Plan for the UnexpectedAdded by Hawley Troxell in Articles & Publications, Business Law on May 30, 2017
All privately owned businesses undergo a transition of management and ownership. These business transitions might take place when the current owner or owners die, become disabled, retire or simply want to sell and move on to their next business venture. Our experience has shown that without proper planning, business transitions are almost certain to fail. So, as advisors we encourage our clients to plan for this inevitable process.
We aren’t the only advisors that work with their clients on this business transition issue. Many businesses are owned by baby-boomers and as they age the importance of a business transition plan is becoming more widely recognized. This is a positive trend for businesses and the economy as a whole. However, there is a piece of the business transition plan that often gets left behind.
A solid business transition plan takes time. Successors that will operate the business need to be properly identified and trained. Normally, the transfer of ownership takes time as well. Typically, outside of a third party sale situation, a slower, longer term buy-in is less risky for both buyer and seller than a single transaction involving the sale of the entire business. A staged sale allows the seller to get actual cash (not just promissory notes) from the transition and allows the buyer to reduce the amount of debt required for the acquisition. However, sometimes we don’t have as much time as we think we will. For many businesses an unexpected death, disability or retirement can have immediate and negative impacts and these business transition plans often presume a reasonably long term and orderly process that isn’t possible when the unexpected happens. This is where a “Death and Disability Plan” comes into play.
Many closely held businesses have a relatively small number of key people whose unplanned absences could cause significant problems. These individuals may have key relationships with customers, clients, suppliers or regulators. Alternatively, they may have vital knowledge the absence of which could quickly and negatively impact a business. It is also possible that a person is so well established in a business that their mere absence could cause important players, including possibly employees, to become concerned and consider a quick departure.
A “Death and Disability Plan” is one way to help avoid panic in the wake of the unexpected loss of an owner. The details in any given plan are very specific to a particular business. Even similar businesses may have plans that differ quite substantially. However, generally all plans should address certain key issues.
These plans should describe the actions to be taken, and by whom, in the event key players experience a short term or long term disability event, or unexpectedly die. There may be people inside the organization who can implement the Death and Disability Plan but for some businesses the plan may require help from outside parties; people with industry experience and credibility.
The plan will often establish the tone of certain “messages” to be delivered to employees and third parties whose relationships with the business are vital to its success. The nature of the message and the appropriate person or people to deliver the message often depends on the audience. The message to employees might be delivered by one or more senior remaining employees, owners, directors or a trusted outside advisor that is known to the employees. The message to outside third parties might come from a team of people including some of the aforementioned and an accountant, attorney, recruited industry expert brought on pursuant to the plan, or some combination of these people.
In general, the message delivered is relatively similar regardless of the recipient: (1) everything is going to be okay; (2) the company has a written plan to address this type of situation; (3) the plan was created in advance with input from all key people including the individual that has recently become unavailable; and (4) some detail as to how any issues created by this person’s absence are going to be addressed so that the recipient of this news won’t be negatively impacted. Often times, the simple fact that a written Death and Disability Plan is in place goes a long way to easing concerns.
Meanwhile the plan can also guide the internal transition (whether for the short or long term) of day-to-day functions so that the long term business transition plan and related documents have time to be implemented. It might address which individuals will temporarily fill in the gaps created by the absence. The plan can also address potential sources and uses of funds to help address problems.
A Death and Disability Plan is no substitute for a broader and longer term business transition plan. However, in many industries, business value can be lost very quickly and that loss can be catastrophic for an owner, the owner’s family and employees. Death and Disability Plans allow for quick action that incorporate advice, input and insight from all of a business’s key people, even those that are now unavailable, and can help assure continuity and continued success in the face of disaster.
Jon Bauer is a business attorney focusing on general business counseling, commercial transactions, estate planning, business formations, corporate formalities, real estate, and financing of capital assets, equipment, operating loans, lease financing and other forms of financing. He represents clients from startup and established business entities, corporate tenants, developers, landlords, sellers and lenders.
This Business Newsletter is provided by Hawley Troxell Ennis & Hawley LLP for educational and information purposes only. It is intended to notify our clients and friends of certain events or issues in corporate law. It is not intended to be, nor should it be, used as a substitute for legal advice regarding specific factual circumstances. © Hawley Troxell Ennis & Hawley LLP all rights reserved.
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