One of the least-heralded benefits of exit planning is preparation for an unplanned exit. In the brokerage business, the reasons driving the listing of a company are known collectively as the Dismal D’s.
Some of “Da D’s” are just typical reasons behind putting a business up for sale. They include Dissension among partners, Declining sales, Divorce, Disinterest by, or Distraction of the owner and Debt.
Others are the driving force for an emergency sale, usually far below the fair market value. Those are Disaster, Disease, Disability and Death. As we’ve said many times before in this space, sooner or later every owner leaves his or her business. If you wait long enough, one of these four horsemen of business apocalypse will claim your transition.
Business Continuity Instructions
In every exit plan we do there are Business Continuity Instructions. As I instruct our Affiliates around the country, BCIs should be part of every engagement. Only a small percentage of our clients will need them, but for those who do they will be the most important and valuable part of our services.
There are two types of planning tools that often go by the name BCI, but fall short in my opinion. One is risk planning, usually associated with insurance. These are questionnaires that focus on financial risk management. Do you have sufficient policy benefits to take care of the business and your family?
The other is business interruption planning, usually in anticipation of a natural disaster. Do you have backup records, a place to establish phone answering, and communications with your employees?
BCIs versus Disaster Planning
Both financial risk assessment and disaster scenarios are useful, but neither takes the approach we do. Our BCI starts with one simple question. “What happens if you are suddenly and unexpectedly absent from your business for an indefinite time?”
We begin from day one, hour one. How does the business open and function? Who is responsible for telling the employees? The vendors? The customers? Who has access to the bank accounts? Where are spare keys and security codes? Most importantly, who has the authority to make immediate decisions regarding operations, finance. personnel and administration?
Who are your key advisors? Who should be contacted regarding legal, accounting, insurance, leasehold or benefit issues? Are there other trusted advisors who should be included on major decisions? What authority do they have?
Is your Board of Directors capable of guiding the company? We find many small corporations where the owner is the only officer and Director. That means in his or her absence the company is incapable of functioning. Who names replacement officers?
New directors musty be elected by shareholders. In the event of an owner’s death, ownership of the business may go into probate, crippling its ability to function.
For each level of decision making, is there a dollar limit? Perhaps your operations manager and controller can handle most of the day-to-day between them. Does their authority extend to selling the company?
Are key employees a flight risk? If they have to step up to a level beyond their normal responsibilities, will their compensation reflect their new authority? Who decides what they are worth?
Insurance
One area where I see frequent issues involves life insurance on the owner. If it is intended to purchase the stock from family members, who is the buyer? A company cannot buy itself. There has to be at least one other owner to execute the purchase.
If the proceeds of insurance are intended to provide working capital, are they also pledged to the bank for a credit line? Do the policies have restrictions on their distribution?
One particularly ugly scenario is when an owner has a buy/sell agreement funded by life insurance. In order to make the premiums tax deductible, he chooses to have the company pay for it. The benefit is paid to the company with the intention being to buy out the surviving family. However, the company is already in dire straits without its majority owner, and the remaining shareholder(s) hold onto the cash, leaving the deceased owner’s family without income.
Unplanned Exits
Exit planning is really about how you want to leave the business. It is a process of examining your choices, and deciding which you prefer. From that day forward you can make business decisions based on the outcome you seek.
A side benefit, however, is deciding how to handle an unplanned exit. Hopefully it is never used, but when it’s needed it is invaluable.
If you would like a fillable PDF form to draft your own BCI, just send me an email at BCI@ExitMap.com.
When we interview an owner, one of our first questions is about time frames. Note that they are plural. The first is when you want to step away from daily management of the business. The second is when you want to leave entirely.
All business owners want to grow their companies, make more money and work a bit less, but few things are more disappointing than finding out that the work you put in won’t result in the outcome you expected.
All these questions should be part of your planning. Yet most owners don’t ask them until they are on the brink of retiring. That is a mistake. Knowing what you want to accomplish, or in other words – where your finish line is, is critical to building your business in the right way, in the right direction.
Whether you plan to eventually sell your business to a third party, pass it on to family or create a transfer to employees, you still want to assess your financial performance compared to industry standards. Your management team needs to be able to run the company without you. Your processes should be well documented. Most importantly, you should be thinking about what you will do when those hits of decision-making dopamine stop coming.
(Suffice to say that your real estate attorney/escrow agent, estate planning attorney or slip-and-fall litigation defender is probably not the guy.)
John: Thanks for a great blog post. I have found that most business owners only focus on the planned ( voluntary) exit. They rarely ( if ever) thank about the involuntary( unplanned) exit. Thanks for reminding all business owners that they should also plan for the involuntary exit as well. Sadly, it happens all too often.
Good tips here. Sometimes, we need to take the unplanned route so it helps to have some exit plan to prep for the unexpected.