Friday , September 21, 2018

Business Continuity Concerns: What if the “Unexpected” Happens?

Most, if not all, business owners have been approached by at least one of their advisors with the ever-popular question, “What would happen to your business if you got run over by a truck?” Few business owners fail to recognize this question for the thinly-veiled pitch to buy insurance that it is.

 

Our goal is not to discourage you from buying life or disability insurance. Far from it. Purchased in the proper amounts and for the correct reasons, life and disability insurance proceeds will, indeed, help your business to survive your sudden absence.

 

Insurance alone, however, cannot resolve all of the three primary issues that face every business when owners go AWOL. In this series of articles, we’ll identify the three primary continuity issues that face your company and examine possible solutions.

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Issue 1(a): Continuity of Ownership for Co-Owners

The most obvious business continuity issue is: Who will succeed you in ownership? If you co-own your company, an up-to-date, adequately funded, buy/sell agreement that completely addresses all of the possible transfer issues can solve this problem. Please pay careful attention to all of the qualifiers in that last sentence.

 

First, “up-to-date” means that the agreement reflects the current value and structure of your business. It also means that you and your co-owners don’t sit down once, discuss continuity, and shove the resulting agreement in a bottom drawer, never to be removed again.

 

Second, “adequately funded” means that one of your advisors has analyzed what the company’s financial needs would be in your absence and has made sure that adequate funding is in place.

 

Third, your agreement must fully address a list of “possible transfer issues.” The list includes:

   Death

   Disability

   Transfer to a Third Party

   Termination of Employment

    Retirement

    Involuntary Transfer Due to Bankruptcy or Divorce

    Business Dispute among Owners

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Issue 1(b): Continuity of Ownership for Sole Owners

If you have no co-owner, your ability to ensure continuity of ownership in the future depends on your ability to create and to implement a continuity plan today. Vital to that plan is the involvement of your key employees. You must create a plan that motivates your important employees to stay with your company even though you do not. One of the best ways to accomplish this goal is to create a “stay bonus” plan.

 

A stay bonus is a written, funded plan providing monthly or quarterly bonuses and salary guarantees, usually over a 12 or 18-month period, for employees who remain with the company during its transition from your ownership to new ownership. (New ownership may be a third party, a transfer to employees, or a continuation by family members.) The stay bonus provides a cash incentive for your important employees (perhaps 20 to 50 percent of your workforce) to stay, hence its name.

 

The stay bonus is typically funded with life insurance in an amount sufficient to pay the employee bonuses over the specified timeframe. The life insurance may be owned by the company or outside the company in an estate tax-sensitive trust. You must tell your important employees that you’ve put a stay bonus plan in place so that they know you’ve put thought, planning and money to pay salaries into ensuring the survival of the company upon your unexpected departure.

 

Your ability to ensure the continuity of your company also depends on your willingness and ability to communicate your continuity wishes to those who will be affected. We typically suggest that business owners complete a “Business Continuity Instruction Form” as a great way to organize and to communicate your thoughts about continuity of your business to your key employees and advisors.

 

The instruction form includes suggestions from the owner (in the event of his death or disability) as to a number of issues including which key employee(s) should have responsibility for business operations, financial licenses, internal administrations, etc., as well as the owner’s suggestion of specific professional advisors, and to whom the company should be sold or transferred (along with his suggested price range).

 

This instruction sheet helps answer the many questions about “What would Sam (the business owner) do?” Of course, the instruction form should be regularly updated by the owner.

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In our next article, we will tackle the second continuity issue that faces your company should you unexpectedly leave: the company’s loss of financial resources.

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