What Happens If.. .?

Unfortunately, bad things happen to good people. Despite the best laid plans of mice and men, illness, accidents, disability and even death can happen to all of us.

What would happen to a privately owned business if it lost its leader? Such a devastating loss can result in power struggles, employee turnover, managerial mistakes, lost customers, and lost profits. Even a vital and profitable company can unravel quickly when its leader is unexpectedly removed from the mix.

As result, contingency planning is an important part of a business owner's overall strategic business plan.

The following tools can be used effectively to manage many of the problems that confront a business, its employees, and other stakeholders when a business owner dies or becomes disabled.

Stay Bonus

A "stay bonus" is a stated incentive designed to keep key employees on board after an owner’s unexpected disability or death.

A stay bonus is a written, funded plan that provides for monthly or quarterly bonuses, usually over a twelve to eighteen month period, for key employees who remain with the company during the recovery of its current owner or its transition to a new owner.

Typically, the stay bonus is funded with life insurance in an amount sufficient to pay these bonuses as well as to continue the normal salaries of your important employees over the specified time period. This insurance may be owned by the company or outside the company in an estate tax-sensitive trust. Once the stay bonus is in place, it is important to communicate the plan to important employees and to let them know how it is funded.

Emergency Instructions

In order to minimize the chance of panic or a power struggle, emergency plans should be developed to account for the sudden absence of leadership. These emergency plans should be a set of written instructions that state: 1) who the business owner wants to be charged with the responsibility of running the business; 2) whether the business should be sold (and if so, to whom), continued, or liquidated; and 3) which professional advisors the business owner’s heirs should consult regarding the sale, continuation or liquidation of the company. This plan should be as detailed as possible and provide names as well as contact information.

Responsible individuals (such as corporate officers and board members) should be made aware of and empowered to implement these plans should the need arise. Further, the plans should be reviewed periodically and updated as appropriate.

Communicate with Advisors and Stakeholders

Once the contingency plan is developed, it is important that a business owner let his or her family, key employees, and advisors know about these plans. The company's lender should also be told about these arrangements and provided with evidence that insurance is in place to fund these plans. Communication will increase the likelihood that everyone is on board with the plan and that it will be implemented seamlessly should it be necessary.

Insurance

Business owners should work closely with a capable insurance professional to make certain the necessary insurance (such as funding the Stay Bonus) is purchased by the proper entity for the right reason and for the right amount. Owning the wrong insurance policy in the wrong legal entity can have serious tax consequences.

The professional you work with should be well versed in both life insurance as well as disability insurance products and applications.

Disability Insurance

Debilitating accidents can happen to young, healthy business owners. As unlikely as it may seem, addressing the issue of disability is an important business practice for owners of all ages.

When it comes to disability planning, business owners have more responsibility than regular employees. In addition to simply needing disability insurance to provide income for their families, business owners must also plan for the financial survival of their business in the event of their diminished capacity.

In addition to providing income for the owner's family, disability insurance can be used to fund a buy-sell agreement that allows certain persons to purchase the owner's shares based on certain triggering events.

Overhead protection insurance is a type of disability insurance that can be used to help manage cash flow problems associated with a business owner's extended disability. This coverage is intended to keep the business viable until the disabled owner is able to return to work. For example, the insurance proceeds can be used to pay debt, rent, utilities, and make payroll until the disabled owner recovers.

Given the tremendous costs of being unprepared, no comprehensive exit plan is complete without including a well thought out contingency plan. The survival of the business, the business owner's personal legacy, and the owner's family's wealth depends on it.