As a business owner, you have many people who are dependent on you and your business, including your family members, employees, and customers. What would happen to them if you should die or become disabled? Could your business function without you? In a privately held business, the value of the business often represents a significant portion of the current owner’s wealth, which can make the risks of not having a contingency plan even greater. Premature death and the statistically more likely premature disability can have a tremendously negative impact on a business and the financial well-being of you and your family. Let’s look at why developing a contingency plan for your business is critically important and what you need to consider.
Understanding contingency planning
Business contingency planning is a risk management strategy that should be undertaken by all business owners. It protects against business disruption in case of unforeseen event by helping you and your colleagues prepare for and respond to an emergency situation. This plan should outline how your business will continue without you. Securing the necessary insurance will enable you to avoid the financial disaster that sudden, negative life events can cause.
A contingency plan should not be confused with an estate plan or an owner’s Will. All of these need to be in place for both the continuity of the business and to protect the family’s financial future.
At a minimum, a contingency plan should:
- Detail the owner's goals and wishes for who will own the business in the future.
- Identify who should manage the business in the owner's absence and if necessary, include a development plan to prepare the successor for this responsibility over time.
- Include important business information, such as the names of the owner's trusted advisors, including accountant, attorney, financial advisor, insurance agent, banker, business consultant, etc. and their contact information.
- Detail other key, confidential information and assets including bank accounts, safety deposit boxes, wills, etc. and passwords to access your accounts.
- Reference an executed shareholder or “buy-sell agreement” if there is more than one owner.
- Determine who can access liquid assets in the event of an emergency.
- Include all of the details for life insurance and disability policies, so benefits may be claimed.
Why you need a contingency plan
If you do not have a contingency or succession plan, you run the risk that your business will not be able to continue if you become incapacitated. This places you, your business, and everyone dependent on the business for their livelihood in great peril.
Additionally, and what many business owners don’t realize, not having a contingency plan in place can negatively impact your business’s value from the perspective of a potential buyer. Buyers are interested in acquiring businesses that are transferable, which includes a solid management team and independence from the owner. Developing a contingency plan, strong management team and a successor will ensure that your business can operate without you. This will not only protect you in the event that something happens to you, but it will improve your company’s value as well.