Imagine building your business over several decades, starting to plan your business exit, then dying unexpectedly before you can implement your plans. Business owners rarely think about how an unexpected death or permanent disability can derail even the most carefully created plans. When you think about it, this makes sense: if you were always worried about what could go wrong, you probably never would have started your business in the first place.
As you approach your business exit, you should take steps to minimize the outside effects that can cause your business planning to fail. One way to do that is to install business continuity instructions. Business continuity instructions are formalized directions that give your family, business partners, and employees guidance regarding how to address any number of unexpected events. Whether those events are extreme—such as death, incapacitation, or blackmail—or more common, such as divorce or the departure of a co-owner or key employee, business continuity instructions help position you to implement your exit plan regardless of what situations might come your way.
Related reading: Exit Your Business on Your Terms with a Documented Plan
Generally, business continuity instructions are useful for answering three key questions.
1. Who will lead the business?
Following a death or incapacitation, one of the first and most important questions survivors ask is, “Who will lead the company now?” For some owners, a buy-sell agreement (sometimes called a shareholder agreement) might answer that question, but buy-sell agreements are often found to be outdated and inapplicable when they’re needed most. As part of the exit planning process, you and your advisors provide this information in your business continuity instructions every year. This process gives you and your company the opportunity to name interim successors and who can run the company in your absence with as few issues as possible. Knowing who can continue the business in the face of the unexpected also minimizes negative effects to your company’s value. The security of a named leader gives your clients and potential buyers peace of mind that your business can remain successful and reliable even if you must exit unexpectedly. It can also help protect your family.
2. What should my family do?
If something unexpected happened to you, your family members may find themselves with responsibilities they never agreed to. Without proper planning, many families of deceased or incapacitated business owners have business responsibilities thrust upon them. In the worst-case scenarios, families lose not only a loved one but also the business and income it produced for the family. Business continuity instructions address these issues by providing clear information on the advisor team that can help family members get the business' matters in order. Business continuity instructions also include use of proceeds schedules, which guide family members in the best way to use funds they may receive upon the owner’s death or incapacitation.
3. What will happen to the company?
Even when the unexpected occurs, you can still have control over what happens to your business. Business continuity instructions provide clear orders for how you want your business ownership transferred if you die or become incapacitated before implementing your exit plan. Among other information, you should quantify the minimum amount of money you expect from your ownership transfer, explain who will make decisions regarding transfer of ownership if that minimum amount is not available, and note any customers or vendors who need special attention and why. This amounts to a survival plan for the business and your family, especially if they relied on you as the primary decision maker and breadwinner.
Above are just a few of the areas where business continuity instructions help protect your business and family against the unexpected. Business continuity instructions also can help you address other issues that may be more unique to your business. To find out more about business continuity instructions and other processes to protect your business and family from the unexpected, please consult one of our advisors.
Information from Business Enterprise Institute.