Successful business owners are usually optimistic people, somewhat averse to dwelling on the more unpleasant aspects of business. Contemplating one’s demise certainly qualifies as an unpleasant aspect. Consequently, advisors to owners tend to use a lot of buzzwords when we talk about business continuity.
We ask, “What happens if the owner ‘passes on’ or ‘leaves the scene?’” We talk about the consequences of an owner’s death upon the business in theoretical, third party terms: “Should an owner die …” Unfortunately, these oblique references gloss over the central fact that you, the owner, must take care of business now in case you (rather than some anonymous third party) die tomorrow.
Typically, when owners think of business continuity, they do so at the prompting of an insurance or legal advisor who warns that unless owners take prudent measures, they will leave their families unprotected in the event of death or permanent disability.
Business continuity, however, is not principally concerned with making sure that an owner’s family is taken care of in the event of the owner’s death or disability. As an owner, you must address those family concerns through proper estate planning.
Business continuity is, on the other hand, a means of handling a variety of transfer events and consequences that impact the business and the remaining (or new) owner when the original owner leaves.
In my first few blog posts, I’m going to discuss a variety of issues facing sole owners and owners in multi-owner companies that an owner’s death or disability creates for the business, for the other owners (if any), and sometimes, for the family. It also proposes solutions to each of these problems.
MAKING SURE THAT YOUR BUSINESS CONTINUES IF YOU DO NOT
The thought of what will happen to our businesses should we die is, at most, fleeting. In that brief moment, we seldom think beyond making sure our families are protected should the unthinkable happen to our co-owner, of course. Yet business continuity, in its most fundamental sense, has nothing to do with protecting an owner’s family. It is about preserving and protecting the business, in the short term and in the long term, should its most important component, its owner, die or otherwise become incapable of continuing in the company.
Ownership succession is the most obvious problem facing a company but it is one of four vital issues:
- Continuity of Business Ownership
- Company’s Loss of Financial Resources
- Company’s Loss of Financial Resources
- Loss of Employees and Customers
In this post, we’ll focus on how business ownership continuity affects both sole-owner and multi-owner companies.
CONTINUITY OF BUSINESS OWNERSHIP
Problem:
Sole Owner Company
Continuity of business ownership is the critical issue in a solely-owned company. In fact, there is no continuity unless you take steps now to create a future ownership group or owner.
Multi-Owner Company
Continuity of ownership is not an issue when a funded (with life insurance) buy/sell or business continuity agreement has been implemented. The problem is that most owners (and their advisors) fail to keep their buy/sell agreements up-to-date and, as a result, those agreements often create more problems than they resolve.
Solution:
Sole Owner Company
First, create and implement a plan to allow the business to continue after you are gone. Since there is no co-owner, you must provide for the business’s continuity – even if owned by your estate or a trust for the benefit of your family – by securing the continued services of your important employees. Do everything you can to prevent your employees from leaving because they are indispensable to the business’s continued existence. Secure their continuation by compensating them at a substantially increased level (usually 50% to 100% more than they ordinarily receive). This is best accomplished through the use of a stay bonus.
A stay bonus is a written, funded plan providing monthly or quarterly bonuses, usually over a twelve to eighteen-month time frame, for employees who remain with the company during its transition from your ownership to new ownership. (This applies whether the business is transferred to a third party, to employees or to family members.) The stay bonus provides a cash incentive for your important employees (perhaps 20 to 50 percent of the total workforce) to stay, hence its catchy name.
Typically, the stay bonus is funded with life insurance in an amount sufficient to pay the bonuses over the specified time period. The life insurance may be owned by the company or outside the company in an estate tax-sensitive trust. The plan is communicated to the important employees when it is created so that they know a plan exists and, consequently, that thought and planning (and money to pay salaries!) will ensure the continuation of the business.
The second linchpin of single-owner continuity planning is to communicate your continuity wishes now. At a minimum, you must communicate, in writing, your wishes as to what should be done with the business upon your death or permanent incapacity:
- Designate key employee(s) or others who can be given the responsibility to continue and to supervise business operations, make financial decisions and oversee internal administration. Name today these individuals on a Business Continuity Form.
- Name advisors and others (such as a friendly competitor) who should be consulted in the ownership transfer process. (Again, put these names on the Form.)
- If it is your wish that the business be sold, state that intention and list the names and contacts of businesses who have expressed an interest in acquiring your company or who you think would make an appropriate successor/owner. Do so on the Form. You may wish to indicate that it is your desire that the business be sold to key employees, continued in the family, or liquidated. The choice is yours, but you must make it while you are alive. Is there a better time than the present to do so?
- Finally, give the completed Business Continuity Form to your spouse and copies to your advisors.
Multi-Owner Company
From a continuity standpoint, the nicest thing about having multiple owners is that the business will continue if one of the owners dies, provided measures are taken (usually in the form of an up-to-date, adequately funded buy/sell agreement) for the remaining owners to acquire the deceased’s interest in the business.
Having said this, chances are, your buy/sell agreement has not been recently reviewed, does not reflect current business value and does not completely address the many possible transfer events such as:
- Death,
- Disability,
- Transfer to a Third Party,
- Termination of Employment,
- Retirement,
- Involuntary Transfer Due to Bankruptcy or Divorce, and
- Business Dispute among Owners.
Finally, it is likely that your buy/sell agreement does not fully address each transfer event (e.g., termination of employment of an owner) from the perspective of whether the company has (or the other owners have) an option, or put a mandatory requirement to reacquire the ownership interest.
As may be apparent, the biggest risk to the continuation of businesses that are co-owned is not the death or disability of one of the owners. Rather, it is that the above-listed events are considered once and memorialized in an agreement. All further thought and action on the subject are shelved – along with the agreement.
In my next post, I’ll discuss Corporate Loss of Financial Resources. Until then, if you’d like to get a copy of a Business Continuity Form, or talk about how to plan for the continuation of your business, reach out to me at 678.466.7885 or
©2007 Business Enterprise Institute, Inc., Business Continuity Planning White Paper