Plan ahead for your business: Risks & Succession

Business owners: this one is for you. The day-to-day operations of running a business might be all-consuming, but it’s important to consider what would happen to your business if you (or your business partner or a key team member) was to retire or is no longer able to work due to illness, death or otherwise?

Businesses are often about the people who run them, a good business is one that is set-up to survive beyond its people. Planning for the times you’re NOT there actually makes you a better business owner.

A well-run business should be able to survive without its owner. Remember; if your business can’t run without you, it won’t grow beyond you.
Not only is planning for the future leadership of your company important, but so is planning for other possible scenarios that could put it at risk. While most entrepreneurs are risk-takers by nature, there are certain things that should not be left to chance.

While you might be reluctant to let go of the reins, for a business’s survival, all scenarios must be planned for. If something happens to you – or another key person in your business – or perhaps if you one day would like to retire or sell off to your business partner.

Consider; who will take over the business when you’re gone? What would happen if an important team member was no longer able to work? And how to protect your businesses against any financial impact if something were to happen to you? How do you ensure your business will continue according to your vision?

Savvy business owners need an exit plan and back-ups for their back-ups. The good news is, there is a solution for every possible scenario. See below out tips:

What happens when you ultimately retire?

Succession planning is a strategy for replacing or passing on leadership roles. A good example of this is when you retire. How will you ensure the future of your business when you’re no longer involved on the day-to-day?
Many business owners focus on the day-to-day operations and forget to plan for their eventual retirement. A well-structured succession plan helps you smoothly transition ownership and leadership to the next generation or a chosen successor.

Start by:
– Identifying potential successors early.
– Ensuring they receive proper training and mentorship.
– Establishing a timeline for the handover to ensure a gradual transition.
– Creating financial plans, such as retirement accounts or shares to be sold gradually, to maintain financial security during retirement.

In the case of a family business, consider the following:
Do you want your children to take over the business? Would you pay capital gains if you sell it to them? Should your kids own it and someone else manage it? If you die, would your spouse gain control of the business?

When selecting someone to run your business as you’ve run it, look at the candidates’ styles and not just their skills. Search for a successor both inside and outside your company. And finally, remember that this handover process can take some time.

Planning for the unthinkable – Death and Disability insurance 

Sadly, it’s not only through retirement that business owners are no longer present in their businesses. The reality is that death and disability could have a terrible knock-on effect for a company if not adequately planned for. This is another good reason for proper succession planning within your business. 

Life can be unpredictable, and ensuring business continuity in the face of death or disability helps mitigate operational, legal, and financial turmoil. Here are some tips of risk planning for these possible scenarios:

  • Disability Planning – Establish protocols for handling leadership and operational roles in case of incapacitation. Designating a successor or interim manager ensures day-to-day operations can continue smoothly.
  • Death – Ensure your estate plan includes clear directives for business ownership transfer, minimising disputes among heirs or partners. A well-drafted will and testament in this case is key, one that outlines your business succession is crucial.

What about other key team members?

In a business it is usually more than the business owner and founder on which the operations and output heavily relies. In fact, the most important asset in any business is its people. Various leadership individuals can play a key role and this should also be planned around.

Having members of staff who are highly competent are always considered an asset. But ask yourself, what’s the contingency plan if something were to happen to them? Over and above having processes in place to ensure handovers for when they want to take time off, for instance, you should also consider Key Person Insurance to protect your company against prospective financial loss.

Key Person Insurance is a life or disability policy taken out on a critical employee or owner whose death or disability could severely impact the business. It is a policy on the life of a key person to cover the business against the expensive replacement costs, or to provide cover against a potential loss.

How do you identify who would be considered a ‘key person’ at your company? This is someone whose absence through death or disability will have a material effect on the future of the business – both the ongoing profitability and sustainability.

Key Person Insurance can help in the following ways:

  • Simple, cost-effective solution that provides financial security and certainty for a business in the event of the death or disability of a key person.
  • Provide funds to cover the costs of recruiting and training a replacement.
  • Help offset potential losses in revenue or profits due to the absence of the key person.
  • Ensure the financial stability of the business while a replacement is found​​.
  • Allows a business to insure itself against this risk in a tax-effective manner.

What if something happens to your business partner?

In the case where a company is owned by multiple business partners, it’s smart to plan for the risk of something happening to one of partners so that all parties are protected. 

The following could pose a risk to the remaining owner/s and should be planned around:

  • The executor of the estate of the deceased owner might interfere in a business about which he/she knows nothing;
  • He/she might want to sell the owner’s interest to the highest bidder, opening up the business to unknown external investors; and
  • The existing owners may not have the funding to repurchase the deceased owner’s interest at that stage.
  • The deceased owner may have had unique skills that he/she brought to the business, resulting in a huge loss for the business. 

There are also potential pitfalls for the family or spouse of the deceased partner, such as not wanting to participate in the business and being left at the mercy of the existing owners or if the remaining owners don’t have the resources to purchase the shares from the estate.

A Buy-and-Sell Agreement can help in this instance, as it provides a clear path for transferring ownership if one partner passes away or decides to leave the business. This is because the agreement does the following:

  • Details how ownership shares are valued.
  • Specifies whether other owners or external parties have the right to buy those shares.
  • Ensures that departing or deceased owners’ shares are bought at a fair price, protecting both the business and heirs.
  • Provides the surviving co-owners with cash to purchase the shares of a deceased co-owner.
  • Each co-owner takes out life cover on the other co-owners’ lives – which pays out on the death of a co-owner, funding the purchase of his/her interest by the surviving co-owner(s).

It’s worth noting that this agreement should be backed by insurance policies to ensure sufficient funds are available to buy the shares​. Disability cover can also be included to fund the buyout of a disabled owner’s share of the business.

Protecting the business from debt of deceased owner

The final consideration we cover in this blog article relates to protecting your business from financial debt in the possible case of death of a business owner. Another form of Succession Planning, it is recommended to get Contingent Liability Insurance for this. 

This type of insurance is designed to protect the business from unexpected debts that may arise when an owner or key person dies. By covering outstanding loans or guarantees signed by the deceased, contingent liability insurance ensures the business remains financially sound and can continue operations without pressure from creditors​. So definitely one to consider for business owners. 

Conclusion

As you can see, there are multiple risks to ponder when planning for the resilience of a company beyond its business owners and key leadership. But with the proper planning, there is no reason that one’s legacy cannot go on, despite the unpredictability of life. Don’t be caught off guard, have a professional Financial Advisor evaluate your business risk and help you plan for any eventuality. Contact TVC Wealth and Health Managers today for more advice on these matters! 

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