The 5 D’s of Contingency Planning: Add Value to Your Business and to Your Exit Strategy

Contingency Planning is one of those areas most business owners would rather avoid.  Who wants to think about worst-case, What-If scenarios?   However, if you develop your contingency plans to effectively address the worst-case concerns and you DOCUMENT IT, the immediate impact is those documented plans add value to your business.  They allow you to add security and streamline ongoing viability in the face of major issues.

To maintain a successful business that can endure, along with growing the top line, you must also plan for and have contingencies laid out for all 5 D’s that can put the entire enterprise at risk. The 5 D’s are:

Death

Disability

Departure

Divorce

Disagreement

Death

It’s unavoidable. Rather than deny it, think about the consequences to the business, your team, your stakeholders and your family.  You can use a range of insurance products to help manage the financial risks of your death while leading your organization.  But you must also think through how to structure your buy-sell agreement and who will run the business without you.  How will the business continue?  Have you written down the location for all major documents and contracts?  Who knows where your passwords are stored or the lock box key or the safe combination?  In addition, it’s important to keep you and your business legally separate.  This discussion may include both your planner, your corporate attorney, your estate attorney and your insurance broker at the core.

Disability

Before age 65, we are all more likely to need the benefits of disability insurance rather than life insurance.  Long before you or your executive team might need to access it, define the parameters, protection and obligations related to your disability.  you must also think through how to structure your buy-sell agreement and who will run the business without you.  How will the business continue?  You

want to avoid a knee-jerk reaction to deciding between business survival and paying an ill or handicapped owner.

Departure

Partners have different timelines in mind for moving on to their next stage in life or retiring.  Where does the money come from to buyout the departing partner(s)?  Who will do the work to ensure business continuity?  How do you fairly compensate or buy out a departing partner without handicapping the business to do so?  How do you make a departure amicable and avoid contention?  Do you have a partners’ contract of commitment, requirements, and constraints?  Planning for an owner’s exit/transition, takes planning from the outset.  You need to identify all partner’s criteria and timelines early on.  Document the continuity plan for the business in the case of each one moving on.

Divorce

The costs and risks associated with building a business are high.  Marriages don’t always survive.  But you don’t want the demise of your (or any partner’s) marriage to destroy or handicap the business.  Divorce can also be a business partnership split, which feels like a marital divorce.  Plan and document who retains ownership in the case of a breakaway, and who gets bought out.  Just like a pre-nuptial agreement, lay out a memorandum of understanding before you open your doors.

Disagreement

Partners in a business are like spouses in a marriage.  They don’t always agree on everything, nor do they need to for the business to thrive.  However, major, unforeseen disagreements can cause rifts in the organization that may harm the

company, team, even client relationships.  Spelling out policy and procedures early, before there’s an issue, to work through if critical disagreements arise is very important.  Decisions such as: reinvesting for growth or taking dividends, how to structure benefits, when to sell, which buyer option to pursue, etc.; require expectations and structure to be able to address and resolve these issues effectively.

 

No one ever wants to face any of the 5 D’s as risks to their business when everything seems to be going well.  Contingency Planning is about making strategic decisions for eventualities that may never happen, but if they do, you are prepared. You can’t buy a house or a car without insurance coverage. Developing a contingency plan for all 5 D’s takes time.  Documenting each element as its decided and executed is how you can monetize the plan and reduce the risks to business continuity.

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