Life-changing events can occur suddenly—and usually when least expected, which is why preparation is the key to protecting the survival of your business. Take the case of Bob Stone:
An accidental fall in his office resulted in a lengthy coma. Prior to the fall he felt invincible and intended to operate the business for another 15 years before handing it off to one of his younger children or selling it. His family was solely dependent on the company for income and benefits.
Ten months after his fall, Stone regained consciousness and found everything concerning the business had been going well considering the slowing economic climate. How did the business continue on without Stone in the interim? Well, before his fall, Stone and his wife, Elaine, created a contingency plan that included a durable power of attorney and an operating plan. They developed this with the help of a business-experienced planner who emphasized the importance of including the operations plan just in case something happened to him.
Creating and Executing a Contingency Plan
Elaine had helped Bob build the company before retiring to raise their family, and even after her retirement, Bob frequently updated her as to the status of the business. She was aware of the company’s 15 employees’ strengths and weaknesses and current and future contracts.
So, when Bob fell into a coma, Elaine knew what to do. Once satisfied that everything possible was being done for Bob medically, she turned her attention to running the business. She took Bob’s Durable Power of Attorney, giving her legal authority to substitute for him, and the company’s operating plan from their home safe. The plan told her:
- How to contact the listed professional advisors
- Who to trust
- Key operating information
- Options for keeping their owner interest in the company
- Where to obtain additional information
Her prior experience, combined with the assistance of loyal employees and professional advisors, allowed her to step in on short notice to operate the company.
The key steps to preserving the business’s survival were:
- Elaine’s current knowledge of the business
- Her management skills
- A legal transfer of authority
- A written operating plan
Plan, Plan, Plan
Without any planning , chaos will rule the day and state statutes will determine the business’s future if the business can continue to operate long enough to determine new leadership.
Had Stone not properly planned what would happen, Elaine would have been left ill-prepared to take over the business, and would have had to hire an attorney to represent herself and other members of the family. That would drain the family savings at a time when the family income from the business has also ceased. Meanwhile, benefits such as health insurance, would only continue for as long as the owner interest is retained.
Time would become of the essence as legal representative try to protect the business’s survival. Obtaining an opening in the court’s schedule can be difficult. Few operating decisions are rendered in an initial hearing. If multiple parties challenge the direction of succeeding hearings, the case can take months—and sometimes years—before a final decision is rendered.
Very few courts have been successful at micro-managing a business. In a worst-case scenario, several hearings are necessary before a judge:
- Appoints an attorney to represent Bob
- Appoints a guardian for Bob
- Appoints a conservator to oversee his assets
- Approves a new manager to replace Bob as principal operator
In the meantime, the business is left to flounder on its own. Elaine, in the end, is forced to sell the business, or if it has closed, sell remaining company assets as she runs out of money and time.
An Estate Plan with No Operating Plan
Estate planning typically includes a durable power of attorney for incapacity and a will for death. Generally there is no operating plan for a business which is the real key to protecting the survival of a business.
A named successor without operating knowledge or management experience is like someone walking into a black room without a working light switch. Elaine’s application of Bob’s operating plan ensured the family business continued operation.
Without that contingency plan, Bob may have woken up to find:
- His business is being operated by a court-appointed manager, or;
- His business has been sold, or;
- (Worse case scenario) His business is closed and the hard assets have been auctioned.
Of course, Bob Stone’s story is the exception, not the rule. One must also consider that caring for the affected spouse can be emotionally draining and time-consuming. Most family businesses end up failing when the principal spouse is unable to participate in daily operations.
So, let’s review. What makes the difference between a business’s survival and its collapse?
Estate planning that includes a durable power of attorney
- An operating plan
- Identifying a successor
- Minimizing time to transfer operating authority
- An appointed successor with industry and operating knowledge and experience
Stone and his family are fortunate that Elaine was able to keep the family business operating while he recovered. Bob had a business to come back to while the family retained its financial lifeblood.
Each business is unique, requiring its own customized planning. A business owner needs the aid of a design team that includes a legal, tax and professional successor advisor who has operated a company. It is difficult for an owner to be objective if they try to do it all on their own.
Is your business prepared to operate on a continuous basis without you?
Dick Yemm, CFP, is an author, speaker and consultant on succession planning. His award-winning book, “The Stories,” was developed with a series of seminars on contingency/succession planning for business owners and their families. Yemm is a professionally licensed certified financial planner and holds multiple levels of security licenses. For more information please call 772.562.1281, e-mail rileyspress@atlantic.net or visit www.yourbusinesswithoutyou.com.
