So I Got Hit By a Bus… Now what?
What Business Owners need to know about Preparing for the Unexpected.
On our website we have a blog called “I’m Never Going to Die and Other Bad Succession Planning Ideas.” While the title is a little tongue and cheek, for many business owners the idea of planning for who will take over their business when they retire is something they plan to get around to one day. Maybe next year, and then next year comes and that day gets pushed further and further away. Why? Because we are busy. We are running our business, growing our customer base, overseeing employees and navigating the various administrative tasks that never seem to end. Succession planning is something we will deal with when we have time, but time is a rare commodity for business owners.
Emergency Planning for the Business Owner.
The problem is not necessarily failing to make time for long term planning. Yes, that is important and early planning is better than planning too late, but eventually that priority will rise to the top and a plan will be formed. The problem, to quote the great Monty Python, is that no one expects the Spanish Inquisition. Or to put it in modern times, no one expects to get hit by that metaphorical bus. And likely the topic is put off because so many business owners don’t know where to start. Except sometimes that bus does come and then it’s too late to formulate a plan.
According to a recent study the death of a founding entrepreneur wipes out on average 60% of a firm’s sales and cuts jobs by around 17%. Professor Becker, Deputy Director of the Centre for Competitive Advantage in the Global Economy (CAGE) in the Department of Economics at the University of Warwick said “We expected businesses that experienced the death of a founder-entrepreneur to have some kind of a dip in performance immediately after the death owing to the upheaval, but we anticipated there would be a bounce-back. However, the results were quite surprising. Even four years after the death, most firms show no sign of recovering and the negative effect on performance appears to continue even further beyond that.”
What happens when you die e incapacitated without a plan in place for your business?
In the United States, over seventy percent of small business owners are sole proprietors. For most of these business owners they are not only the sole owner, they are also the sole director and officer or manager. They may be the only person authorized to sign checks, or maybe someone else has authority but that authority has a limit. They may be the only person who can approve payroll or sign contracts. They may have their own filing “system” and are the only one who knows where to find key information or contacts. The list goes on and on. But one day that business owner gets hit by that metaphorical bus and splat, they are gone. What now?
For most business owners their business is their most valuable asset. They plan on selling one day to provide money for themselves and their spouse to retire on or they plan having recurring revenue to support themselves and their spouse through the end of their life. Now you may be thinking, so what… I’m gone but my business is still there. My spouse can just sell the business. Except not only are you gone, but the sole decision maker is gone. Maybe you put together an estate plan, but many times that is not enough. What happens to that business over the next few months while we are straightening out your estate? Here is what happens:
If you own your business in your name (rather than through a trust) then your shares will go through probate. You may have named your spouse as your executor but it can take up to 60 days before they are appointed and have the ability to walk in the bank and gain control over the account. So who is signing checks? Who is authorizing payroll? Who is making the decisions needed to keep the business going? The answer – no one. You know what selling your business in that type of situation is called? It’s called a Fire Sale and your spouse will be lucky to get a fraction of what it’s worth.
With proper planning this can be avoided, but unlike retirement there’s no time to correct the failure to plan. Once you are gone, that’s it. Your family is left to figure it out on their own.
What happens when you are incapacitated without a plan in place for your business?
It’s not just an owner’s death that can impact a business, any incapacitating medical condition can have a similar impact. A larger scale, but very public, example of this was watching the impact of Steve Jobs battle with cancer and its impact on Apple. When Apple announced Steve Jobs was taking 6 months off to focus on his health in 2009, Apple shares fell almost $5 as soon as trading opened the following day—wiping out about $4 billion of the company’s market value. The impact on small business is different, but just as damaging.
Various studies have shown that a person is much more likely to experience a disabling condition rather than death before retirement age. This can range from coma to cancer treatments to chronic conditions, but regardless of the reason the impact on your business can be the same if you do not have a plan in place. If you are suddenly hospitalized and unable to make decisions while you are under medical treatment – who is running the business? If you are in capacitated, who is signing those checks?
Unlike death you may recover and be able to get back to work, but how long can your business be on hold? What does a week without you look like? What about a month? Putting a plan in place can make all the difference for your family’s financial security.
Emergency Planning for Business Owners
The remaining 20+% of small businesses in the United States have more than one owner. If your business falls into this camp you may be thinking, I’m good because there’s someone else who can make all of these decisions. Not exactly.
In these businesses typically the owners split the various roles. So what happens when suddenly no one is handling that ½ or 1/3 of the shared work? Do you hire someone to come in and handle it and if so, how long will that take? Do you pile that work onto your already overflowing pile? If so, do you know where all the passwords are or where the information is saved so you can just pick it up and run with it? While you may not be faced with the problem of who will authorize payroll – there are a number of issues that need to be addressed or your business (and again, your most valuable asset) could suffer.
Having a legal roadmap from the conception of your business through growth and completion will ensure an easier transition after your passing.
Should you have questions about implementing a succession plan to protect your business or if you would like to discuss other questions you have about your business, visit us online navigantlawgroup.com or give us a call 847-253-8800 to schedule a no-charge initial consultation.
Navigant Law Group, LLC is a law firm with various areas of service to assist your business, including: Employment Law, Intellectual Property, Commercial Real Estate, and general Business Law services. Individual services include Estate Planning, Wills and Trusts, Probate and Guardianship.
This article constitutes attorney advertising. The material is for informational purposes only and does not constitute legal advice.