A Real Business Emergency

by | July 6, 2016

Succession planning has been a hot topic in business planning conversations for years but the focus is often on longer term retirement planning answering questions like “Who will be the next CEO?” and “How will ownership transfer?”  Most businesses, though, do not spend a lot of time planning for the “emergency” succession.  “What is ‘emergency’ succession?”, you wonder.  It’s a situation where the business must quickly  replace a key employee due to a death or disability.

Planning for the loss of a key person is important in all businesses but absolutely essential in a business where there’s only one owner and that owner is the key person in the business.  In these businesses, the loss of the key person typically devastates the business because the person is the key sales person and leader.  The person is sometimes also the “chief” everything – CFO, CMO, CTO and so on. Without them, the business cannot function.  Therefore, a single owner business must plan for how the business will continue, or alternatively how it will wind down, in the event that the owner is no longer participating.  Here are a few critical steps:

  • Estate planning.  All business owners should have their estate planning documents in order.  These documents will describe how the ownership of the company will transfer in the event of a death of the owner.  Having this in place enables the company to continue to make decisions and move forward during a difficult time.  The estate planning documents should also include a Healthcare and Financial Power of Attorney that identifies individuals who are responsible for the key person’s affairs in the event he or she is incapacitated and unable to make decisions.
  • Key person insurance.  The company should consider carrying key person insurance on the individual owners who are critical to the business’ success.  The policy will provide the company with funds to fill the key person’s position in the interim while other decisions regarding the company’s transition are made.  Similarly, your family may desire a life insurance policy to cover expenses and loss of your income.
  • Internal documents.  The company should have internal documents that describe key processes of the company so that a new person can easily jump in and keep things moving.  In addition, the company should have an internal succession planning document or governing document that directs the new owner or guardian who the owner desires to serve in what role.  This document may be referenced in or attached to the estate planning documents as well so that the complete plans are together in an easily identifiable place.
  • Other key individuals.  The owner should also ensure that one or more key individuals are familiar with the transition plan for the business and know the important advisors of the company such as the accountant or lawyer who may have critical information or documents to support a transition.

In reading this list, you are probably thinking:  “I know this is important, but I can’t seem to find time to get it done.”  You should really consider this a priority, though.  If you are a sole owner and you leave no plan, the likelihood of the business’ failure after your “emergency” is quite high.  Your family will have lost the business income you have provided and your employees the jobs they have; and the work you’ve invested in building something of value will also be lost.  These few steps are not so difficult or costly but they do require some thought and time investment.  Of all the things you need to do, I encourage you to put this one toward the top!