Personal Contingency Planning
Most business owners are very good at contingency planning. They plan for every possibility imaginable, but surprisingly few business owners plan for the one thing that is certain: their eventual death or disability. Generally speaking, owners have more pleasant endings in mind when they think of exiting their businesses; nonetheless, we all know someone who died too soon. It is easy to put off or overlook this possibility during the exit planning process.
Without continuity of leadership, your business will probably fail. If ownership transition for the business is uncertain, business continuity is seriously threatened. Your death can have a significant effect upon the company’s ability to maintain its financing, its relationships with key customers and vendors, and its relationships with other parties who are important to the ongoing success of the business.
Failing to understand the consequences that your death can have upon your business can result in the unintended death of the business.
A good exit plan requires that you develop a contingency plan for your business and then update it every year. The plan should be updated to include a current value for the business and any changes in your exit plans.
What is often forgotten is that a large part of the value of your company is based on the buyer’s assumption that the previous owner will be around for 6 to 12 months to facilitate the transition of ownership with the company’s employees, vendors, and customers. If the previous business owner dies or becomes disabled and cannot play this vital role, the buyer will discount the value of the company dramatically.
The balance of power, particularly in a closely held business, can be very fragile. The loss of the company leader can leave a void that results in power struggles, employee turnover, managerial mistakes, lost customers, and lost profits. Even a vital and profitable company can unravel quickly when its leader is unexpectedly removed from the mix.
The loss of a mentor and business leader may be especially damaging to the crucial management succession grooming process. Not only are the company’s profits threatened, but the plan for the long-term development of the successor may become derailed. Successors who are not ready to lead may be prematurely thrust into leadership positions, drastically reducing their chance of success. Other employees may sense trouble and begin to seek employment elsewhere. Important customers and suppliers may react in the same way.
To minimize the chance of this type of panic or power struggle, emergency plans should be developed to account for the sudden absence of leadership. Responsible individuals (such as corporate officers and board members) should be made aware of and empowered to implement the plans should such an occasion arise. Further, the plans should be reviewed periodically and updated as appropriate.
Click the link to review this sample contingency plan: Contingency Plan of Robert Garson
Join the broadcast on March 14 at 1PM ET for the good look at how to reinvent your views on personal planning and how it directly affects your business value.