The Importance of a Business Contingency Plan

February 9, 2021

There is no way around it – the life of a business owner is hectic.  Constantly worrying about things like revenue growth, product development, and employee retention can be very stressful.  Outside of work, there is a desire to allocate remaining time to family, friends, and other important things.  This results in many business owners finding themselves in a time crunch and non-essential tasks being placed on the backburner.  In fact, this lack of time is the main excuse many business owners give as to why business contingency planning is tossed aside.  What if the business owner becomes disabled?  Even worse, what if the owner passes away unexpectedly?  These are difficult questions to answer, and nobody enjoys thinking about them. Still, without a business contingency plan, these events can cause significant damage to the business, resulting in diminished family wealth.  Here are some of the critical things to consider when putting a contingency plan into place:

Who would step in to run the business?  Without continuity of leadership, the business is likely heading toward failure.  The importance of having a successor selected, adequately trained and ready to step into a leadership role cannot be overstated.  Effective communication with this individual, other key employees and family members is critical to ensure everyone is on the same page if they are unexpectedly thrust into action.

How will key employees be compensated?  If there is a change in ownership due to the owner’s death or disability, key employees should be incentivized to stay on board.  Often, “stay” bonus programs are funded with life insurance on the business owner, so if something happens to him or her, the business has ample cash to pay employee retention bonuses.  These bonuses should be tied to the continued success of the business during the transition period.  When structured properly, these programs can keep employees focused and the business running smoothly in a disaster.

Does your buy-sell agreement contain the appropriate provisions?  Many buy-sell agreements spell out what happens if the owner passes away, but not all of them include the owner’s disability as a triggering event.  Omitting this vital provision can result in other members of upper management being unable to act in the best interest of the business during a vulnerable time.  The business may suffer if someone cannot step in quickly, which can jeopardize its value going forward.

The above questions are just a few of the many that should be addressed in a business contingency plan.  As mentioned earlier, failure to put a plan in place in case a significant event occurs can result in employee turnover, poor business performance and diminished family wealth.  All business owners should put their plans into place sooner rather than later because, as the saying goes, failing to plan is planning to fail!