Business continuity is a tool for handling the transfer of a business to a different owner when the original owner leaves, dies or becomes incapacitated. A continuity plan protects short-term and long-term business interests and is one of the most important components to business exit planning (opens in new tab).
The death of an owner often sets off a ripple of events for a business if it is not prepared for continuity. This loss of direction can lead to losses of financial resources and vendors, key talent and ultimately loyal customers. Below are the key issues that can occur when owners do not create a plan, along with ways to mitigate them:
Loss of Financial Resources
Vendors may decide to discontinue their services to the business, especially if the business defaults on their contracts. The banks, lessors, bonding and financial institutions you do business with may end their relationship with your company. How to handle these situations depends on the type of ownership:
Sole owners: Your death can put enormous pressure on the business to continue its performance should third parties refuse to lend money or make guarantees based on the health of your company. Continuity planning can help offset the loss of leadership.
Partnerships: The loss of financial resources can be mitigated by funding a buy-sell agreement (opens in new tab), which places a significant amount of money in the company reserves should you die.
Loss of Key Talent
Another issue that can create problems with business continuity is the loss of your key talent. If the remaining owners do not have your experience or skills, the business can suffer as if it had been a sole ownership. Your experience, skills and relationships with customers, vendors and employees may be difficult to replace, especially in the short term. To overcome this situation, begin grooming and training successive management capable of filling your shoes. You should also begin preparing for the transition early, because training your replacement can take years.
Loss of Employees and Customers
Particularly with sole ownership, as vendors end their relationship with the business, employees will be unable to satisfy their obligations to customers. This can hasten the employees’ departure, taking with them key skills and even client relationships.
To mitigate the loss of key employees, you can incentivize them to continue their employment through a written Stay Bonus that provides bonuses over a period of time, generally 12-18 months. This bonus is designed to substantially increase their compensation, usually by 50% to 100% for the duration specified. Typically, this type of bonus is funded using life insurance in an amount that is sufficient to pay the bonuses over the desired timeframe.
For businesses with only one owner, it should be obvious that there will be no continuity of the business unless a sole owner takes the appropriate steps to create a future owner. Whether it be grooming a successor or creating group ownership, this step is one that should be addressed early. Even if your business is owned by your estate or a trust, you will need to provide for its continuity, if only for a brief period while it can be sold or transferred. These steps should help business owners move through the process of creating a continuity plan:
- Create a written Succession of Management plan that expresses your wishes regarding what should be done with your business over a period of time, until your eventual departure.
- Name the person or persons who will take over the responsibility of operating your business.
- Ensure your plan specifically states how the business transfer should be handled, whether continued, liquidated or sold.
- Notify heirs of the resources available to handle the company’s sale, continuation or liquidation.
- Meet with your banker to discuss the continuity plans you have made. Showing them that the necessary funding is in place to implement your continuity plans will help the eventual transfer of ownership to proceed smoothly.
- Work closely with a competent insurance professional to assure the amount of insurance purchased by the owner, the owner’s trust, or the business can cover the business continuity needs outlined in your plan.
For businesses with more than one owner, continuity planning can be achieved by creating a buy-sell agreement (opens in new tab). Such an agreement stipulates how the co-owner’s interest in the business is transferred and is often funded using life insurance or disability buyout insurance. It can also be funded through an employee stock ownership plan (ESOP) by creating a privately held corporation. It is important that you keep the buy-sell agreement updated to avoid creating additional problems with continuity. There are several types of buy-sell agreements to consider:
Cross purchase: Another business partner agrees to purchase the business from the owner or the owner’s family. All business owners generally purchase, own and are the beneficiary of an insurance policy insuring each of the other business owners.
Entity purchase: The business entity agrees to purchase the business from the owner or the owner’s family. In this case, the insurance policy is usually owned by the business.
Wait-and-see: The buyer of the business is allowed to remain unspecified, and a plan is put in place to decide on a buyer at the time of a triggering event (e.g., retirement, disability, death). The policy ownership and beneficiary structures vary, depending on the type of the agreement.
Deciding when to begin business continuity planning is complicated and likely depends on your health, family circumstances and overall business financial wellness. We suggest you seek the advice of a business planning professional to help you sort through your options.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax adviser or lawyer.
Kris Maksimovich, AIF®, CRPC®, CRC®, is president of Global Wealth Advisors (opens in new tab) in Lewisville, Texas. Since it was formed in 2008, GWA continues to expand with offices around the country. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Financial planning services offered through Global Wealth Advisors are separate and unrelated to Commonwealth.
McDonald’s Gold Card: The Mysterious Piece of Plastic That Gets You Free Food for Life
Order from the McDonald’s app in December for a shot at winning a rare McDonald’s McGold Card and free food for life.
By Bob Niedt • Published
Microwave vs Air Fryer: Which is Cheaper for Cooking?
Can the trusty microwave be beat by the air fryer for cost savings in the kitchen?
By Ben Demers • Published
How Parents Can Teach Their Kids About Cryptocurrency
Starting with explaining the concept of money to begin with can help them grasp the concept of digital currencies.
By Neale Godfrey, Financial Literacy Expert • Published
How Do You Overcome Stage Fright? These 6 Tips Can Help
Many people fear public speaking more than they fear death, yet advancing professionally could depend on whether you make a good impression when you step up to the microphone.
By H. Dennis Beaver, Esq. • Published
2 Ways Retirees Can Defuse a Tax Bomb (It’s Not Too Late!)
If you’re retired and find yourself sitting on a “tax bomb,” you may think there’s nothing you can do. But two strategies could seriously reduce your taxes in retirement.
By David McClellan • Published
5 Trends in High-Net-Worth Philanthropy
Wealthy families and organizations are giving more to charity but also targeting funding to fewer grants in their efforts to create bigger impacts.
By Hannah Shaw Grove • Published
6 Ways a DAF Can Make Your Year-End Giving Better Than Ever
Giving appreciated assets instead of cash could be the most tax-smart move you can make with a donor-advised fund, but wait, there's more…
By Stephen Kump • Published
Life Insurance Strategies to Consider When You Own a Family Business
Not only can life insurance replace lost income, but it can help with estate taxes and provide a sense of fairness for family members who don’t participate in the business.
By Howard Sharfman • Published
Short-Term Investments to Protect Against Inflation and Market Volatility
Rates on Series I savings bonds, T-bills and fixed annuities are all above historical averages and could serve investors well during turbulent times like these.
By Bradley Rosen • Published
What’s the Difference Between Average and Actual Rate of Return?
An average rate of return can mask losses over time, so what investors really want to keep an eye on is the actual rate of return.
By Carlos Dias Jr., Wealth Adviser • Published