It’s likely the hardest thing to admit, but each one of us has an expiration date. Unfortunately, we don’t get to pick when it happens. If you own a business, an untimely death can devastate the number one asset you have created for yourself.
When my mom died in 1987, her passing began an unexpected trail of events that resulted in my father becoming bankrupt four short years later. The stress of running a business is hard enough but imagine yourself in my father’s shoes. You have a business to run daily and when you come home at night you must manage two young kids – ALONE. My father was just like every other business owner. Living life, but never thought these events would happen to him.
Over half of business exits are unexpected. Read that sentence again slowly. The reason more than 50% of businesses fail or end is because of an event that no one saw coming. When you break down the cause of these unexpected exits, an untimely death tops the list of causes. Wouldn’t it be foolish to lose the most beneficial thing you’ve created because you think you are invincible to circumstances? The cost of planning is time and money, but the cost of ignoring this issue for most owners is devastating. We always underestimate the difficulty we will face in having to make hard decisions in the middle of grief.
When creating a plan to address an unexpected death, there are at least three ways that an unexpected death can cause your business to fail. Most owners fail to recognize the first two when they begin their planning.
The first is the death of a key partner inside your business. We often don’t realize how important these people are to our day‑to‑day business activities, until they are gone. I can think of at least three people in my business that would cause major disruptions if they couldn’t come to work any longer. How many of these people exist in yours? If they are no longer here, who would do their work? How would you replace them?
I have found it valuable to run a “lifeboat drill” on my business at least annually. Take a look at all of the work done around your business. If one person was lost, who would continue the work in their place? What would get missed? Are there systems written so the work could continue?
Systems are a great start, but there will also be a financial setback related to losing a key partner. It’s important that businesses own life insurance and disability policies on those key players. It may be just the thing you need to protect yourself and bridge the gap, so you have time to grieve and consider how to make your next moves.
The second is the death of a spouse. My dad had to become Mary Poppins overnight. He had to divide his attention between the business and home, and many days it was hard to choose which one needed the majority of his attention.
What my dad was missing was a life insurance policy on my mom. When she died, he didn’t have extra funds to help with the unexpected medical bills. He didn’t have any extra money to hire help to cover the work my mom was doing at home to raise kids of 13 and 6 years of age. He didn’t have any extra money to cover the lost income for the times he couldn’t be at work because he was managing his grief as well as the grief of his children.
No amount of money could replace my mother, but the proceeds could have provided a reprieve in the middle of the chaos. As owners we often underestimate how lonely our lives are, but the devastating cocktail of managing loneliness and grief for yourself, your children and your employees is unsurmountable without some assistance. I have no doubt that any amount of life insurance from my mother’s death would have saved my father from his bankruptcy.
The most obvious death owners think about is their own. It’s also the easiest to ignore, because, if we are honest, we won’t be here to deal with it. Although you won’t personally experience the devastation, the greatest way you can show love to those left behind is by having the right documents and instruments in place to take care of this unfortunate scenario.
As my company has grown, I’ve personally been putting a lot of thought into how to help my own company deal with this potential outcome. My leadership team and I began by laying out the framework of an operating agreement. This agreement gives details on how leadership should be structured if I am no longer here or able to fulfill my duties. I’ve also used this document to give instructions to those who are left behind to lead the company.
In addition, we have structured a well-designed buy-sell agreement to help the business keep running. My agreement, like most, is funded with life insurance to allow my wife and children to get cash out of the business while also providing some ownership to the leadership that will keep the company running.
However you choose to protect your business, I encourage you to see this through to its completion. I’ve known too many situations where the owner had good intentions and never finished putting everything in place. The affect was more devastating because those around the owner just assumed it was completed only to realize nothing had been done.
I know from experience, talking about these topics is never fun. I also know the unfortunate consequences of what it looks like to ignore these topics. Facing potential pain is never easy. However, on the other side of pain sits confidence and clarity. I challenge you to face the pain today so that your family and business has the confidence and clarity to keep pushing forward should the unexpected happen.
At Paradiem, we have discovered that financial success has the potential to create legacies that fail. Most professionals do a great job helping business owners create great tax, business and estate plans that are ultimately horrible family plans. Our experience is that beginning with a different perspective, creates outcomes beyond anything your current professionals have helped you develop. I encourage you to get a copy of our whitepaper, “Are there unintended consequences hidden inside your current estate or business plans?” If you would like a copy, email [email protected] with the subject “Unintended Consequences” or give us a call at (985) 727-0770.