Left Behind—The High Cost of No Contingency Plan—and How to Avoid It

Overview

We’ve seen firsthand how having—or not having—a contingency plan can make or break a business during times of crisis. Two real-life stories illustrate this stark contrast: one of a widow left with a business she couldn’t run and little value to show for it, and another of a business that transitioned seamlessly after the unexpected death of one of its co-owners because they had a solid plan in place.

Let’s walk through these contrasting situations and outline the essential elements of a solid contingency plan—one that protects your business, your employees, and your loved ones. We will look at how contingency planning can preserve business continuity, protect value, and support the owner's family and employees in the event of an untimely death or incapacitation.

Compare & Contrast

Without a Plan: Loss of Value, Lengthy Transition

The owner of an auto parts store died suddenly in his forties. His widow was left to manage a business she didn’t understand, with little guidance and no plan for ownership succession. Although she was eventually able to negotiate and close on a transaction to sell the business to the employees, it took two years—and by then, the value had eroded significantly. The stress of holding her family and the company together while she was grieving was extremely difficult and it took a toll on her. 

With a Plan: Smooth Execution, Preserved Value

Contrast that with another contractor business co-owned by two individuals. They had a structured plan in place to sell the business to three internal successors over a multi-year period. Unexpectedly, one of the owners was diagnosed with a terminal illness and passed away just two years later. But because the transition plan had already been activated, the business didn’t suffer. The successors were motivated and equipped to step in, and the deceased owner's family received a fair value for his equity, partially funded by key person life insurance proceeds. The plan was executed flawlessly and provided continuity during a time of emotional distress.

The Problem: No Contingency Plan

Many business owners operate under the assumption that they will have time to prepare for their exit. Unfortunately, life is unpredictable. Dying without a plan can cause chaos, uncertainty, and rapid devaluation of the business. Competitors will quickly circle hoping to buy your business for pennies on the dollar.

This scenario is common, especially for owners whose spouses are not involved in the day-to-day operations of the business. Without a documented plan for continuity, even a successful company can spiral into crisis.

Why Contingency Planning Matters More Than You Realize

These two stories underscore a single, powerful truth: contingency planning is not optional. It’s essential. The right plan allows your business to remain strong, your employees to stay engaged, and your family to be protected—regardless of what life sends your way.

The Solution: A Comprehensive Contingency Plan

Elements of a Strong Contingency Plan

• Leadership Succession
  
  
  • Designating Key Personnel: Identify which team members will assume leadership in the owner’s absence.
    
    
  • Compensation Structure: Establish incentives—such as retention bonuses or payouts upon sale—to encourage key employees to stay and maintain stability.
    
    
  • Defined Terms: Employees may receive bonuses only after staying for a specified period of time after the sale is completed.

• Ownership Instructions
  
  • Clarify whether the business should be:
    
    • Sold to employees
      
      
    • Sold to an outside buyer
      
      
    • Held by the spouse with advisors or a leadership team running operations

• • Include instructions for working with a broker, if needed, to get the best price for the company.

• Business Power of Attorney
  
  
  • In addition to a personal power of attorney, consider using a Business Power of Attorney to empower a trusted advisor to make business decisions alongside the spouse.
    
    
  • This individual would be compensated and should be familiar with the business and its operations but does not need to run it directly.

• Life Insurance
  
  • Life insurance can:

• • • Provide needed capital to your business during the transition period.
    • Cover family lifestyle costs, particularly during the expensive mid-life years.
    • Provide liquidity to pay estate taxes.
    • Fund a buy-sell agreement, allowing co-owners or key employees to buy out the surviving spouse’s interest.

• Corporate Governance Alignment
  
  • Ensure corporate documents are aligned with personal estate planning documents:
    
    • Shareholder Agreements (S-Corps) or Operating Agreements (LLCs) must clearly outline terms for equity buyouts in the event of death, disability, or resignation.

• • • These agreements should specify valuation methodology, sources of financing and payment terms.

• Estate Plan Integration
  
  • Wills and trusts should all reflect the owner’s intentions for the business and protect the owner’s assets.
    
    
  • Shockingly, many estate plans omit the business entirely—even when it is the owner’s most valuable asset.

• Letter of Wishes
  
  • Legal documents are essential, but we recommend supplementing them with a straightforward letter that outlines the owner’s goals in their own words. This can provide clarity to family members, employees and advisors at a stressful time.

Key Takeaways

Contingency planning is not just a best practice—it’s a necessity for protecting your life’s work. As we’ve seen, the difference between having a plan and not having one is often the difference between preserving value and watching it disappear. A well-thought-out plan safeguards the value of the business, retains key employees, and supports the surviving family. Whether your future includes a sale, succession, or simply protection for your loved ones, the time to plan is now.

Want to learn more? Check out our guide:

Executing the Exit – A Step-by-Step Digital Guide to Exiting Your Business