Guiding Your Company with Business Continuity Planning

By Kris Maksimovich, AIF®, CRPC®, CPFA®, CRC®:

Business continuity is a tool for handling the transfer of a business to a different owner when the original owner leaves, dies, or becomes incapacitated. A continuity plan protects short-term and long-term business interests and is one of the most important components to business exit planning.

Ripple Effect

The death of an owner often sets off a ripple of events for the business if it is not prepared for continuity. This loss of direction can lead to losses of financial resources and vendors, key talent, and ultimately loyal customers. Below are the key issues that can occur when owners do not create a plan, along with ways to mitigate them:

Loss of Financial Resources

Vendors may decide to discontinue their services to the business, especially if the business defaults on their contracts. The banks, lessors, bonding and financial institutions you do business with may also end their relationship with your company. How to handle these situations depends on the type of ownership:

Sole owners – Your death can put enormous pressure on the business to continue its performance should third parties refuse to lend money or make guarantees based on the health of your company. Continuity planning can help offset the loss of leadership.

Partnerships – The loss of financial resources can be mitigated by funding a buy-sell agreement, which places a significant amount of money in the company reserves should you die.

Loss of Key Talent

Another issue that can create problems with business continuity is the loss of your key talent. If the remaining owners do not have your experience or skills, the business can suffer as if it had been a sole ownership. Your experience, skills, and relationships with customers, vendors, and employees may be difficult to replace, especially in the short term. To overcome this situation, begin grooming and training successive management capable of filling your shoes. You should also begin preparing for the transition early since training your replacement can take years.

Loss of Employees and Customers

Particularly with sole ownership, as vendors end their relationship with the business, employees will be unable to satisfy their obligations to customers. This can hasten their departure, taking with them key skills and even client relationships. To mitigate the loss of key employees, you can incentivize them to continue their employment through a written Stay Bonus that provides bonuses over a period of time, generally 12-18 months. This bonus is designed to substantially increases their compensation, usually by 50 to 100 percent for the duration specified. Typically, this type of bonus is funded using life insurance in an amount that is sufficient to pay the bonuses over the desired timeframe.

Continuity Planning

For businesses with only one owner, it should be obvious that there will be no continuity of the business unless a sole owner takes the appropriate steps to create a future owner. Whether it be grooming a successor or creating group ownership, this step is one that should be addressed early. Even if your business is owned by your estate or a trust. The following steps should help business owners move through the process of creating a business continuity plan:

- - Create a written Succession of Management plan that expresses your wishes regarding what should be done with your business over a period of time, until your eventual departure
  - Name the person or persons who will take over the responsibility of operating your business
  - Ensure your plan specifically states how the business transfer should be handled, whether continued, liquidated, or sold
  - Notify heirs of the resources available to handle the company’s sale, continuation, or liquidation
  - Meet with your banker to discuss the continuity plans you have made. Showing them that the necessary funding is in place to implement your continuity plans will help the eventual transfer of ownership to proceed smoothly
  - Work closely with a competent insurance professional to assure the amount of insurance purchased by the owner, the owner’s trust, or the business can cover the business continuity needs outlined in your plan

Buy-Sell Agreement

For businesses with more than one owner, continuity planning can be achieved by creating a buy-sell agreement. Such an agreement stipulates how the co-owner’s interest in the business is transferred and is often funded using life insurance or disability buyout insurance. It can also be funded through an ESOP by creating a privately held corporation. It is important that you keep the buy-sell agreement updated to avoid creating additional problems with continuity. There are several types of buy-sell agreements to consider:

Cross purchase – Another business partner agrees to purchase the business from the owner or the owner’s family. All business owners generally purchase, own, and are the beneficiary of an insurance policy insuring each of the other business owners.

Entity purchase – The business entity agrees to purchase the business from the owner or the owner’s family. In this case the insurance policy is usually owned by the business.

Wait-and-see – The buyer of the business is allowed to remain unspecified, and a plan is put in place to decide on a buyer at the time of a triggering event (e.g., retirement, disability, death). The policy ownership and beneficiary structures vary, depending on the type of the agreement.

Deciding when to begin business continuity planning is complicated and likely depends on your health, family circumstances, and overall business financial wellness. We suggest you seek the advice of a business planning professional to help you sort through your options.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

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Kris Maksimovich is a financial advisor located at Global Wealth Advisors 4400 State Hwy 121, Ste. 200, Lewisville, TX 75056. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network^®, Member FINRA/SIPC, a Registered Investment Adviser. Financial planning services offered through Global Wealth Advisors are separate and unrelated to Commonwealth. He can be reached at (972) 930-1238 or at info@gwadvisors.net.

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