By Maurie Cashman
Planning for a rainy day may be difficult to think about but there may be nothing worse for a business than to have its owner suddenly die or become incapacitated – especially if it’s your business.
Let’s look at what can happen when an owner dies or becomes disabled.
Bob Dumphy was the 65-year-old sole owner of a successful construction company. Bob planned to sell his company to a third party within the next two years.
What Bob needed was a way to ensure that his company would survive if he died or became disabled during that period. Before he could put any plan into place, Bob died of a sudden heart attack. Soon after his death, key employees feared that the company might not continue without Bob’s leadership and personal financial backing, and left his company for jobs with more certain futures.
Their departures caused a default on a number of contracts, which exposed the company to significant liabilities and a decrease in revenues. Long-time customers perceived the company lacked direction and financial staying power and took their business to competitors. Bob’s bank grew uneasy as well and decided to call in his company’s debt â€” debt Bob personally guaranteed.
Within weeks of Bob’s death, his key managers were gone, his company defaulted on a number of contracts, revenues plummeted, customers moved to competitors and any chance of acquiring replacement financing vanished.
For these and other reasons, business continuity planning is critically important to your company. Without a well thought out “survival plan,” the consequences to employees, customers and your family and estate are disastrous. Many make the mistake of believing that incorporating will protect their families and estates, but creditors will quickly attempt, likely successfully, to pierce the corporate veil and get at your personal assets.
Fortunately, there are a number of methods owners can implement to help avoid the type of business collapse that Bob Dumphy’s business experienced.
Create a Written Ownership Transition Plan
First, create a written plan that states: 1) who will become responsible for managing the business; 2) who your heirs should consult regarding the sale, continuation or liquidation of the company; and 3) whether the business should be sold (and to whom if you know), continued or liquidated.
Protect Key Employees
Second, the written plan should contain provisions to keep key employees in the company if you die or become incapacitated, offer ownership â€” perhaps via a buy and sell agreement, or offer additional compensation if key employees continue to run the company. The amount of compensation or ownership can be directly tied to company profitability and continued success by vesting. As an additional incentive, offer these employees a substantial Stay Bonus for staying with the company while things are being sorted out â€” one that can be funded with insurance and that can be accessed in case of your death. This is often for a year or two.
Involve Your Advisors
Third, involve your advisors in your transition planning.
Assemble a competent team including and experienced ownership transition planner, transaction attorney, CPA, financial planner and insurance professional. It is important to insure that you have a process in place to accurately value the business and market it if necessary, minimize taxes, ensure that you have maximum legal protection in place, tie into your personal financial planning and make certain the necessary insurance (such as funding the Stay Bonus) is purchased by the proper entity, (you, your trust or the business) for the right reason and for the right amount.
Meet With Your Banker
Finally, meet with your banker to discuss the written ownership transition plan you have implemented and show him or her that insurance to affect the plan is in place. Make sure your creditors are comfortable with your transition plan. Ask them for additional input on what they would like to see in place.
With a written ownership transition plan in place you can minimize the impact if an owner dies or becomes disabled.