Contemplating one’s demise is never pleasant and can be challenging. And yet it’s critical that sole owners tackle the topic for the good of their families and their businesses. Consider the outcome for fictional Harry Withers, the 54-year-old owner of Withering Hikes, a chain of seven retail apparel stores for outdoor enthusiasts on the Western Slope of the Rocky Mountains.
One day, Harry disappeared without a trace while on a routine scouting trip for new hiking trails. After several months, Harry’s family opened probate proceedings only to realize that Harry’s once-thriving business was losing money.
Harry had no reason to expect that he would not realize his dream of selling his company at age 60. He’d given little thought to answering the question of “What if something happens to me before I sell?”
Withering Hikes’ demise was the result of our natural aversion to thinking about death and/or disability combined with the belief that neither will happen to us. Harry’s family and business paid a high price for Harry’s failure to confront the What If?
- Harry’s key employees left Withering Hikes for jobs with more certain futures. Since Harry had not even named anyone to take charge of the company in his absence, employees feared that neither the company nor their salaries would continue without Harry—or anyone else— at the helm.
- The key employees’ departure left no one to manage the business. Total chaos reigned, and revenue took an immediate and irreversible nosedive. Longtime customers and vendors grew uneasy with what they perceived to be a rudderless ship. Customers took their business to Harry’s competitors, and vendors demanded cash payments; cash that the company no longer generated.
- Harry’s bank saw the revenue drop and chose to call in the company’s debt that Harry had personally guaranteed.
Because Harry left no instructions or recommendations about who could run the business, who could offer advice, or even what to do with the business should something happen to him, his business failed, and his family was left virtually penniless.
We hope that this classic story of Withering Heights illustrates what can happen when owners fail to answer the question of “What if something happens to me (my family, estate, employees and business) if I’m not around to enjoy and benefit from the business exit of my dreams?”
From our experience as Owner-Based Planners, we know that, without a wellconsidered business continuity plan, the consequences are dire.
Business Continuity Planning for Sole Owners
Fortunately, there is a process that sole owners can use to help avoid an outcome similar to Harry’s.
1. Motivate top employees to remain.
We recommend that sole owners motivate top employees to stay on after an owner’s life-changing or life-ending event by creating financially meaningful incentive compensation plans that vest over time. We call these plans Stay Bonus Plans because they provide employees a substantial bonus for remaining in place. Designated employees receive a cash bonus (usually about 50% of annual compensation) and a salary guarantee if they stay—typically 12 to 18 months—after the owner’s death or incapacitation. A company can usually fund stay bonuses with life insurance on an owner’s life.
2. Create comprehensive Business Continuity Instructions (BCI). We’ve written articles and detailed white papers on this topic, but in brief:
BCI function as non-binding, accessible and comprehensive guides that family and loved ones can use to address business concerns and personal finances when aren’t able to do so. BCI can include information about:
- Whom your family should contact and for what information.
- Who should fill various roles in your company.
- How company ownership should be handled.
- Your vision for your company.
- The plans you’ve made to equip your family to maintain its current lifestyle.
- And much more.
3. Tell the Appropriate Parties.
Continuity plans are worthless if they exist only in an owner’s head and little if in writing, but no one knows they exist!
Sole owners must communicate these actions to employees to assure them that they have put in place plans to ensure the continuation of their companies. They should discuss with their bankers the arrangements they’ve made to assure them that an ownership transfer will proceed smoothly and demonstrate that the necessary funding to implement their plans is in place.
4. Assess Insurance Coverage
We also recommend that sole owners work closely with capable insurance professionals to assure that the proper entity (the owner, owner’s trust, or business) has purchased the necessary insurance for the right reason and in the appropriate amount.
Creating a continuity plan for your company should you depart unexpectedly is a vital part of your overall business planning process. Failing to do so invites the outcome that Withering Hikes, Harry’s employees, and his family experienced.
Our expertise in crafting business continuity plans including Business Continuity Instructions and Stay Bonus Plans that are appropriate for you and your business can prepare everyone involved for a truly unpleasant and exceptionally challenging event. Contact us today to learn more about how we can help you create a continuity plan for your solely owned business.
We are here to Help!
We strive to help business owners identify and prioritize their objectives with respect to their business, their employees, and their families. If you are ready to talk about your goals for the future and get insights into how you might achieve those goals, we’d be happy to sit down and talk with you. Please feel free to contact us at your convenience.
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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Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.
