I have been asked several times, what is the difference between a Business Continuation plan, a Succession plan and an Exit plan. That is an excellent question and although there are distinct differences, they all tie in together through the lifetime of your business.
If you are a business owner and are actively engaged in your business daily, you obviously provide value to that business. Most small business owners are “in the trenches”, meaning, they are responsible for sales, marketing, payroll and other overhead, HR including hiring qualified and capable employees and firing those who are not…shall I go on?
Does this sound familiar to you? If so, you will want to pay close attention to this issue. What you don’t know, can and will affect you and the life of your business! Statistics show very few small business owners step away from the business for any longer than a few days—even a week is hard to come by. For your health, the health of your family and the health of your business, taking some “down time” to just have fun is critical. You can read here on some tips to how to get away: https://www.business.com/articles/how-to-take-a-vacation-as-a-small-business-owner/
But I digress—since this is not a perfect world and business owners are sometimes forced to take time off from work—usually involuntarily due to sickness or accident. And sometimes, unfortunately, they die before completing an entire life cycle. Many of you know that happened to my husband, Joe, in November 2017, at the young age of 62. For the better part of that year and a couple of months before that, he was seriously ill; in and out of the hospital, eventual chemo for lymphoma. All of this took a toll on me and our business, since he ran our back office and was a wiz at marketing and I/T and had an HR background as well. Fortunately for us, and me, we had many things in place, including a cancer plan that paid out handsomely while he was being treated, as well as hospital income while he was in patient, and life insurance. That was on the personal side… but what about the business?
And then, there is the story of two business owners—one died suddenly of a heart attack and another was diagnosed with cancer and died after several years. One was prepared and had purchased a large life insurance policy for the benefit of the business, just the year before he died of the heart attack. This allowed his family (succession planning) to revamp and reorganize the business. It gave the necessary financial support during this transition. That company is still very much alive after over 35 years since his death. The other didn’t fare so well—even though they had some time between diagnosis and his eventual death, no planning was done. Sadly, his wife inherited the business that employed a son and a daughter. After two years, the wife decided she didn’t want the business and shut the company down. No sale, no residual value, just shut it down. Most of their inventory was donated. Proper planning could have provided an ongoing enterprise for the benefit of the children, who were now out looking for jobs.
Which business owner are you? Which would you rather be?
So, here we go:
As illustrated above, there are situations that take the business owner out of the business on a temporary basis, like an illness or accident. One of my business coaches had a serious car accident that kept him struggling to keep his business open throughout his treatment and rehab, exhausting his personal savings. He now carries insurance against that risk. This is centered on the business owner. The business can be protected by purchasing a disability overhead plan. That’s right, an insurance plan that will pay your overhead, including rent or mortgage, salaries, and other fixed expenses. Oh and, if you need to bring someone in to cover the work you are unable to do, it covers that as well. A chiropractor recently told me she had double pneumonia that kept her out of work for about 8 weeks. The overhead plan would have allowed her to bring in another chiropractor to treat her patients while she was out, so they wouldn’t leave and go somewhere else.
Disability overhead plans are available for either one or two years in benefits. If the business owner can’t come back in that time frame, another plan should be in place. For your personal loss of income, there is a disability income plan. This can be purchased individually on the business owner and at the very least, covers loss of income for two years if you are unable to perform the primary duties of your role. They can also extend to NRA-normal retirement age as determined by the government. You can also have a group disability plan of insurance, that covers not only you but your employees. This is usually less expensive than a personal plan but does have some limitations. The maximum payout is 60% of your income and caps out at $6000. So, anyone earning over $10,000 per month can purchase an individual plan to capture the higher amounts.
The second issue is the death of the business owner, as mentioned above. Regardless of whether the business is viable without the owner or not, having a life insurance plan for the benefit of the business can buy valuable time, paying final expenses on the business and any capital left after the business is systematically and shut down in an orderly manner, the remaining capital can be returned to the heirs. If the business is viable and has a succession plan in place, the influx of capital can cover the legal costs and financial obligations to do so.
What do I do and where do I start?
Follow us next month for a deeper dive and practical ways to protect your business, legally and financially. You, your family and those in business with you do not have to experience the pain others have. Proper planning will help everyone sleep better at night, knowing there is a plan in place!
If you can’t wait until next month, give me a call at 520-888-9649 or sign up for a complimentary assessment online at www.sandbrookgroup.com.