly effective, you also need to make key employees comfortable with being a part of that solution.

Considering our own demise is depressing. So let’s talk of someone else, an imaginary character, Mike Trout (age 54) who owned “Trout’s Togs,” a manufacturer and wholesaler of apparel for outdoor enthusiasts. One day Mike simply disappeared on a fishing expedition.

After several months of searching with no results, Mike’s family opened probate proceedings only to find that Mike’s once thriving business had also disappeared. Trout’s Togs’ disappearance, however, was far more typical than Mike’s. Because Mike had dreamed of selling his company at 60, he had given little thought to what would happen to his business if something happened to him. So Trout’s Togs died of an all too common cause—human error and neglect, setting off a chain reaction of ever worsening consequences for Mike’s family and business:

1. Mike’s key employees left the company for jobs with more certain futures. They feared that neither Trout’s Togs nor their salaries would continue without Mike at the helm.
2. It didn’t help the business or Mike’s family that he left no instructions about who could run the business, offer advice or what to do with the business should something happen to him.
3. The departure of key employees meant that there was no one to manage the business. Chaos reigned and revenue took an immediate and irreversible nosedive. Long-time customers grew uneasy with what they perceived to be a rudderless ship and moved their business to Mike’s competitors. The company’s vendors demanded cash payments–cash that the company no longer generated.
4. Mike’s bank saw the drop in revenues and decided to call in the company’s debt–debt Mike had personally guaranteed.

Trout’s Togs didn’t just wither away; it fell off a cliff, as presumably did its owner. It could not survive without its top employees or without any direction from Mike.

The point of reviewing this list of mortal blows is to demonstrate that business continuity planning is vitally important to your company and to your family. Without a well-thought-out business survival plan, the consequences to employees, customers and most importantly, to your family and estate are disastrous (don’t think that your estate will escape the notice of your business creditors).

Fortunately, there is a process sole owners can quickly and easily use to help avoid the type of business collapse that Mike’s business experienced.

First, motivate top employees to stay on if you are unable to by creating financially meaningful incentive compensation plans for them that vest over time.

Consider creating a plan that offers these employees a substantial bonus (called a “Stay Bonus”) for remaining with the company beyond an owner’s death. The company can usually fund the Stay Bonus with life insurance on the owner’s life. This funded Stay Bonus Plan provides designated employees with a cash bonus and a salary guaranty if those employees stay after the owner’s death. Your job is to communicate your actions to these employees and assure them that you’ve made additional plans to ensure the continuation of the business.

Second, alert your bank to your continuity plans. Meet with your banker to discuss the arrangements you have made and show him or her that insurance funding necessary to implement these plans is in place. Additionally, make sure your major creditors are comfortable with your ownership transition plan.

Third, create a written plan that:

1. names the resource(s) your heirs should consult regarding the sale, continuation or liquidation of the company;
2. names the person to take on the responsibility of running the business; and
3. states whether the business should be sold, continued or liquidated.

Finally, work closely with a capable insurance professional to make certain the necessary insurance is purchased by the proper entity for the right reason and for the right amount.

Creating a contingency plan for your company should you depart unexpectedly is a vital part of your overall ownership transition planning process. Failing to do so invites the kind of disaster that befell Trout’s Togs, Mike’s employees and his family.

If you have any questions about the ideas discussed in this article or other business contingency planning ideas, we invite you to read our White Paper on Business Continuity Planning. To those of you who own your companies with others, we will discuss the business continuity arrangements available to your companies in the next issue of this newsletter.