Michael Jones Archives - Your ExitMap

A number of years ago, I worked for a financial advisory firm that was affiliated with a broker-dealer (b-d) network of a few hundred businesses throughout the country. Each year, the b-d would take it’s best firm owner customers and their spouses on a fully paid trip. This particular year, it was to Hawaii. Unfortunately, during a scuba diving excursion, one of the owners suffered a heart attack and died.

On top of the shock his family and employees were experiencing, it quickly came to light that he did not have a continuity plan in place. As a result, his family, during their time of mourning, had to scramble to not only keep the firm going day-to-day, but also decide on a longer term solution. As emotionally difficult as the situation was, it also had serious financial implications. Most small business owners have anywhere from 40% to 80% of their family wealth tied up in their business, and this situation was no different.

Luckily for the family, the b-d was a huge help. They provided additional services and technical support to help keep the business operating and even assisted with finding a buyer. While the company wound up being sold at a discount, it was a much better outcome than a fire sale, or worse yet, having the business dissolve.

In this case, the firm had a great relationship with a critical supplier, who was willing and able to step in and help during a crisis. Unfortunately, most small businesses who haven’t adequately planned aren’t so lucky.

What is a Business Continuity Plan?

As the name implies, a business continuity plan is a document that contains everything needed to successfully preserve the company’s value in the event of an owner’s death or incapacitation. There are 2 parts of a good plan. The first is the information that the family and employees need to keep the business going over the short term. The other is a longer-term strategy for the company in the event that the owner will be permanently absent.

A solid plan requires time and effort but is definitely something owners can do on their own. However, if you’d like assistance, there are business and exit planning consultants available to help. Let’s look at what’s included in a plan.

The Emergency Kit

This is where your family and key employees will find the critically important information that’s needed for running daily business operations over the short term. It would include such items as:

Bank account information
Insurance policy information
Points of contact for key business advisors – CPA, Banker, Attorney, Insurance Agent, etc
Lists of key suppliers and customers
Passwords
Information about trade secrets, patents, and other intellectual property
Who has short-term decision making authority

This is just a start. Every business is unique and the emergency kit should include everything needed to run the business as efficiently as possible in the days and weeks immediately following your absence. If the document is complete, your family and key employees should be able to find the answers to the following questions:

1. What do you, as the owner, do on a daily basis in the company?
2. What information do you have that others would need to know about in order to perform these tasks?

Once you think you have everything covered, have your spouse and key employees to review it. They will probably come up with some additional items that need to be addressed.

Long-Term Strategy

This is the portion of the plan that spells out your intentions for the company if you are expected to be incapacitated indefinitely or have died. This may or may not be the exit plan you currently have in mind. For example, if your current goal is to one day pass the business along to your children, but they are still in high school or college, an alternate plan is needed.

In some cases, this strategy could be similar to what you had envisioned if nothing had ever happened. However, additional contingencies may need to be put in place to help ensure its success. Let’s say your plan was to sell the business to your key employees several years from now. If the timetable was accelerated would this plan still work? If not, why not? Could these obstacles be overcome? If so, how?

A common reason I hear from owners planning an employee sale is their lieutenants aren’t quite ready to take over. One solution to this could be to have a ‘just in case’ arrangement with an outside advisor you have already vetted. That way, your employess will know who you want to come in to help manage the business and finish their training.

If you already have a contingency plan in place, congratulations, you’re ahead of the game. Now, when was the last time it was reviewed and updated? If it includes a buy-sell agreement, that should be reviewed on a regular basis as well. For instance, does the buyout amount reflect the company’s current market value? If the buyout is to be financed, is the financing still adequate? A large percentage of buy-sell agreements use life insurance to provide at least part of the buyout funds. If yours does, when was the policy last reviewed by an insurance professional?

If you died yesterday…

What would be going on at your company today? Do your loved ones and key employees have a good answer to this question? If not, then putting a business continuity plan in place will be time well spent.

By definition, a small business depends on you, its owner. Especially if you are its original founder. After all, the business would never have existed without the leap you took to start it in the first place. It wouldn’t have survived it’s early years without the sweat, tears and sacrifices, financial and otherwise, that were made.

Likely it survived and went on to flourish because of some special knowledge, skills or traits you either already had when you began, or that you developed while building it into the successful enterprise it has become. The value that you brought to the table in the beginning was your company’s most precious asset, and is likely still valuable today.

However, if your company is too dependent you, then it’s probably not operating as efficiently as it could. Put another way, If you are your company’s greatest asset, then you could also very well be its biggest liability. Owner dependence can be an obstacle for growth and hurt a company’s value when the time comes to sell.

Degrees of owner dependence

Owner dependence comes in many different forms. Does the business rely on you for most or all of its sales? Are you the go-to person for a key skill or necessary knowledge? Are you required to review others’ work and sign-off because you hold the required license? Are you still doing the bookkeeping or payroll?

Even if not involved in the daily operations, there are other ways a business could be owner-centric. Are you the only one who brings new ideas for growth? What business decisions are you responsible for? In what areas does your management team need your approval before taking action?

There are various surveys available which can help identify how owner-centric a business is; we offer one that takes less than 15 minutes to complete. Here’s another way to get a basic idea of owner-centricity that takes only a few seconds. How much time did you spend ‘touching base’ with your company during your last vacation? If you’re not sure, I’ll bet your spouse knows.

Too much dependence = less value

A business too dependent on its owner can make it more difficult to sell and even reduce its value. If a potential external or internal buyer (if you plan on selling to key employees) can’t fill your shoes, then they must either hire talent to replace the lost skillset, or keep you on for an extended time to help with the transition. Adding headcount means less profit and therefore less value. An extended transition means more risk to the buyer, (what if the business can’t be as successful without you) which again makes it less valuable.

Even if you don’t plan on selling any time soon, getting the business less dependent on you can provide value in other ways. How much would it be worth to you if you could spend 10 less hours a week at work? What would it mean to those you cared about if you had more time to spend with them? How would it feel if you could take 3 months off comfortably knowing that your company is humming along fine without you?

Some owners who have had this concept presented to them have reasons why they can’t take their fingerprints off the business. The most common ones are, “I’d love for the business to be less dependent on me, but I’m too busy to train someone else.” Or, “I’m involved in these areas because a mistake would be too expensive.” There’s also the classic “No one can do this as well as me!” These or other reasons could be challenges for you as well. I didn’t say this would be easy. On the other hand, owners that have been able to overcome these obstacles have created more business value and a better quality of life for themselves. And some who initially thought they wanted to sell had a change of heart. Once they found that the business wasn’t running them, ownership became enjoyable again and it was worth keeping.

Taking the first step

If this sounds like a worthwhile exercise, the first step is to identify the aspects of your business that are dependent on you. Then start small and pick one area to tackle first. Can it be delegated? Can it be systematized? Outsourced? Maybe some additional training is needed. Maybe someone with experience in that area should be hired.

Once you have the first one checked off, you should have more time and energy to tackle the next. It’s a virtuous cycle. Accomplish enough of these and not only will your company’s value increase, so will your quality of life.

Michael Jones, CFP, CEPA spent several years in management and engineering roles for various Fortune 500 companies. He has a B.S. degree in Mechanical Engineering from Virginia Tech and an MBA from the Krannert School at Purdue University. He is the President of Ataraxia Advisory Services, LLC.

Business Continuity Planning

Is your business too dependent on you?