The Need For A Solid Continuity Plan
A great characteristic of successful business owners is that they are optimistic people and will do what it takes to protect their business. They have a can-do attitude, setting their goals high, taking risks, hiring the right people, constantly striving to improve the delivery of their service or product, with a constant drive to build their entity into one of great significance.
As a result, building a successful company may give the owner great pride in their achievements and a strong sense of identity. That is normal human behavior. But because of that, the thought of an event that causes the owner to leave the business due to death or a disability is often never planned for and is overlooked. If such an event were to occur, it would not only jeopardize the value or even the survival of the business itself, especially if the business is heavily reliant on the owner or a key partner, but it also jeopardizes the future career paths of key employees and others, and leave customers scrambling to find somewhere else to go.
What Does It Take To Protect Your Business?
One thing is often on the minds of owners and advisors; how the family is taken care of through an unexpected death or disability. However, business continuity planning goes much further than that. A solid business continuity plan includes agreements, procedures, employee incentives, and safeguards that are put into place to help enable the business entity and all of its successors. This includes all key employees, vendors, operations, procedures, and customers. It helps the business continue on a successful path, with as little interruption as possible, if the owner/s is no longer present.
For instance, who will fill the slot of Chief Executive or Chief Operating Officer? Does the remaining management have a plan? Do they have financial resources available to search and bring in somebody from the outside to fill that position? Should they begin, now, to groom key employees for that role? How will the key vendors, creditors, and customers be handled? Will supplementary training need to take place? What will you tell the customers and the community to maintain confidence in the company during an unexpected death or disability? What plan will you put in place to entice the key employees to stay around and ensure the internal integrity of operations?
The reality within the marketplace is, if the business is left paralyzed and vulnerable, they risk losing key customers, creditors, and key employees who may be quickly recruited by competitors.
The Elements of a Solid Continuity Plan
The good news is that building a solid continuity plan is a required step within the exit planning process. It helps to build the value and marketability of the organization.
There are many areas that a continuity plan addresses and help protect your business. It includes the creation of a Buy-Sell Agreement, or amending or replacing one; the disposition of ownership interest, which is done through estate planning documents; insurance to fund the Buy-Sell Agreement; a management continuity reward program; retaining key employees after death or disability; a stay bonus plan; a process for terminating personal guarantees for business obligations, business continuity instructions; and a Buy-Back agreement for minority owners. There are other potential areas to address, but these are the likely critical areas.
Key Documentation
Buy-Sell Agreement – This document is created to summarize the terms of the written agreement that will govern the ownership transfer and ownership rights aspects of the ownership interest of the primary owner/s and other members of the controlling interest group. This document also covers the issues related to the rights and responsibilities of the parties to the agreement.
Disposition of Ownership Interest Through Estate Planning Documents – Estate Planning documents summarize the intentions and issues that are most important to the owner if he/she dies while holding the ownership interest in the company. This is carried over into the continuity plan and is created within the personal estate planning documents.
Insurance to Fund A Buy-Sell Agreement – The purpose of this exercise is to recommend and select the appropriate type of life and disability insurance related to the purchase/sale of the owner’s interest in the company. Proceeds from these policies are used to purchase the ownership interest.
Management Continuity Reward Program – This is to address the benefits that the owner intends to provide to the individuals who take over the management responsibilities if the owner should die or become disabled, and is unable to perform the regular responsibilities.
Retaining Key Employees After Death or Disability – This is the section of the plan that addresses the steps to retain key employees. This is not intended to include incentive and reward planning for key employees, which is more properly addressed in a separate component of the overall planning. Instead, attention is given to the particular issues relevant to the key employee retention when a majority or controlling owner is unexpectedly absent from the company. This section is intended to assist the successor management staff. It also allows them to concentrate on the continued success of the company and protect your business.
Stay Bonus Plan – Develop a written agreement that would become effective upon the owner’s death or disability. The Stay Bonus Plan acknowledges the indispensable employees remaining with the company should such an event occur. The plan provides confidence and support to specific employees who choose to remain with the company and provides substantial financial reward for them doing so.
Terminating Personal Guarantees for Business Obligations – This is a stipulation of steps to be taken to protect the company if the owner’s personal financial resources are no longer available to support the financial activities of the business. In the event of death or disability, the company relationships may require that the business demonstrate financial stability to continue their relationship.
Business Continuity Instructions – Business continuity instructions are written instructions that are completed, signed, and stored with other important personal documents related to the owner’s death or disability.
Buy-Back Agreement for Minority Owners – The purpose of developing this agreement is to state the situations in which an employee owner’s interest will be purchased by you or the company in specific situations that may arise. It also governs the employee’s ownership interest while he or she is an owner. It addresses certain rights and responsibilities associated with the ownership status and other terms related to ownership.
Work Flow Diagram
Over the years my staff and I have developed a work flow diagram to help the owner understand how we can approach the development of a Business Continuity Plan. Although, every situation is different, it gives you a general idea of how it may come together.
Protect Your Business
The bottom line is, a solid Continuity Plan is critical for you, as a business owner, to develop and maintain, to help ensure that your business, which you and your staff have worked so hard to build, maintains its integrity and success if something should happen to you.
Steven Zeller is a Certified Business Exit Planner, Certified Financial Planner, Accredited Investment Fiduciary, and Co-Founder and President of Zeller Kern Wealth Advisors. He advises business owners and develops exit plans, increases business value, employee retention, executive bonus plans, etc. He can be reached at szeller@zellerkern.com