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Contemplating one’s own demise is far too depressing. So let’s take an example of a business owner who suddenly died at age 54. The business owner’s family opened probate proceedings only to find that the once thriving business had also disappeared.  The business owner 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 his company died of an all too common cause—human error and neglect, setting off a chain reaction of ever worsening consequences for the business owner’s family and business:

1. The key employees left the company for jobs with more certain futures. They feared that neither the business nor their salaries would continue without the owner at the helm.
2. The departure of key employees meant that there was no one to manage the business. Total 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 took their business to the competitors. Further, the company’s vendors demanded cash payments–cash that the company no longer generated.
3. The bank saw the drop in revenues and decided to call in the company’s debt–debt the owner had personally guaranteed.
4. It didn’t help the business or the family that he left no instructions or recommendations about who could run the business, who could offer advice, or even what to do with the business should something happen to him.

The business 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 the owner.

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 dire.  

Fortunately, there is a process sole owners can quickly and easily use to help avoid this type of business collapse.

First, motivate top employees to stay on after your demise 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 demise. 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 (usually about 50% of annual compensation) and a salary guaranty if those employees stay (typically 12 to 18 months) 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 succession plan. Ask them what arrangements they would like to see in place.

Third, create a written plan that:

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

Finally, work closely with a capable insurance professional to make certain the necessary insurance (for purposes such as funding the Stay Bonus Plan) is purchased by the proper entity, (you, your trust or the business) 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 exit planning process. This article contains excerpts from an article in The Exit Planning Review™  published by Business Enterprise Institute, Inc. Subsequent issues of The Exit Planning Review™ provide unbiased and advertising-free information about all aspects of Exit Planning.  Please contact us or if you would like to sign up for a free subscription to The Exit Planning Review™, if you have any questions or want additional Exit Planning information.

Filed under:
Business Advice, Exit Planning by Kjell Andreassen