If owners die or become disabled prior to their planned exits, their companies face many of the same problems they would have had a key employee died. In this issue we outline the problems that can confront both sole-owned and co-owned businesses and, more importantly, outline suggested remedies to those problems. When an owner dies or becomes incapacitated prior to a planned exit, the company must confront three issues:
- Continuation of ownership.
- Company’s loss of financial resources.
- Company’s loss of key talent—the owner—and the cascading effect on employees and customers.
Today, we look at how the loss of an owner affects both sole-owned and co-owned businesses. Problem for Sole Owners. An owner's death will likely have the same impact on the company that the death of any one of the company's key employees would have. The owner's talents; experience; relationships with customers, employees, and vendors may be quite difficult to replace (especially in the short term). Once the owner is gone, employees may jump ship unless the owner made careful contingency plans. Without employees, the company is likely to default on its contractual obligations. Without planning, few businesses have the financial resources or successor management to weather this storm. Problem for Co-Owners. Multi-owner companies experience the same losses as solely owned companies if the remaining owners do not have the experience or talent to replace the former owner. If the owner was the primary generator of new clients, headed operations, or maintained most of the company’s key relationships, his or her death or incapacitation will, at best, jeopardize your company’s survival. Solution for Sole Owners. Sole owners should create written Stay Bonus Plans to motivate their key employees to remain with the company after the owner’s death. Additionally, owners should create a succession-of-management plan that names the person(s) who will assume the owner's duties. Finally, owners should decide now how they want their companies to be preserved (e.g., sold, continued, or liquidated) Solution for Co-Owners. If co-owners do not have the skills and experience to replace the owner's skills and experience, the owner must create a plan to give them the skills and experience they lack. If employees are confident that the surviving owners have the skills necessary to bring in new business, run the operations, or maintain key relationships, they are less likely to jump ship. Business continuity requires cash, usually in the form of life insurance proceeds. But continuity requires more than cash. Your company will need to fill the talent void created by your departure. To do that, you must encourage existing management to stay, perhaps with cash through a Stay Bonus Plan or an offer of ownership. If your business does not currently have, in place, management capable of assuming the reins, you must make it a priority to find and hire that management now. If you would like to discuss how you can go about managing your company’s continuity, please contact us.
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The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial professional. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial professional. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Business Enterprise Institute, Inc. is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.
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