Exit planning conversations tend to focus on a voluntary transition. You decide you are ready to move on, prepare the business, and eventually negotiate a sale on favorable terms. That is the version of the story every business owner hopes for.
It is not always the version they get.
Planned, orderly transitions require considerable preparation. However, any number of the “Dismal Ds,” including death, disability, and disease, can force a transition on a timeline and under conditions that benefit no one.
If you have not anticipated those possibilities, you are not just taking a personal risk. You are leaving your family, your employees, and your legacy exposed to outcomes that may have been preventable.
Contingency and Continuity
There is a difference between a contingency plan and a continuity plan. A contingency plan addresses a business interruption, loss of records, or natural disaster. Many companies have one. It may include data backups, alternative workspaces, emergency procedures, and access to additional credit.
However, most contingency plans depend on one critical factor: your presence to lead the business through the crisis.
What happens if your absence is the crisis?
That is where a continuity plan becomes essential.
Death is the most obvious possibility and the one for which many business owners are most likely to have made some preparations. Life insurance is a standard recommendation, and you may already have coverage. But does that coverage reflect the actual value of your business? Does anyone know what to do with the company if you die tomorrow? Who is authorized to sign checks? Which vendors must be notified? Who will assume responsibility for your relationships with major customers?
Disability caused by disease or an accident is statistically more likely than death, but it is often less thoroughly planned for. If your business cannot function without you, it could face a serious cash flow crisis if you are incapacitated for three months, six months, or longer.
If you are expected to recover, the company may enter a kind of stasis. Critical decisions are postponed. New initiatives stop. Employees hesitate to act because they are unsure who has authority.
You may then feel forced to return before you are ready to address declining performance, or you may come back to a company already in crisis.
You cannot always prevent or predict these events. You can make sure they are handled well.
The Business Continuity Gap
What would happen to your company if you were unable to work for six months starting tomorrow?
Could you give a confident, specific answer?
Many owners would describe a rough plan that relies on one or two key employees, assumes customers will stay, and hopes the business will hold together until they return. That is not a plan. That is optimism.
A real business continuity plan documents who has authority to make financial and operational decisions. It identifies the company’s critical relationships and assigns responsibility for maintaining them. It specifies where important documents are located, which outstanding obligations must be honored, and what steps should be taken under several different scenarios.
The plan should also tell a family member or trusted associate where your personal and business passwords are securely recorded and how they can be accessed if necessary.
Most importantly, the plan must be in writing and stored somewhere accessible to the people who will need it. It cannot exist only in your head.
Buy-Sell Agreements Can Address Continuity
If your business has multiple owners, a buy-sell agreement is not optional. It is the document that answers the most important questions following an owner’s death, disability, or departure: Who buys the departing owner’s interest? At what price? On what terms?
Without a buy-sell agreement, those questions are resolved through negotiation under pressure, dissension among the owners, or litigation. The results are rarely favorable for anyone involved.
A buy-sell agreement that has not been reviewed in ten years can be almost as dangerous as not having one. The valuation formula may have made sense when the agreement was drafted but no longer reflect the company’s value or current market conditions. The resulting price could be wildly inaccurate in either direction.
The funding mechanism matters as well. If the agreement requires a surviving partner to write a large check immediately but no insurance or financing is available, you have a plan on paper that cannot function in practice.
Review the agreement regularly to ensure that its valuation, terms, and funding still reflect the realities of your business.
The Myriad of Dismal Ds
Other “Ds” can be just as threatening to your company, but they may be more difficult to plan for.
Divorce can force a liquidity event in a business that is not prepared for one. Financial distress may require you to sell when profitability is poor and the company’s value is depressed. Disagreement between partners can paralyze the business and force a transition under the worst possible conditions. The defection of a key employee or major customer may also deliver a blow from which the company cannot easily recover.
Disenchantment, including burnout, disinterest, distraction, and depression, can put you out of commission as certainly as a physical illness. Documents alone may not be enough to address these situations. You also need a trusted employee, partner, family member, or advisor who is willing to recognize the warning signs and speak honestly with you.
The challenge with contingency and continuity planning is that it requires you to prepare for circumstances that may feel remote. Business owners are optimistic by nature. You did not build your company by dwelling on worst-case scenarios. However, the same forward-looking confidence that helped you succeed can also make it easy to postpone planning for events you do not expect to happen.
Continuity planning is not about expecting disaster. It is about protecting everything you have built: your family’s financial security, the employees who depend on the company, the customers who rely on it, and the legacy that should not disappear because of an event no one was prepared to handle.
If you’re planning to sell your business someday, here’s a statistic worth sitting with: research from the Exit Planning Institute and PwC found that 75% of business owners feel “unhappy” or “profoundly unhappy” one year after exiting their company. Three out of four owners who worked hard to build something, then sold it or handed it off end up regretting how it turned out.
1. Someone at a conference sold a business “kind of like mine.” That’s hearsay, not data.
Very true. Some banks like say Celtic Bank (John Park) will take the financial information(Tax Returns and financial statements) needed for a reasonably accurate value and what they will lend on the sale of the business. Accrual basis is most important as banks lend on cash flow and accrual based is the only real acceptable accounting method as opposed to the cash basis which is not GAAP and is how so many companies file their tax returns-Cash basis!