In the first part of this article, I described the need for every business owner to create a contingency plan to deal with the possibility (however unlikely it seems) of his or her death or disability. If unplanned for, such an event could lead your company into a chaotic situation that it might not be able to survive.
The Key Elements of a Succession Plan
Business owners creating a succession plan to address the contingency of their death or disability should consider including the following specifics:
- Some form of key man insurance on critical players that provides a financial cushion to bridge any transitional issues that arise with an unexpected death or disability.
- Joint and several guarantees (sometimes to be co-signed by spouses), to address the possibility that a death/departure may magnify the risk assumed by the remaining guarantors or leave a spouse with a contingent obligation.
- A buy sell agreement, designed to address the possibility of a widowed spouse acquiring a controlling interest in the business. These generally give the company and then the other shareholders repurchase right to the shares of a shareholder who dies or otherwise leaves the business.
- A buy sell agreement often also includes a valuation methodology and a financing vehicle so that the company doesn’t have to come up with a lump sum of cash at the same time it is dealing with an unexpected transition.
Like everyone else, business owners hope for a long and healthy life. But they should nonetheless consider planning for the contingency of death or disability. It is worth taking the time to imagine the issues and risks that would materialize if you were to leave the company unexpectedly. To fail to do so is to underserve your own interests, as well as the interests of investors, employees, customers and others who depend on the company.
For more advice on how to navigate your way through No Man's Land, download our complimentary ebook, "5 Steps to Survive No Man's Land."
Bill Reading is a Newport Managing Director of the Carolinas. Bill’s career has focused on the markets Newport serves: emerging growth companies that need to get past No Man’s Land and private equity firms that invest in these firms. To learn more or contact bill, click here.
