Contingency Planning – Facing Your Own Mortality
When a business owner dies (or becomes incapacitated) earlier than expected without a contingency plan to deal with the situation, it can be fatal to the business. Plan today to avoid catastrophe.
When a business owner dies (or becomes incapacitated) earlier than expected without a contingency plan to deal with the situation, often the company cannot survive the owner’s death or absence. Studies show that the business represents 50-90% of a typical business owner’s net worth. So the business owner’s family is not only overwhelmed by the personal loss of someone they love, they may also be devastated financially. A 50% to 90% loss in net worth is not the type of legacy you want to leave your family. For their years of emotional support during your entrepreneurial business ownership struggles and efforts, they deserve more.
Do not procrastinate
Most of us have a tendency to avoid facing our own mortality. It’s not enjoyable to consider your own death. So, we put off designing a will and estate planning because it requires us to think about dying. But as Ben Franklin wrote, it is a certainty, it is going to happen. And we do need to face it. Especially as a business owner, where a large portion of your net worth is tied to the business, you are not being fair to your family or others in the business if you procrastinate.
Of all the articles in our newsletter series, heed the advice of this one and get started on a contingency plan TODAY! Overcome the Power of Inertia, do not procrastinate and do something NOW. (While you’re at it, start working as well on your “alive” exit plan, it’s more enjoyable.)
Examples of problems encountered if no contingency plan exists
Your premature departure, if you are the sole or primary owner, can result in several problems for the business. There may be a leadership vacuum. Who is going to run the business if you are not there? What’s going to happen to the business? Will it be sold, liquidated or continue under new management? Employees may worry the company will not survive and begin to look for other jobs. Especially if you have personally guaranteed loans, lenders may call in outstanding debts. Customers may become concerned and switch to your competitors. Concerned vendors may detrimentally change the company’s payment terms, perhaps requiring cash on delivery. Without a contingency plan, the company is unlikely to survive these types of scenarios.
Develop a one page written contingency plan.
You need to work with your family and your employees to come up with a simple contingency plan. You also want to have a PIC designate.
Here is a sample for a PIC/Owner to share with their staff.
I don’t’ intend to die anytime soon, but if I do, here is some useful information:
- You will need a PIC. I have spoken with Pharmacist A who agreed to step in on an emergency basis until a long-term solution can be found.
- For payroll, Person X is backup on the payroll account. They will make sure everyone is paid. Their number is ____.
- For all other bills, Person X is a signatory on the bank account. Their number is ____.
- The lease and other important documents are located in the file cabinet here.
- Person X knows my passwords for my e-mail account. They can be reached at ____.
That’s it. Keep it really simple. If you want to have a longer plan including your attorney, your CPA, your lenders, a life insurance specialist, and possibly a professional exit planner and a pharmacy intermediary) to develop a written contingency plan, you can do that, too. But to get started, just keep it really simple as noted above. This longer plan should address what your intentions are for the company if you die unexpectedly. What will ultimately happen with the business?
Contingency plans do not need to be confidential
Whereas confidentiality is very important when you are trying to sell a business, the opposite is true with a contingency plan. You want all the parties mentioned above to participate and be knowledgeable of the details of your contingency plan. If something unexpected happens, all parties will then have expectations of what should occur, aiding a successful transition.
What will be your legacy?
Without a contingency plan in place, if you die or become incapacitated next week, would your business survive? Would your family be devastated financially because most of your net worth is tied up in the business? Is that going to be your legacy?
Don’t let the absolute worst scenario develop for your family. Start working on a contingency plan TODAY and make it your top priority. What could be more important?
Give ColonyRX a call today to help plan for a contingency exit.