Most business owners are good at contingency planning. They plan for every possibility imaginable as it relates to their business. However, few owners plan for the one thing that is certain and can completely disrupt the business – death (or disability). We all have more pleasant endings in mind as we think about exiting our businesses; nonetheless, we all know someone who died too soon.
If ownership transition for your business is uncertain in any way, business continuity is threatened. Without continuity of leadership, your business will probably fail. A premature death can affect the company’s ability to maintain its financing, its relationships with key customers and vendors, and its relationships with other parties who are important to the ongoing success of the business.
A good exit plan requires that you develop a written contingency plan for your business and update it every year. What is often forgotten is that a large part of the value of your company is based on a buyer’s assumption that the owner will stick around for 6 to 12 months to facilitate the transition of ownership. If the previous owner cannot play this vital role, a buyer will significantly discount the value of the company. Even a vital and profitable company can unravel quickly when its leader is unexpectedly removed from the mix.
Engaging with a CEPA advisor to develop a contingency plan is advisable. Responsible individuals (such as corporate officers, advisory board, family, etc.) should be made aware of and empowered to implement the plans should such an occasion arise.
Sample Contingency Plan
Dear Wife and Children:
Our family business has been a joy for me to build and run. I’m proud that it has provided so well for our family for the last 30 years. That said, the business was my passion. I don’t expect it to be yours. You have your own dreams to pursue and your own lives to live. As a result, I have created the following plan in the event that I die or become disabled. I hope this will make the process of dealing with our family business easier.
Management: Day-to-day executive management should be turned over to John the company CFO. He should assemble a management team made up of Roger in Operations and Bill in Sales. Management oversight should be provided by a board made up of Merriam, Ken and Marybeth.
Compensation: John, Roger and Bill should be covered under the “stay bonus” program that I put in place last year. Under this plan they will continue to receive their regular salaries but can also receive a bonus up to 100% of their base salaries if they stay with our company during the transition period and maintain the company’s financial performance.
Disposition of the Business: I believe the company should be sold upon my death or disability. Although John, Roger and Bill are great managers, I’m not sure they have my drive and vision needed to continue to make the company a success the way I have.
My Goals: My primary goal in having you sell the company is to provide you with a financial legacy that will enable all of you to live comfortably, pursue your dreams and have rich and rewarding lives.
I wish to be a part of your lives, but if I can’t be there physically, at least I will have some comfort in knowing that I played a big part in making it possible.
Secondarily, I would love for the company to stay in town where it has provided good jobs to our friends and neighbors all these years. I would love for the company’s name to stay the same, as a memorial to me.
If you can accomplish my primary goal and any of my secondary goals that would be great, but please do not compromise my legacy to accomplish any of these secondary goals.
Each of you has been a treasure to me and together you have been the light of my life. I am very proud and honored to be your husband and father.