As a business owner myself, I know how much work goes into growing a business. And I know the thoughts that go through our minds each and every day. I am always thinking about something happening to me and the risks on my business, my employees and my family. But, then I stop and reassure myself that my succession plan is in place.
The sudden illness or mental disability of the family business leader is probably the single largest reason for having a succession planning in place TODAY! If the business owner becomes ill, it is important to understand the financial issues that arise from transition, as well as the need for mentoring the next leader or leaders. Depending upon how intimately involved the owner is in the business and the severity of the illness, a business can be completely crippled by the owner’s absence.
Unfortunately, the following happens more often that I care to admit:
A business owner is making most of the management decisions, maintains most of the vendor relationships, and is significantly involved in the customer side of the business is recently diagnosed with late-stage cancer. In this particular case, the business has to be taken over by a competitor (for pennies on the dollar), who over the space of a year terminates all of the employees.
In a business where the owner has become less of an integral part of the business, an owner illness has less impact on all of the people (customers, vendors, and employees) involved with the business. The more the owner is involved in the day-to-day activities of the business, however, the bigger the impact both on the resilience of the business and on the emotional reactions of its people. These two facts are a primary reason for every business owner to have a series of processes that involve multiple staff in each of the facets of the company and to have a transition plan – at least in outline form.
So, in order to take care of all of the people for whom the owner feels responsible, steps must be taken to help the business survive an owner’s illness or mental/physical disability.
A business with a disabled owner has limited planning options for survival:
1) Cash Flow – You can use cash flow to pay expenses and salaries. But if you aren’t able to generate additional revenue because you are disabled and not working, what kind of pressure will that create and what impact will that have on the business?
2) Borrow – You MAY be able to borrow, but you’ll be paying interest on every dollar. Additionally, a bank may not be willing to lend your business money if the key person, the business owner, is not able to be actively involved in the business.
3) Sinking Fund – You could create a separate, liquid account for a “rainy day.” The advantage of this approach is that if nothing unexpected ever occurs, you still have immediate access to your cash. The disadvantage is that if the unexpected occurs too soon and the fund hasn’t had sufficient time to grow, there still isn’t sufficient liquidity to keep the doors open.
4) Insurance – For pennies on the dollar, you can shift the risk to the insurance company, which will provide the exact amount of cash needed at the exact time it’s needed, in order to keep the business afloat. Of course, if the unexpected never occurs, in most cases the premium cannot be recouped.
The takeaway here is that you get your succession plan in place TODAY. It has probably taken you a good deal of time to get your business to be successful. The lack of planning today could cause that business to fail a lot quicker than the time it took you to grow it.