checklists for pre-planning … and for recovery in a worst-case scenario.
by ed mendlowitz
77 ways to wow!
every sudden death or disability is a tragedy. for those who own a business and do not have a contingency plan in place, their legacy is confusion, high costs, stress and anxiety for their family, employees, customers, vendors and everyone else who depends on that business in some respect.
more: when an owner dies without a buy-sell agreement | are you ready for a co-owner to drop dead? | simple controls can prevent fraud | charity directors must take theft seriously | forensic techniques can be fraud deterrence | the hazards of poor internal controls | rule #1: start with cash
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businesses are organic in that many people depend on them for many things and do become part of people’s lives. owners who do not plan, shortchange those they leave behind … saddling them with doubt and many times with unnecessary and unfavorable consequences. lack of planning is not done through ignorance, but through arrogance. making plans for your death is difficult and unpleasant … but it is a necessary part of life. it is a courtesy for those closest to you who contributed to your success.
checklist: 15 consequences that could have been avoided with planning
here is a listing of some of the things that flow from not planning and could possibly be avoided with a little bit of work:
- the business will need to be liquidated or sold by someone who either doesn’t know how to do it or someone who might not be authorized to do it for a delayed period of time.
- any sale or liquidation will be done under stress with much lower receipts than could have been obtained with an orderly plan.
- employees will need to be let go or salary payments will be in doubt. responsibilities and loyalties will not be clear to them if they stay.
- long-term employees might not receive minimal severance payments. or they will quickly start looking for a new job and will not be available to help with the process of unwinding of the business.
- customers expecting deliveries or services will be left unaware of what they will receive and when.
- customer projects might have to be canceled with penalties or continued at losses.
- contracts will be defaulted on with undue costs.
- leases will encumber asset transfers and will carry penalties if broken, or ongoing costs if maintained without a viable operating business able to make continuing payments.
- loan repayments can be in doubt … sometimes forcing the bank to act precipitously.
- family conflicts are more likely to arise with confusion and no clear instructions or mandate.
- litigation will be probable.
- valuation experts might need to be engaged, as will attorneys.
- a surrogate’s court might appoint people to run, liquidate or oversee the business with added costs including bonding, accounting costs, attorney fees and reporting fees.
- accounts receivable will need to be collected, inventory sold, work in progress finished or penalized if abandoned.
- tax returns will need to be filed and accountings made to beneficiaries and the court.
problems don’t disappear if they are ignored – they fester and grow. putting simple plans in place can make unpleasant necessary actions easier and less costly to bear. planning doesn’t affect an owner’s independence or actions and has no consequence unless a sudden death or disability. plan and don’t be a jerk!
contingency plan for a sole business owner dropping dead
here are some illustrative points that can be used to get you started toward a plan to continue, sell or wind down the business if a sole owner drops dead or suddenly becomes disabled. the goal is to prepare so someone can quickly assume control of the business and continue operations.
checklist: six first steps
- place ownership in a living trust.
- the owner would be trustee as long as he is able to perform all duties. death is easily defined. disability would need to be defined in the trust agreement.
- someone of owner’s choosing would be selected as the alternate trustee who would only become elevated to trustee upon owner’s death or the “disability.”
- an alternative to the living trust for disability is a specific durable power of attorney. however, this would not be effective for death.
- another alternative, also less effective, is to elect another officer, e.g., assistant secretary, with bank signatory power as a fallback.
- either as part of the living trust or in a separate agreement of instructions, the owner would spell out his wishes, as suggestions, of how he wants the business to be operated. it would be suggestions because things change and the trustee (or person acting under the power of attorney) should not be bound by what he writes in the agreement.
checklist: ten critical decisions
- the trustee (as i will refer to the person operating the business) as “owner” and the person controlling the trust would immediately arrange to become a signatory at the bank accounts (if not previously arranged).
- various key people that the owner will list will be consulted in hiring and firing, scheduling staff, billing customers, customer relationship contact and other issues that will be identified by the owner in meetings with the alternate trustee. these meetings should take place at six-month intervals before any disability or death.
- payroll payments would have to be made as scheduled and this would be one of the early actions, as would the continued servicing of customers or clients and meeting with customer contact people to assure them of the continuity of the business.
- cash-flow distributions to the owner’s family will be made to provide for any care he needs. this would be done in conjunction with his health care proxy person.
- if it appears the disability will be prolonged, or if there is a death, a decision will be made whether to sell or continue the business, and whether someone should be hired to handle day-to-day operations, in effect to become a general manager or chief operating officer.
- long-term decisions such as lease renewals, pricing changes or hiring permanent management personnel, with exception of a general manager, should be deferred as much as possible.
- any plan should be in writing and discussed with the company’s banker (if large lines of credit exist) and any other “interested” party.
- compensation should be established for the trustee based on a fixed amount for oversight and responsibility and a payment arrangement based on time, value creation or staff working on the company’s activities. additionally, the trustee should receive a payment for assisting in the sale of the company.
- communications with family members will need to be kept open and the existence of this arrangement should be told to them.
- arrangements to sell the business should start after the operations are stabilized.
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- beforehand, the owner would need to identify major competitors and others in the industry that might be potential buyers.
- trustee will need to engage a professional to prepare a “book” and then initiate contact with potential buyers starting with the companies identified by owner.
- if these companies are not practical purchasers, or if assistance is needed, then a business broker or an investment banker should be engaged.
checklist: eight pre-planning items
- for long-range disaster planning, owner should assemble a board of directors or advisors.
- complete instructions of operating the company and selling it with all the backup a representative would need to know should be written out and kept in an easy-to-access location if needed.
- included in the instructions would be documentation of passwords, processes, procedures, comments about individual employees and customers and customer contact people, and a list of what the owner does in a typical day or week.
- if the business’ ownership is placed in a living trust, then the owner’s wishes will not be operative with respect to the business, or anything else in the trust.
- owner’s primary concern should be the continuation of the business if he is disabled.
- a second concern will be maximizing the value for himself if he is permanently disabled, for his family if he dies, or for reducing the winding-down costs as much as possible.
- it is suggested that owner consider life insurance as a method of providing for wealth transfer to his family (independent of the business) and to assure bankers of the repayment of outstanding loans.
- a life insurance trust should be set up as the owner of the policy with the bank as a beneficiary to the extent there is outstanding debt. the mechanics of this will need to be worked out to consider estate and income taxes, especially with the repayment of the bank loan.
conclusions
- reality must be recognized, and that is: the precarious nature of life.
- a contingency plan that can be implemented almost immediately under the worst type of conditions needs to be established for both the people involved and the business.
- the costs of setting up the plan are an investment you hope will be wasted with god’s grace, but that will provide assurance to key people, customers, vendors, lenders and family, and to yourself should you become disabled.
use this outline as a starting point to establish a plan that would work for the client. no control is given up as long as they are okay. a major factor in long-range planning is to reduce confusion and to assure continuity and cash flow if the owner becomes disabled and maximizing value if he dies.
working until you drop
many entrepreneurs love what they do and rarely think about retiring. however, unless they plan on working until they drop, they need to consider what they really want for themselves.
i never try to push or lead clients into retiring because it is a major life-altering event and needs to be made personally and wholeheartedly. however, i do offer some comments to consider when making that decision.
- retiring doesn’t mean retiring from life. it is entering the next stage of your life. assuming good health, regardless of age, someone retiring can look forward to at least 15 to 20 or more productive years in which to pursue another interest devoid of the need of having to make a living. the pressure is gone, and the only concern is the desire to follow a path that could create a benefit, fuel interest and lead to involvement with new people, ideas and causes. it will also enable you to extricate yourself from any problems when running a business, having people depend on you for too much and being forced to make decisions many times under stress and without adequate information.
- running a business is work. work is done to earn a living and acquire sufficient funds to live securely when no longer needing to work. it would seem work should end when the security is obtained, based on anticipated future needs.
many people are conflicted on what they would be doing after giving up running their business. each has their own interests. rarely does someone have no other interests. they may have no hobby or overwhelming desire to accomplish something, or they may be afraid they will sit around doing nothing. we all hear stories about people dying soon after retiring because they lost their passion, feeling of importance or identity. i do not know if this is so, because neither i nor anyone i know has ever spoken to one of these people. life itself is a passion and should be enjoyed. if someone lost their passion for living because they gave up work, well, how exciting was the life they lived?
when talking about retiring, i always think about benjamin franklin, who retired at age 42 by selling his business for half of its earnings for 18 years. by surrendering half of his income for all his time, he was able to spend the remaining 42 years of his life developing the theory of electricity, helping found the united states of america, inventing bifocals and watching the first manned balloon ascend and descend in paris, among a great many other things. he did not go mad, as many business owners fear if they retire.
retiring is a very personal decision, and no one can make that decision for you, but it is certainly something to consider. while considering it, think about deciding how you want to spend the rest of your life knowing you do not have to work. otherwise, work until you drop.
