Best-Case Scenario
To get a glimpse of how succession planning should go, let's look at the story of married couple Bob and Elaine. Unfortunately, a fall in his office resulted in a lengthy coma for Bob. Prior to the fall he had felt invincible, and he intended to operate his business for another 15 years before giving it to one of his children or selling it. What's more, his family was dependent solely on the company for income and benefits.
Bob regained consciousness 10 months later and found everything concerning the business had been going wonderfully, considering the economic climate. Luckily, hard decisions about reducing the number of employees and scaling back the company had just been completed prior to his accident. Still, critical decisions had remained that determined the business' survival, but his company and family were prepared, due to their diligent planning for just such an occasion.
Bob's fall set into motion a contingency plan that included a Durable Power of Attorney and operating plan. Bob and Elaine had developed the plan with the aid of an experienced planner who emphasized the importance of including the business operations plan just in case something happened to him.
Elaine had worked with Bob building the company for 15 years before retiring to raise their family. He frequently updated her as to the status of the business. She was aware of the company's 15 employees' strengths and weaknesses and current and future contracts.
Once Elaine was satisfied that everything possible was being done for Bob at the hospital, she turned her attention to running the business. She took her husband's Durable Power of Attorney, giving her legal authority to substitute for him, and she obtained the company's operating plan from their home safe. The plan told her:
- to contact the listed professional advisors
- whom to trust
- key operating information
- options for keeping their owner interest in the company
- where to obtain additional information.
Her prior experience, together with the assistance of loyal employees and professional advisors, allowed her to step in on short notice to operate the company.
Key to preserving the business' survival were:
- Elaine's current knowledge of the business
- her management knowledge
- a legal transfer of authority
- a written operating plan.
Worst-Case Scenario
Unfortunately, Bob and Elaine's story is the exception, not the rule. Caring for a spouse in a similar case can be emotionally draining and time-consuming. Most family businesses end up failing when the principal spouse is unable to participate in daily operations.
Consider the alternatives. If the worse were to happen, you might find your business:
- under operation of a court-appointed manager
- sold
- closed, with your hard assets auctioned.
Let's discuss what would have happened to Bob's business without any planning. Odds are, it would have stumbled along as chaos ruled the day. State statutes would have determined the business's future if the business could have continued to operate long enough while new leadership was determined. Most likely, Bob would not have had a business to return to after waking from his coma.
In this case, Elaine would have been ill-prepared to take over the business. She would have had to hire an attorney to represent herself and other members of the family, draining the remaining family savings. She would have become financially desperate as the family income ceased. Benefits, such as health insurance, would have only continued as long as the owner's interest was retained.
Remember, time is of the essence without planning. Obtaining a court schedule can be difficult, decisions are rarely rendered at an initial hearing and, if multiple parties challenge the direction of succession hearings, it can take months or years before a final decision is given.
What You Need to Do
So what makes the difference between a business plan that works and a plan that fails?
- Estate planning that includes a Durable Power of Attorney.
- Identifying a successor.
- Deciding on an operating plan.
- Minimizing time to transfer operating authority.
- Ensuring the appointed successor has industry operating knowledge and experience.
Each business is unique and requires its own customized planning. A business owner needs the aid of a design team that includes a legal, tax and professional succession advisor who has operated a company. It is difficult for owners to be objective if they do it all on their own. Now, ask yourself: Is your business prepared to operate on a continuous basis without you?
