In the previous blog, I reviewed step five of our seven-step process to create a successful business exit / transition plan. In this blog, I will cover step six and seven, which deals with what happens if one exits before the plan takes hold.
Step Six: Develop a contingency plan for the business
One of the benefits of developing an overall exit strategy is that you quickly appreciate how contingency planning is an integral part of it.
Taking prudent measures so that your business survives if you don’t is a natural part of the exit planning process. In an ideal situation, business continuity needs upon the death or incapacitation of an owner can be met by a business-continuity agreement with a co-owner. However, if a business is solely owned, circumstances change.
If sole owners do nothing else, they have a duty to their families and businesses to create written plans that answer the following questions:
- In my absence, who can be given the responsibility to continue and supervise the following:
- Business operations?
- Financial decisions?
- Internal administration?
- How will these people be compensated for their time and, most importantly, their commitment to continue working until the company is transferred or liquidated?
- What should happen to the business upon my death or permanent incapacitation?
When owners make the decision to begin transferring their businesses, the last thing they are likely to consider is the need for adequate planning to protect the business if they should suddenly die or become incapacitated. Yet, this is precisely the point at which the business is most vulnerable: It has peaked in value, but the event creating liquidity (i.e., the sale of the business) is likely years away.
The remedy is usually straightforward: adequate legal documentation in the form of a buy-sell agreement or a stay-bonus program that includes adequate funding for important employees.
Step Seven: Develop a contingency plan for the owner's family
With this final step, your exit planning process comes full circle. Review your financial objectives established in step one: If you don’t survive until your business exit, which financial resources will your family need and where will they come from? What actions can you take to minimize or avoid estate taxes?
As a business owner, your estate plan is another part of your overall exit plan. Unlike some of your lifetime objectives (e.g., financial security), estate planning objectives and business-continuity objectives are relatively easy to meet upon your death or incapacitation.
To acquire the liquidity sufficient to meet your financial objectives, consider the purchase of life insurance and disability insurance. You may be surprised by how easy it is to meet after-death objectives using insurance.
Once owners complete the first two steps of the process (setting objectives and quantifying available resources), they often jump to this final step (preparation of appropriate estate planning documents and funding financial needs using insurance) so they can minimize the financial impact their death would have on their families and their companies’ ability to survive.
All of the techniques that produce operational business success (learning from mistakes; developing business strategies based on experience, and trial and error; and conducting business efficiently and effectively) do not guarantee a successful business exit.
Sadly, the valuable experience owners develop over the course of their business lives does not equip them to leave their businesses successfully. Experience, learning, and trial and error all require time – a luxury most business owners do not enjoy as they approach the end of their ownership lives.
All this planning sounds complex and time consuming, but it does not have to be. We can help create a written and comprehensive exit plan that gets you the money you need, achieves all of your other objectives in a time and cost-efficient manner, and meets the following criteria:
- Based on your objectives
- Includes all seven steps previously discussed
- Holds you (the owner) and all advisors accountable
- Provides a means of measuring your progress toward a successful exit
- Imposes deadlines to ensure that you and your advisors act in a timely manner
Armed with a written exit plan, a team of skilled and experienced advisors, and with (ideally) several years before you exit, you can optimize your ability to leave your business in style. If you would like more information about how we can facilitate an exit planning process tailored to meet your specific objectives, please give us a call.
If you would like an illustration of the seven-step path from where you are to your successful exit, please ask us for our exit plan roadmap. And be sure to keep an eye out for part three of this six-part blog series.
OPES Family Advisory's mission is to continually strive to be the premier wealth management provider to our clients. Through our unique wealth management process, we provide our clients with the intellectual framework to make sound financial decisions. We continually work to provide our clients with unparalleled personal service and peace of mind to allow them to dream, plan and prosper.
Dean Trudeau, CFP, OPES Family Advisory founder began his investment and advisory career in 1987 and has held the designation of certified financial planner for more than 20 years.
His impressive career has grown over the years to include principal of Horizon Financial Services, sales manager of Manulife Financial/Manulife Securities and district vice-president of RBC Global Asset Management.
Trudeau has a deep commitment to his field and over the years has been recognized with many industry awards and has been asked to speak at a variety of conferences. Along with a deep commitment to the profession, he believes strongly in working closely with all his clients in aspects of their lives to give them peace of mind.