We all know that every day is a gift; none of us know what tomorrow holds in store for us.
As a business owner, one of the most important things you can do to preserve your business, your legacy and protect your family in the event of an unforeseen event is to have a detailed and up-to-date contingency plan.
What is a contingency plan? Simply put, a contingency plan is a written set of instructions of who, should do what, when, in the event of your incapacitation or death. Click here to read more about “The 5D’s – An unplanned sale. Could this happen to me?”
Having a contingency plan is not an option, it is a necessity; and every business owner should have a contingency plan.
What is a contingency plan?
According to dictionary.com, a contingency plan is:
A plan designed to take a possible future event or circumstance into account.
What the contingency plan aims to accomplish will vary depending on how your business is structured: sole owner, multiple owners, partners. However, what every contingency plan must do is identify who in your organization has the knowledge, skill, ability and authority to execute and make decisions on your behalf.
Why small businesses need a contingency plan.
In a sole owner business, every decision, more or less, relies on your direct input. Without you around to make sure your plans and vision for the continuation or sale of the business are realized, your family, management team and advisors may not know or be in accordance with your wishes and opinions with respect to the future of your business. Without a clear path, key members of your organization may leave for the safety of another job, which could further cripple your business and diminish its value.
Some points you should take into consideration:
- If you have partners or shareholders in your business, have you discussed with them how the transfer of power should occur and to whom?
- Do you have a buy / sell agreement in place?
- Does it address how to handle your ownership in the business in the event of disability as well as death? Is the buy / sell properly funded?
- Is the buy / sell agreement clear on the path forward in the event you are disabled? (Structuring disability coverage for a buy / sell can be complicated and will be the subject of a future post).
- When you do get replaced, how will you get paid if you are not working? Will the company need to hire someone with your skill set to replace you?
- Will the business be able to sustain itself without a disability policy in place?
If you are the sole owner and your business cannot survive without you, then you must leave a short-term plan that guides your designated advisor how to run the business until it can be sold or liquidated in an orderly manner. This may include stay bonuses for key employees, insurance proceeds to pay off debts and satisfy other obligations. It should also include a list of potential buyers for your business.
What are the risks and rewards associated with a contingency plan for my small business?
Clearly, yourself, your family, your business will all benefit from having a contingency plan in place. A copy should be provided to your spouse or other family member, your attorney, your CPA and your financial planner. Presumably they all know each other already, this will make sure that your key advisors are all clear on what you expect from them in your absence.
Without a clear, concise and detailed contingency plan, you run the risk of:
- Key employees leaving
- Key clients leaving
- Key vendors / suppliers tightening terms
- Inability to satisfy critical obligations
- If staff starts to leave, projects can be left incomplete which could damage the company’s reputation and value. In extreme cases defaults can force the business into bankruptcy
With a clear, concise and detailed contingency plan, you have the opportunity for:
- An orderly sale or liquidation of the business which will provide cash to your family to replace the income you will no longer generate
- The business will survive and preserve your legacy and continue to provide jobs and serve your community
- The business will most likely transfer according to your wishes
Preparing a contingency plan is neither costly or time consuming. The benefits it will provide in the event of an unfortunate situation is an order of magnitude much greater than the time and money you will invest to complete one.