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Copyright 2014 Rick Fulton, LLC. All rights reserved worldwide. No part of this work may be reprinted, copied, reproduced, or transmitted in any form or by any means without the prior written permission of the author. Disclosure. This material is provided for educational and informative purposes only. This information does NOT constitute legal advice, and should not be construed as such. I highly advise you to consult with a competent legal professional before implementing any of the advice, ideas or strategies contained in this document.
Copyright 2014 – Rick Fulton, LLC | www.RickFulton.com | 732-‐389-‐0313 2
A Business Owner’s Worst Nightmare! Before we get started… I want to point out this information is not about “Business Continuity” as it pertains to potential business disasters like floods, hurricanes, power outages, etc. While planning for these types of business interruptions is important, it is not the focus for this document. Our focus is going to be on how to protect and maximize the value of your business when the unexpected happens to you (the business owner)… death, disability and everything in-‐between! I know you are busy and have a business to run, but I urge you to take the time to carefully read this information. There is no fluff. I tried to make this document as concise and informative as possible. It is very important you take action on the steps we discuss in this document to protect your family, your business, and your legacy in the event your exit from your business is “unplanned”. Here’s what I mean… While Paul Simon told us there were 50 Ways to Leave Your Lover, there are essentially only two ways to leave your business. One way is a “planned exit”, the other is an “unplanned exit”. When most business owners think about leaving or transitioning from their business, they imagine one day selling the business for a pile of money and walking off into the sunset without a care in the world. Or maybe handing the keys off to the children, knowing they have provided their family a wealth vehicle for generations to come. Life is good. What??? Do you really think it will be that easy? Well it’s not, but let’s daydream for a minute and assume it is that easy. This kind of exit is called a “planned exit”. You decide ahead of time how and when you want to transition from your business -‐ you plan for it.
Copyright 2014 – Rick Fulton, LLC | www.RickFulton.com | 732-‐389-‐0313 3
Unfortunately, there is another type of exit, an “unplanned exit”. While a “planned exit” can be extremely challenging even for the best prepared business owner, an “unplanned exit” could quite possibly be a business owner's worst nightmare. Why… Nobody expects it. I don’t think it is going to happen to me. And I’m sure you don’t think it will happen to you. But it happens everyday. It’s sad. It’s heartbreaking. It destroys businesses. It tears families apart. And not to plan for it, is just plain dumb. It really is. Especially when your business is probably the biggest asset you have. In fact, planning for the unexpected is so important, it is one of the first things I tell new clients they must do immediately. This is definitely not one of those “I’ll worry about it later” things. You can't buy insurance on a burning building! Bottom line? You can’t predict misfortune… but you certainly can and should plan for it! It doesn’t matter how big, or how small your business is. Where you’re located. What industry you are in, or how many employees you have. If you own a business, you must have a business continuity plan. What’s a “Business Continuity Plan”? It is nothing more than a plan that tells the owner’s family, heirs, and advisors what the owner would like them to do with the business in the event the owner cannot do it themselves. Here are the 5 essential “Silver Bullets” that every business continuity plan should have. It’s not really that hard or complicated. Hopefully this will get you started. If you get stuck or need help, please give me a call at 732-‐389-‐0313 or email me at [email protected].
Copyright 2014 – Rick Fulton, LLC | www.RickFulton.com | 732-‐389-‐0313 4
Silver Bullet #1: Get It In Writing Your Business Continuity Plan could be the most important document in your business. So it needs to be in writing, fully spelled out. Unfortunately, the overwhelming majority of business owners do not have a business continuity plan of any kind. Nada. Nothing. Zip. Every so often, I will encounter a business owner who has thought about an exit plan and briefly “discussed” what should be done upon their death or disability with their spouse, family, partners or advisors. While this is better than nothing, it is very important to put your complete wishes in writing so there are no misunderstandings as to your true intentions. I can’t tell you how many times I have sat in a conference room listening to family members, senior management, and advisors argue about what the deceased or disabled business owner wanted. They just can’t seem to agree about anything! Your plan should be as detailed as possible, but at a minimum it should provide answers to basic, but very important, questions such as…
• Who should run the business? • Who controls the checkbook? • Should the business be sold (if so, to whom), continued, or liquidated? • Who should the business heirs or family consult with moving forward?
The most important advice I can give you is not to procrastinate. As Nike has reminded us a million times... Just Do It! To help you get moving in the right direction, I have included a SAMPLE Business Continuity plan at the end to give you an idea of what it should look like. Obviously, you need to customize it to your particular situation. I highly advise you to engage a competent attorney to assist you. Silver Bullet #2: Who’s in Charge? Avoiding disruption in a closely held business is critical – the disruption begins 10 minutes after an owner unexpectedly dies or is disabled and goes straight downhill from there. The balance of power in entrepreneurial and/or family run businesses is often very fragile.
Copyright 2014 – Rick Fulton, LLC | www.RickFulton.com | 732-‐389-‐0313 5
I recently was hired to help a business that had fallen on hard times less than a year after the owner had suffered early onset Alzheimer’s. To protect his privacy, let’s call him John (not his real name). John is no longer able to make even the simplest business decisions and will need enhanced care for the rest of his life. Unfortunately, at about the same time, his wife contracted cancer and is facing a very scary future herself while trying to care for her sick husband. It can’t get much worse. Their accountant recommended they sell their multi-‐million dollar business ASAP and build a cash reserve to use to fund their care as they move forward. Their children, who work in the business, had other ideas. As their father’s disease became progressively worse, the kids grabbed control of the business and proceeded to “run it” as they personally saw fit. After spending just a few days in the business, it was very clear to me it was doomed. As I quickly scanned the updated YTD profit & loss statement, I saw sales were down a whopping 38% after just 7 months. Employees were leaving. Vendors were not getting paid. There were almost no new sales and existing customers were leaving in droves. The place was in turmoil. After 22 years of hard work, John's dream was going to end badly. Working with the company attorney and CPA, we quickly found a buyer willing to pay a fair price and all cash. It was a great deal. There was just one problem… the kids! They did not want to sell. They knew the business (or so they thought!) They needed jobs. They needed health insurance. They did not want to go to work for someone else. They liked coming in when they wanted. And leaving when they wanted.
Copyright 2014 – Rick Fulton, LLC | www.RickFulton.com | 732-‐389-‐0313 6
And now they didn’t even have a father to yell at them! As I write this, the kids have convinced (blackmailed?) their mother into keeping the business with the veiled threat she will never see her grandkids otherwise. You can’t make this stuff up. The pile of unpaid bills continues to grow. Sales continue to drop. Their attorney is ready to quit. Of course, I hope they make it. But I know they won’t. John’s 22 years of hard work is going to slip away. I suspect as the business continues its freefall, it will eventually be sold to a competitor for “pennies on the dollar” with some sort of earn-‐out. Or maybe just close the business with John's estate still liable for his personal guarantees on some of the loans. Not good at all. John and his wife will be in significant financial distress the rest of their lives. And the kids will be looking for new jobs. As you can see, the loss of the company leader often leads to a void that results in power struggles, employee turnover, managerial mistakes, lost customers, and ultimately lost profits. Don't let this happen to you! I urge you to make completing your Business Continuity Plan a priority this week. Silver Bullet #3: Let Everyone Know A Plan Does Exit Not only is it important to put your business continuity plan in writing, you should also communicate to your family and heirs that a plan does exist. It might not be important (or wise!) to divulge every detail in your plan to family members or employees, but they should know that there is a solid plan in place in case the unexpected does indeed happen. It is also important to meet with your advisors to discuss your plan and ask for their suggestions and/or help.
Copyright 2014 – Rick Fulton, LLC | www.RickFulton.com | 732-‐389-‐0313 7
Silver Bullet #4: Steady At The Helm When a business owner suddenly dies or becomes disabled, even the best-‐managed companies can quickly begin to unravel. Your job as the owner is to make sure that doesn’t happen by having a written business continuity plan in place. You can’t blame employees for worrying about their own future as well as the future of the business. With their own families and future to worry about, employees often leave at alarming rates. One of the first and most important things that must be done is keeping your employees motivated and “on task” during transition periods. Your Business Continuity Plan should make provisions to:
• Motivate key employees to increase the company’s sales and cash flow (or at least maintain them) during the period leading up to a sale or transition to new owners.
• Keep key employees on board before, during, and after the transition if needed. The best way to do that is with what is known as a “stay bonus”. A typical stay bonus plan is written, funded, and provides an incentive for your top employees to stay on during the transition, keep profits flowing, and to reward them when the business is sold or the transition plan is completed. The bonus should be substantial, definite, and in writing. It could be cash bonuses, partial ownership, etc. and should be tied to the company profitability and continued success. It is imperative that your intentions, specifically the stay bonus plan, is clearly communicated to all employees as soon as possible after a triggering event occurs such as your death or disability. You do not want your employees even thinking about leaving! Funding the Stay Bonus Typically, a stay bonus upon the death of an owner is funded with life insurance. You should work closely with an insurance professional to ensure the proper type (usually term insurance), amount, and in which entity (the client, a trust, or business) is best. Just know owning an insurance policy in the wrong entity can have serious tax consequences. Double-‐check and make sure your strategy is right for you. The funding for the disability of an owner is more complicated, but can be solved with the right strategies.
Copyright 2014 – Rick Fulton, LLC | www.RickFulton.com | 732-‐389-‐0313 8
Most business owners understand how a personal disability policy can help them and their family receive payments based on the business owner’s disability. It’s good to have and is relatively cheap. You should have it. A typical disability income insurance policy normally pays a percentage of the owner’s regular monthly salary directly to him or her until they overcome the disability or attain a certain age, usually at age 65. But what about disability insurance for the business itself? There is a little known type of policy called “disability overhead protection insurance” that is for the benefit of the business, not the disabled owner’s family. The insurance benefits are used by the company to replace lost cash flow due to the absence of the owner. Because of the expense and risk involved, it is recommended most business owner’s self insure for short-‐term disability (90 – 180 days), but do NOT self insure for long term disability which is usually very cost effective considering the possible long term cost of not having it. Silver Bullet #5: Shareholder Buy-Sell Agreement I have found most companies that have multiple shareholders already have an agreement in place that defines the death of a shareholder as a triggering event and often purchase life insurance in order to fund the redemption or purchase the deceased shareholder’s stock. Notice, I said most. If you do have partners and/or shareholders and don’t have a Buy-‐Sell Agreement, stop what you are doing and call your lawyer right now. Seriously. I’m not kidding. If you do have a Buy-‐Sell agreement in place, make sure it has been recently updated. An out-‐of-‐date Buy-‐Sell agreement could be worse than no agreement at all. A good Buy-‐Sell agreement should be designed to handle the unhappiness that can arise when any of the following events happen to a major shareholder of a closely held company:
• Death of a shareholder • Disability of a shareholder • Divorce of a shareholder • Bankruptcy of a shareholder • Sale of part or all of the company to a third party • Retirement of a shareholder • Involuntary termination of a shareholder • Business dispute among shareholders • Incarceration or criminal conviction of a shareholder
Copyright 2014 – Rick Fulton, LLC | www.RickFulton.com | 732-‐389-‐0313 9
Unfortunately, most Buy-‐Sell agreements do NOT consider a long-‐term disability as a triggering event. This can cause serious problems for any business and should be addressed immediately. All buy-‐sell agreements should include a provision that defines long-‐term disability as a triggering event for the purchase or redemption of the disabled shareholder’s stock. Using a long-‐term disability insurance policy is a good way to fund this provision. While these all seem like pretty basic provisions, you would be surprised at some of the agreements I see. I often get asked how much it costs to put a Business Continuity Plan in place. Obviously, that depends on your situation. A sole owner business with 20 employees probably will be easier to set-‐up than a business with 4 partners, 5,000 employees, and complicated shareholder buyout agreements. Just know this... The costs of setting up the plan for your business are an investment you hope will be wasted with God’s grace, but can and does provide a "security blanket" to your family and your business should you become disabled or die unexpectedly. Here's the thing... You think nothing about paying thousands of dollars for car insurance year after year, right? For what? A depreciating pile of metal! Why would you even hesitant to spend a few hours and a few dollars to insure the biggest asset you have, protect the family you love and continue the business you have worked all your life to build? Your family is counting on you. Your business is counting on you. Your legacy is counting on you. Thanks!
P.S. -‐ I show business owners how to maximize and protect the value of their businesses by helping them develop & execute a comprehensive exit plan that enables them to leave their businesses on their terms and their schedules. If you would like help implementing an exit plan for your business, please contact me at 732-‐389-‐0313 or by email at [email protected].
Copyright 2014 – Rick Fulton, LLC | www.RickFulton.com | 732-‐389-‐0313 10
SAMPLE
Business Continuity Instructions
Business Continuity Instructions for: ______________________________________________________________ Upon my death or permanent disability, the following people are to be given responsibility to continue and supervise the following activities: Day-to-Day Executive Management: ____________________________________________________________ How should this person(s) be compensated for their time & commitment to continue working until the business is transferred or liquidated? ________________________________________________________________________________________________________ ________________________________________________________________________________________________________ Should this person(s) be paid a “Stay Bonus” if they stay and assist the company through its transition? If yes, how much and how should it be funded? ________________________________________________________________________________________________________ ________________________________________________________________________________________________________ ________________________________________________________________________________________________________ Financial Decisions: _______________________________________________________________________________ How should this person(s) be compensated for their time & commitment to continue working until the business is transferred or liquidated? _________________________________________________________________________________________________________ _________________________________________________________________________________________________________ Should this person(s) be paid a “Stay Bonus” if they stay and assist the company through its transition? If yes, how much and how should it be funded? _________________________________________________________________________________________________________ _________________________________________________________________________________________________________ _________________________________________________________________________________________________________
Copyright 2014 – Rick Fulton, LLC | www.RickFulton.com | 732-‐389-‐0313 11
Internal Administration / Operations: _________________________________________________________ How should this person(s) be compensated for their time & commitment to continue working until the business is transferred or liquidated? _________________________________________________________________________________________________________ _________________________________________________________________________________________________________ Should this person(s) be paid a “Stay Bonus” if they stay and assist the company through its transition? If yes, how much and how should it be funded? _________________________________________________________________________________________________________ _________________________________________________________________________________________________________ _________________________________________________________________________________________________________ Upon my death or permanent disability, the business should be: ____ Sold to an outside third party. ____ Sold to employees, specifically _________________________________________________________________ ____ Sold to other partners, specifically ____________________________________________________________ ____ Transferred to family members, specifically _________________________________________________ ____ Continued ____ Liquidated Notes: _________________________________________________________________________________________________ _________________________________________________________________________________________________________ _________________________________________________________________________________________________________ _________________________________________________________________________________________________________ _________________________________________________________________________________________________________ _________________________________________________________________________________________________________ _________________________________________________________________________________________________________
Copyright 2014 – Rick Fulton, LLC | www.RickFulton.com | 732-‐389-‐0313 12
In the scenario I have chosen above, the following professional advisors are to be consulted: Name: _________________________________________________________________________________________________ Type of Advisor: _____________________________________________________________________________________ Contact Information: ________________________________________________________________________________ Name: _________________________________________________________________________________________________ Type of Advisor: _____________________________________________________________________________________ Contact Information: ________________________________________________________________________________ Name: _________________________________________________________________________________________________ Type of Advisor: _____________________________________________________________________________________ Contact Information: ________________________________________________________________________________ Name: _________________________________________________________________________________________________ Type of Advisor: _____________________________________________________________________________________ Contact Information: ________________________________________________________________________________ Notes: _________________________________________________________________________________________________ _________________________________________________________________________________________________________ _________________________________________________________________________________________________________ _________________________________________________________________________________________________________ _________________________________________________________________________________________________________ _________________________________________________________________________________________________________ _________________________________________________________________________________________________________
Copyright 2014 – Rick Fulton, LLC | www.RickFulton.com | 732-‐389-‐0313 13
If I have chosen to sell the business to a third party, here are the names of possible buyers who have expressed an interest or whom I believe would be interested in acquiring the business: Name: ________________________________________________________________________________________ Business: _____________________________________________________________________________________ Comments: ___________________________________________________________________________________ Name: _________________________________________________________________________________________ Business: _____________________________________________________________________________________ Comments: ___________________________________________________________________________________ Name: _________________________________________________________________________________________ Business: _____________________________________________________________________________________ Comments: ___________________________________________________________________________________ Name: _________________________________________________________________________________________ Business: _____________________________________________________________________________________ Comments:____________________________________________________________________________________ In addition, here are people and/or other companies I would prefer NOT to buy the business unless there are no other alternatives: Name: _________________________________________________________________________________________ Business: _____________________________________________________________________________________ Comments: ___________________________________________________________________________________ Name: _________________________________________________________________________________________ Business: _____________________________________________________________________________________ Comments: ___________________________________________________________________________________
Copyright 2014 – Rick Fulton, LLC | www.RickFulton.com | 732-‐389-‐0313 14
My primary goal for the business upon my death or permanent disability that prevents me from managing and supervising the business is: _________________________________________________________________________________________________________ _________________________________________________________________________________________________________ _________________________________________________________________________________________________________ _________________________________________________________________________________________________________ _________________________________________________________________________________________________________ _________________________________________________________________________________________________________ _________________________________________________________________________________________________________ In addition to my primary goal, my secondary goals are:
1. _________________________________________________________________________________________
2. _________________________________________________________________________________________
3. _________________________________________________________________________________________ Sincerely, Name: ___________________________________________ Date: ________________________ Signature: _______________________________________ Witness: __________________________________________ Date: ________________________ Signature: ________________________________________