If you’re a business owner, or are ramping up to start your own, then you’ve probably spent a lot of time thinking about the future of your business, and this is for the best. It takes careful planning to build a successful business that’s profitable and long-lasting.
One crucial part of your business’s future you probably haven’t considered is contingency planning. What would you do if something unfortunate happened to your business? What would your business do if something unexpected happened to you?
Contingency planning presents these types of questions front and center so that you can prepare for them beforehand. Most business owners tend to put these questions off because they’re either too absorbed overseeing the day-to-day operations of their business or they are uncomfortable thinking about the topic altogether.
However grim or irrelevant the topic may seem at present, it’s crucial to address these questions sooner than later to ensure the continuity of your business.
So, what aspects of contingency planning are of utmost importance for you as a business owner? The most critical asset is you, the business’ owner, and any other key members.
Without a leader, a business cannot function. For small to medium sized businesses (SMBs), the loss of a key member, such as a founder or co-founder, can be a critical blow. That’s why it’s paramount to plan ahead in the event that something happens to you.
Keep reading to get a more in-depth look into what you should include in your succession plan, or take a look at our infographic below.
How to Plan for the Survival of Your Business
Corporations and larger, established businesses usually have a set of governing documents that dictate the steps to take in the event that any key member passes away or becomes disabled. These provisions ensure the continuity of the business by helping executives maintain order at the top.
While your business may not require the same degree of detail and structure, you can still learn from how these enterprises handle such situations and apply the same principles to your business.
When planning for the death of a founder or co-founder, two of the more pressing items of importance are key person insurance and succession planning.
A succession business plan includes instructions as to how your business should replace you if you are disabled, retire, or pass away. Your replacement should ideally be someone you know and trust. Of course, if you run a family business, you may already have an heir in mind.
Whatever the case may be, it’s important to get your succession plan underway. Here are some considerations to keep in mind:
- Are you looking for internal candidates? Drawing outside talent can be a costly investment. They need to be properly trained before they can truly grow into their role. They also tend to be more expensive than promoting internally — on average, hiring external candidates costs 1.7 times more than promoting internal candidates.
- Are you considering a family member? If you run a family business and are considering a family member to succeed you, there is the possibility that you may encounter some tension between family members. To avoid this, you should state your intentions early on as to who will succeed you, and begin training that person so that it’s clear who will inherit your role.
- Have you considered multiple candidates? Even if you have a particular person in mind, it’s a good idea to open the floor to multiple candidates. By limiting your options to one choice, you create yet another possible point of failure in your plan if something happens to them or they decide not to take on the role.
- Do you have a leadership development plan to train your successor? You should always assess the skills and traits of your employees. Once you’ve identified several candidates that may be cut out for the role, be sure to give them plenty of growing opportunities and expose them to different parts of the business as they gain your trust.
- Have you thought of middle management? As a founder, you may have hired a manager beneath you to help you run your business. When you leave your role, it’s wise to also have a succession plan in place for these middle management positions so that your business runs smoothly.
With these considerations in mind, your succession plan should address the following:
Choice of Successor
If you have a specific successor in mind, then you need to name them in your succession plan to clear up any confusion once you’re gone. If you do not want to specifically name a person, then it’s wise to lay out a protocol that covers how you want your business to go about securing your successor.
Distribution of Property
You should clarify how your property (business assets) are to be distributed once you leave. In the event that you pass away, preparing what’s known as a buy-sell agreement ensures that beneficiaries, such as family or loved ones, don’t unintentionally become owners of your business interest. A typical arrangement might name other co-owners to automatically purchase and acquire your interest upon your death.
Type of Business Form
You need to specify what type of business you own, be it a sole proprietorship, an LLC, or a partnership. Each type of business has unique requirements when it comes to succession planning that dictate how and when a successor can be instated, and the extent of power they have when they do step into their role.
You should resolve any issues regarding outstanding taxes, debts, or unfinished business. If you choose to liquidate the business, for instance, will you transfer the wealth to your family? If so, would you like them to donate a portion of the total estate to a charity, or will you divide the wealth amongst specific family members? If you have any outstanding debts or unfinished business, you should clarify how your business should handle it when you leave.
You will need to clarify if your benefits will continue after you leave the company. For example, will you continue to receive health care and retirement benefits? If you choose to extend your benefits once you leave, then you should discuss this with any other partners or co-owners.
To make sure these matters are properly addressed and legally viable, you should consult an attorney. Aside from these legal aspects of succession planning, a large part of it is simply knowing who your ideal replacement would be.
Key Person Insurance
Key person insurance is life insurance the company takes out on key members of the business, such as a founder, co-founder, or any other crucial executives or upper-level management. Here’s how it works: The company takes out a policy on a key business person and designates itself as the beneficiary.
This usually has one of two outcomes: 1. When said person dies, the proceeds of the policy pay for expenses until a replacement is found or 2. if the company can no longer operate, the insurance payout covers debts, distributes money to investors, and pays a severance to employees while the company closes.
Like personal life insurance, key person insurance policies are available as term or whole life. The amount of coverage you need depends on the size of your business, but it’s recommended to take out term policies on any significant member critical to your business’s survival. Should any of you pass away unexpectedly, the death benefit will sustain business operations and give you time to ensure the role is filled.
Another consideration is taking out a personal life insurance policy. Whether you choose a whole life policy or a term life policy, it’s a good idea to have coverage for your family or loved ones to make sure they are provided for no matter what happens to your business.