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Plan for Transition or Prepare to Get Left Behind

Daily Journal of Commerce
July 18, 2013


Plans may take time, work and monitoring – and evolve – but the result can be an incredible payoff

Guest Commentary – Carmen Calzacorta

Every business has plans: a budget, a strategic business plan, an employee succession plan, several project or product plans. Bankers, insurers and customers require them, especially in the construction business.

Business owners also need other plans, such as a contingency plan and a business transition plan. However, these two plans are often deferred until it is too late, with the business owner or business and family losing out.

All business owners know that eventually ownership will transition and that a business transition plan is very important. The key is to be ready and set the business and family up for future success to maximize, capture and keep the value the owner has built. These plans take time, work and monitoring and do evolve – but the result is incredible payoffs.

What many owners may not realize is that an essential business contingency plan for the death or disability of the owner is critical and has to be done now, not in five years or when the owner gets older.

A business contingency plan is a risk management plan to prepare for and respond to a business emergency. Those emergencies should include the owner's sudden illness or death, and can include unplanned liabilities (like taxes and bad debt), family disputes, natural or man-made disasters (like computer or utility failure), or reliance and departure of key management. For a privately held business, the risks are more intense because the value of the business often represents a significant proportion of the owner's wealth.

A good contingency plan confronts all of these situations. But the essential contingency plan addresses the owner's sudden illness or death and needs to be done now. The benefit of having a contingency plan is that the family or key employees left to run the business know the owner's intent and don't need to speculate and be distracted by trying to figure out the deceased owner's wishes. There is no guessing.

A contingency plan is a written document that states:

  • The owner's goals and other wishes (keep or sell the business, use the insurance money for the children's education, don't sell or license the family name, etc.).
  • Who should manage the business in the owner's absence and how key managers will be compensated (stay bonus, other incentives, etc.).
  • If the business is an Oregon contractor, who will be the "responsible managing individual" for licensure purposes and who will be the guarantor or financially responsible party on the surety bond?
  • The names of the owner's trusted advisers (CPA, attorney, financial adviser, insurance agent, banker, investment banker, valuation and business consultant, etc.) and their contact information.
  • Information on the business' value and possible buyers (prior offers, who the owner would like to sell the business to and anyone the owner would prefer not to sell it to, etc.).
  • The location of important information and assets: passwords, safety deposit boxes, insurance, wills, etc.

The contingency plan is a simple wayto reduce unnecessary stress and conflict in an already difficult time. Failure to plan ahead will both compromise current business performance and limit future exit options.

In "Baby Boomer Business Owners: Will there be a mass sell-off?", Carey McMann notes that as the baby boomer generation retires within the next 10 to 20 years, we can expect to see an abundance of businesses transitioning ownership. This wave is expected to put downward pressure on pricing. A business owner must be prepared for the future with a business transition plan.

A transition plan is much more detailed than a contingency plan. However, the time and resources spent creating one will be beneficial when transition eventually occurs.

Creating a plan starts with collecting the existing data about the business, defining the goals and objectives of the owner (timeline of transition, financial goal, etc.), working with a team to analyze and help align the goals with any value gap, creating and monitoring a plan to best reach these goals, and ultimately executing the transition when the timing is right. Most owners skip this planning and preparation; they jump head first into the sales or transfer phase, ignoring management or family dynamics, market timing, value enhancements, wealth planning, tax planning, and the various other attributes that transition planning delivers. A survey by PriceWaterhouseCoopers showed that the biggest reason private business sales fail or only partially succeed is a lack of planning on the seller's part.

As a business owner, it is critical to have a contingency plan and vital to work with a team to create a business transition plan. Without these plans, a business owner will be behind the wave of baby boomer businesses selling and will create unnecessary stress for the owner's family and employees, resulting in lost value and likely higher taxes. The time to prepare is now or business owners risk being left behind.

The Daily Journal of Commerce, Monday, July 15, 2013..