Planning for the Unexpected
Did you know that 50% of businesses will transition unexpectedly? No one ever expects bad things to happen, but they do. In business, we often refer to the factors as the 5 D’s: death, divorce, disability, disagreement and disaster. These are the things none of us want to think about but any of these can interrupt your business and cause a lot of pain and stress for you, your business and those important to you.
As we all experienced during the pandemic, disasters happen and if you are unprepared it could easily shut down your business. Bob is a business owner who suddenly became ill and incapacitated during Covid. He was the sole owner of a 20 person manufacturing facility and the only signee for checks and was the only one authorized for processing payroll. He was on a ventilator for almost 3 weeks and the business suddenly became crippled. They could not pay their vendors or their employees. Even though his wife was involved in the business, she was powerless to do anything.
Fortunately, he survived and came off the ventilator in time to get everyone paid. Had he not recovered, the business could have been ruined and his legacy destroyed.
While it’s impossible to prevent every possible setback, there are things you can do to prepare for them.
Have a buy sell agreement in place. This is a contract between business owners that spells out what will happen if one of them leaves or dies. It can help avoid disagreements and keep the business running smoothly.
Creating a buy sell agreement is not as difficult as it may seem. There are many online resources that can help you get started. We do recommend you consult an attorney before finalizing any agreement. The agreement should include the following:
- The triggering event, or events, that will cause the agreement to go into effect (e.g., death, disability, disagreement etc.)
- How the price the business will be sold for is calculated
- How the proceeds from the sale will be divided among the owners
- What will happen to the business if one of the owners becomes incapacitated, dies, divorces or leaves
Know what your business is worth. For most owners, their business is their biggest asset in their wealth portfolio but have no idea what it is worth. It is key to any exit plan. Understanding the value is important in case you need to sell it, buy out your partner or are planning to use the proceeds to fund your retirement
There are many factors that go into calculating the value of a business and different ways to assess value. Look for advisors who not only look at the financial assets of the business but take into consideration other factors that can influence value including client concentration, dependency on the owner, recurring revenue, growth potential etc.
Have a risk mitigation plan in place. This plan will help you deal with unexpected disasters and minimize the damage they can cause. A risk mitigation plan should include the following:
- A list of critical business functions and how they will be maintained in the event of a disaster
- A comprehensive insurance review for protecting the business
- An emergency contact list, including addresses and phone numbers
- A plan for continuing operations if you as the owner or key employees become incapacitated or the business is forced to close its doors
Disasters can happen to any business, large or small. By being prepared, you can minimize the damage they cause and keep your business running smoothly. If you have any questions about transition planning or risk mitigation, please don’t hesitate to contact us.