We can get sick and at some point in our life, we die. I joke with Devon that I plan to live forever, and so far, so good! But kidding aside, if you own a business, your illness or death will create business problems for your families and your employees.
A business can typically suffer in four ways when the owner or a key employee dies or is incapacitated.
- A loss of management skill and experience. This can be particularly devastating for companies without management depth, which is typical of smaller companies of the mom and pop variety.
- A disruption in sales or production. If the owner does most of the sales (which is the case in most construction-related companies) or is in charge of production, the business is certain to suffer. If clients recognize the owner is vital to the business operations, they may refrain from doing business until they find out how the organization will respond to this loss. I've seen clients stop making payments out of fear their job will be delayed or not be completed.
- Cash flow. A decrease in revenue, either because sales aren't happening or jobs aren't getting built, will make it difficult to pay debts or make payroll. Creditors might be hesitant to extend loans or favorable credit terms, particularly if the owner's talents or resources were the basis of any previous loans or special terms. They may even have the ability to demand full payment on any outstanding loans or lines of credit.
- Expenses incurred with hiring and training a replacement. Even if the company can promote from within, business losses may continue to accrue until the replacement becomes thoroughly familiar with the job.
Putting together a game plan is not difficult. The hardest part is getting started. Face the reality that you are mortal. You might get sick, you will eventually die. Neither of those will happen on your timetable, so the sooner you prepare, the better. Decisions you make now can be made logically. Decisions made later might be made under emotional distress, or worse, decided in a courtroom.
So how do you prepare? Some of these ideas are from our work with our coaching clients, from research on the internet, from personal experience. We can't cover every detail here, but here are some major things you should do or have done on your behalf.
Regardless of whether we are talking about sickness or death, part of your preparation must be to have things in writing, and kept up-to-date. A thorough written plan will tell the next person in charge exactly what you had in mind for the business and how you planned to get there.
Don't be intimidated by the process. Grab a notebook or a three-ring binder and start writing. You can organize it later, and you'll add items as time goes on. Some of the things you first need to get in writing are:
- A list of what you do and what your thought process is on major decisions.
- Who will be responsible for management decisions in your absence. This person should have the ability to step in and replace you for a short time and keep the business functioning just as if you were there every day. Depending on the severity of your illness, you may want to have the new manager report to a committee of three people periodically to be sure they are following the plan you laid out.
- Any salary changes for key employees during your absence. Some of them will be asked to increase their work load and take on added responsibility. How should that additional workload impact their salary?
- Who can make hiring/firing decisions regarding other employees? This needs to be stated clearly and with tight restrictions so the temporary manager can't arbitrarily terminate other employees they don't like.
Now that you've addressed the "what if's" for you, think through each of your key employees. What would happen if you lost them suddenly? Don't forget the office staff; are they keeping any passwords in their head? Are they doing any tasks that others should be cross-trained in, just in case?
I once read that if you have three key people in your business between the ages of 35 and 45, there is a 50% chance at least one of them will die while they're still of working age. It's a depressing statistic, but an important one to consider.
The following things should be written down:
- All financial account names and numbers, with addresses, phone numbers, etc.
- A list of all company assets including real estate, vehicles and tools
- All company liabilities including mortgages, leases or loans and related contact names and phone numbers
- Contact info for all key people in your business
- Contact info for those you do business with. The list would include insurance agents, attorney, bookkeeper, CPA, lenders, suppliers, subcontractors, associations, clubs or other organizations.
If you're concerned about security, put these items in a password-protected file and let a few trusted individuals know how to access it.
You need to have your will in order. This should be done by an attorney who knows and understands the impact of your death on your business. As a business owner, your will needs to include what should happen with your business when you're gone. If you want it to pass to your heirs, who should run it? If you want it sold or dissolved, who makes the decisions?
You also need a Durable Power of Attorney document for financial affairs. The official name might vary by state, but the document will give someone you trust the ability to make financial decisions in case you are dead or incapacitated. If you're wise, you'll also have a Health Care Power of Attorney established to handle critical health care decisions that might arise.
Business continuation and succession planning can help prevent business assets from being frozen, and can help avoid conflict among family members, partners and shareholders.
You should have enough personal life insurance so your family will be, at minimum, debt free. Insure anything you don't have the money to replace. Additionally, your business should consider cross life or key man insurance on all key employees. This insurance will cover the costs to replace and train key employees.
Finally, remember that things change. Keep everything current: Outdated information won't be of any value. You can't write down too much; you can write down too little.
If the succession of your business isn't planned, it will be done by crisis. Make life easier for everyone else and start writing down what you know, and what you want done, in your absence.