Imagine being a successful business owner who’s done just about everything right as you approach retirement. You’ve set achievable goals, bridged your Asset Gap, built business value, and have chosen and begun to pursue your preferred Exit Path. You still have things to do to fortify your business before you exit, but you’re on the right path. Then, without warning, you die. Your business doesn’t have any safeguards to address your death, because you hadn’t planned on dying so soon. Because you didn’t create a plan to protect the business from your unexpected death, it proceeds to fail. All the work you did prior to your death goes for naught, and it has negative effects on your employees, your family, and your legacy.
This scenario is tragically common for business owners who don’t have formalized Exit Plans. Too often, owners assume that having a robust life insurance policy and Buy-Sell Agreement is enough, but it rarely is. However, there are ways for business owners to protect the business, and it starts by asking two questions. In this post, we’ll present these two questions and provide ideas for how to answer them.
2 Questions to Ask to Protect the Business
Though most business owners prefer to ignore how their deaths or permanent incapacity can affect their businesses, addressing how those events can impact their businesses is a crucial aspect of successful planning and the best way to appropriately protect the business. A cynical owner might ask, “What does it matter? Once I’m dead or permanently incapacitated, none of this affects me.” But an unexpected death or incapacitation can have a ripple effect for the owner’s family, and even their communities and legacies.
To prepare for the unexpected, business owners should ask themselves two questions, then act to answer them as soon as possible.
Will My Business Survive?
It can be easy for owners to take for granted just how important they are to their businesses’ success. Most owners serve as the hub of their businesses: They make all the big, final decisions. They guide the company’s growth and evolution. In some cases, they are the only reason the business has clients at all. Usually, business owners address this fact by purchasing life insurance so that the business can use the money to stay afloat.
But purchasing life insurance rarely positions a company to survive its owner’s death or incapacitation on its own. Once the business has access to that money, someone needs to know how to best delegate that money to keep the business not only open but also thriving. There are three key things owners can do, starting now, to encourage this.
- Address Debt and Capitalization: For many small- to mid-sized businesses, the owner serves as the personal guarantor for debt, leases, surety bonds, and so on. An unexpected death or incapacitation can cause lenders or obligees to call in those personal guarantees. The quickest way to address this is purchasing life insurance on the owner’s life.
However, owners must also consider nuances in their agreements. For instance, sole owners often sign personal, non-transferable agreements at the outset, which then becomes the norm even as the business grows. A sudden death under these circumstances can cause a business to fail quickly. Co-owned businesses can face a similar fate if the surviving owner’s balance sheet isn’t sufficient to cover the company’s credit needs. To avoid unexpected risks that result from an unexpected death, owners can consult with estate planning attorneys and M&A professionals on their Exit Planning Advisor’s Advisor Team to drill down into their debt and capitalization issues and adjust agreements as necessary.
- Groom Managers and Key Employees to Fill in: Recall that the most important Value Driver business owners can install is next-level management. Having a stable of ready and willing managers or employees is an effective and efficient way to mitigate the risks caused by an unexpected death or incapacitation. Exit Planning Advisors have the networks and strategies necessary to help business owners identify and train internal managers and employees to step in when needed. And even if they aren’t needed to fill in for a death or incapacitation, the training they receive can still increase the business’ value.
- Create an Emergency Operating Plan (EOP): An EOP is a written document that parses out responsibilities to appropriate workers to cover for an owner’s unexpected death or incapacitation. It guides employees and internal advisors on how to keep the business’ doors open in the owner’s permanent absence. An EOP can keep a business running in the short term if the owner hasn’t completed their Exit Plan with their Exit Planning Advisor or until a permanent successor can be installed.
Will My Other Goals, Including My Values-Based Goals, Be Achieved?
Sudden death or incapacitation can devastate an owner’s values-based goals. Achieving values-based goals usually requires that owners live to their exits for two reasons. First, most business owners intuitively act on their values-based goals. Second, because values-based goals typically live solely in the owner’s head, there’s no way for potential successors to consider and abide by them. Unless those owners actively work with an Exit Planning Advisor to incorporate those goals into a formal Exit Plan, those goals often die with them.
While Business Continuity Instructions are a good way to telegraph the owner’s wishes in case of an unexpected death or incapacitation, they are not legally executable. To assure that successors implement any values-based goals, business owners must translate their Business Continuity Instructions into binding directives in their estate planning documents. Exit Planning Advisors and their Advisor Teams, which almost always include and estate planning attorney, can help owners do just that.
Asking, answering, and acting on these questions is critical for owners. Exit Planning Advisors can help owners confront these issues without dwelling on the morbidity of an unexpected death, while giving owners, their families, and their businesses the peace of mind of knowing that there’s a plan for the unexpected.