Contingency and Continuity Planning

Contingency and Continuity Planning

May 10, 2022

When business consultants talk about preparing for unforeseen problems, they frequently commingle the terms contingency and continuity. The terms are not synonymous, and there are important differences between them.

Contingency Planning

Contingency planning is generally accepted to mean how a business will respond in the event of a disaster. This could entail a building fire, severe weather, a strike of key service workers, civil unrest or riots (depending on the audience.) In this age of cybersecurity, ransomware or a denial of service attack, identity theft, and electronic fraud are all well qualified to be categorized as disasters.

Generally speaking, these are all insurable events, and contingency planning often recommends insurance as a major component of preparedness, along with remote working capabilities or alternative production resources. In privately held businesses, however, contingency planning has one weakness.

It assumes that the owner of the company will be available to oversee the implementation of the plan.

What if the disaster is at the top of the pyramid? Most businesses need a continuity plan that addresses the sudden absence of the owner. We start the conversation with a simple scenario. “What if you are hit by a bus on the way to work tomorrow? You are rushed to the hospital, and no one knows where you are. When they find out, it appears that you will be unable to respond to questions for weeks, if not months. How will the business operate for that time?”

Continuity Planning

Exit Planning is presumably designed around a voluntary departure from the business, but what if it isn’t voluntary? Where Contingency planning looks at a variety of financial risks, Continuity planning is focused on the operational problems of an owner’s absence.

Continuity planning starts with the most elementary task-based assignments. Who opens the business? Who informs the employees, the customers, the vendors, and the bank? How are they told, (By email, phone call, personal meeting or teleconference?) Who distributes funds, draws down the credit line, and signs contracts? Are there specific customers or vendors who will require special treatment?

If employees are expected to step up to a higher level of responsibility, will they receive contingent compensation attached to their added duties? Many owners rightfully anticipate that employees will shoulder additional duties out of loyalty, but loyalty has a limit. What if they are in this position for months?

Are there limits on the employees’ decision-making authority? Can they decide on new capital investments, or enter into new vendor relationships? If there is a dollar limit, who has the authority to exceed it if necessary? Who are the key advisors they should consult if they have questions? Is there a compensation agreement with those advisors if they need to be closely involved or engaged for an extended time period?

Contingency and Continuity

These are just a few of the operational answers required on Day One. The owner’s extended or permanent absence will also involve decisions about credit facilities, family income, real estate, working capital, buy/sell agreements, licenses, cybersecurity and the long-term disposition of the business.

We take a practical look at the issues of an owner’s absence from the business, whether it is planned or unplanned. Continuity planning is just one component of modeling “life after the business.” For the great majority of exit planning discussions, it is a useful but not urgent exercise. If a Continuity plan is needed, however, it may be the most important thing we’ve done for that client.