What do business continuity plans and prenuptial agreements have in common?
Both protect you from unforeseen circumstances.
As a TEC/Vistage chair and CEO coach, I learn firsthand the various ways business owners protect their businesses. While most owners of privately held companies know the importance of having a business continuity plan, they often delay creating and keeping the documents they need to assemble it.
Having a plan, long before you begin an equity purchase or transfer, will make an important difference in the amount of wealth you build for yourself and your family. Reviewing and maintaining the company’s continuity plan, often documented in your shareholder/unitholder agreement, is perhaps the most important step a business owner can take.
What happens if…?
Most companies don’t have a sole owner. If you don’t, what happens if you decide to buy your partner’s interests, or your business partner dies unexpectedly? Is your partner’s spouse or child – or both – your new partner?
Does that person have knowledge and expertise important to the business? Are you obligated to buy him or her out? Can you afford to? Is he or she obligated to sell to you, or can the person invite other buyers? How much is the person’s interest worth? How should the purchase price be paid?
These and many other questions also surface if you need to monetize your interest in the business.
Will your spouse be left without any liquidity if you die and your surviving business partner refuses or is unable to purchase your business investment? What happens if your partner simply decides to move on to a new opportunity or retire? What if one of the business owners divorces?
Continuity at risk
These events and many others can put the continuity of your business, which may be your greatest financial asset, at risk. A well-crafted continuity plan determines what will happen in these situations before they occur. Creating a solid plan for your business goes a long way toward preventing damage to company operations and value.
Continuity plans make terrific sense for any business that has multiple owners, including family members, because they establish transaction and valuation standards. Think of creating a continuity plan as a prenuptial agreement for business owners. Though it’s best to create the plan when you start your business, you can do that at any time and review it annually.
What your plan should include
Your plan should identify:
- The owners of the business.
- The underlying assets the plan addresses.
- Shares or percentages of ownership, or both.
- Trigger events like a death, divorce, termination, incapacitation, etc.
- The prearranged price or formula for valuing the business. This can be an outside appraisal or industry standard.
- Funding mechanisms. This can include whether the buyer pays cash using personal funds, insurance proceeds, bank loans or other sources. Another method may be for the buyer to pay a part of the price at closing, and pay the balance in a promissory note over time.
One of the biggest issues of your continuity plan, beyond not having one in the first place, is failing to review and revise it on a regular basis. Annual shareholder/unitholder meeting agendas should include assessments of the company’s value, and the viability of the funding mechanisms that will be deployed if there’s a triggering event. You do conduct annual meetings, right?
Creating and following a business continuity plan protects your business and provides continuity. It also benefits your business partners, your employees and your family.
