Are You Ready for the Unexpected?
Business succession planning can help secure the future of your business.

By Jim Lutz

You have been successful in operating your small business so that it provides you and your family with a source of income and security. You are confident of the future and believe that a strategic buyer will be available to purchase your business when you are ready to retire.

Plan Ahead
Does this all sound familiar? Although many small business owners think this way, they ignore the fact that their businesses would not be able to continue without their daily involvement. The question that they fail to ask is: “What would happen to my business if I suddenly died or became permanently disabled?” The answer to that depends on how much planning they have done. If they haven’t planned, the following could happen:

•    The employees will immediately realize that without the owner at the helm of the business, their jobs are not secure.
•    If the owner’s surviving spouse has not been involved in the business, he or she will be unable to step in and operate the business.
•    Many small businesses would have to close for several weeks after the sudden death (disability) of the owner, resulting in loss of clients and customers.
•    The business’s lenders may suddenly become nervous about the ability of the business to repay its loans. There could be provisions in the loan documents that allow a lender to “call” the loan upon the death of a small business owner.
•    Some employees may feel this is their opportunity to start their own businesses with the customer base and work force of their deceased employer.
•    The business will have to be sold (at a significantly reduced value) and liquidated.
•    The surviving spouse and other family members may not have sufficient assets or income to continue the lifestyle to which they have become accustomed.

While that may paint a scary picture, if the small business owner has a succession plan in place, the outcome can be totally different:

•    There will be employees and advisors in place to operate the business until a sale or long-term transfer of ownership can be achieved.
•    Critical employees and advisors will be notified immediately and given instructions as to contacting customers and suppliers to assure them that the business will continue to operate in the same manner as it did prior to the owner’s death.
•    The succession team will make contact with the banker to assure the lender that all loans will be repaid in a timely manner.
•    The surviving spouse and one or more key advisors can join the board of directors to monitor the performance of the person parachuted in to lead the company on an interim basis.
•    An orderly transition of the operation of the business will assure that the full value of the business will be realized on a potential sale.
•    The surviving spouse and the owner’s family will be assured they have sufficient assets to support them and replace the deceased owner’s compensation from the business.

Most business owners believe that they are too busy to engage in business succession planning. In other words, they are too busy working in their business to reap the benefits of working on it.

Share Key Information
Most small business owners know what their business is worth and have a good idea of how it operates, but they have not passed on this information to anyone else, including their spouses. Succession planning for business owners involves thinking about what they would want their families or key business advisors to know, if they weren’t around. That is a great starting place for developing your business succession plan.

Identifying a key employee or business advisor to act as an interim chief executive officer is a huge step in the right direction. Finally, business owners and their families will greatly benefit from having a team of business advisors who meet regularly with the owner of the business to run through a “fire drill” of what would happen under different scenarios (death, disability or other catastrophe). This will help all parties plan for the unexpected.

From dealing simply with the unexpected, the plan could evolve into a potential long-term sale exit strategy for the owner of the business. This can involve a transfer of ownership and control to the next generation, a sale to key employees, or a sale to outsiders. Employee stock ownership plans also can be developed to provide funds for the purchase of the stock. All of these solutions can be developed after the plan is created to deal with the sudden death or disability of a primary owner. Contact your professional advisors today for help in developing such a plan.

Jim Lutz is an attorney practicing at Lewis, Rice & Fingersh with offices in Kansas City, Missouri and Overland Park. Lutz specializes in estate planning and business succession planning for small to medium-sized businesses.