Posts tagged with: contingency planning
Contingency Planning is one of those areas most business owners would rather avoid and not think about at all. Who wants to think about worst case What-If scenarios? However, what if you were to develop your contingency plans to address the worst problem or tragedy AND DOCUMENT IT. What is the immediate impact? Those documented plans immediately add value to your business. They allow you to preserve and enhance the value of your business, add security, and streamline ongoing viability, in the face of major issues.
To build a successful business that can endure, along with growing the top line, you must also plan for and have contingencies laid out for all 5 Ds that can put the entire enterprise at risk. The 5 Ds are:
It’s unavoidable. Rather than deny it, think about the consequences to the business, your team, your stakeholders and your family. You can use a range of insurance products to mitigate the risks of your death while leading your organization. Establish who pays for the various insurance products, and who owns them early. But you must also think through how to structure your buy/sell agreement and who will run the business without you. How will the business continue? Have you written down the location for all major documents and contracts? Who knows where your passwords are stored or the lock box key or the safe combination?
In addition, it’s important to keep you and your business legally separate – separate legal entities. So this discussion may include both your corporate attorney, your estate attorney and your insurance broker at the core.
Before age 65, we are all more likely to need the benefits of disability insurance than life insurance. Long before you or your executive team might need to access it, define the parameters, protection and obligations of your company disability policy. Decide early what your company must cover for disability and who is eligible. You want to avoid a knee-jerk reaction to deciding between business survival and paying an ill or handicapped owner or executive.
Director & Officer insurance is critical to securing the future of the company if something untoward were to happen to you or other board members. It is expensive but not as expensive as losing both your company and your livelihood.
Be sure you establish an employee benefits program that will handle any founder’s death, disability or retirement – even if it appears likely not to happen for another 10 years.
The costs and risks associated with building a business are high. Marriages don’t always survive. But you don’t want the demise of your (or any founder or partner’s) marriage to destroy or handicap the business too. Divorce can also be a business partnership split, which feels like a marital divorce. It is best to define your policy on share ownership, value and votes in the bylaws from the outset.
Plan for who retains ownership in the case of a breakaway, and who gets bought out/paid off. Just like a pre-nuptial agreement, lay out a memorandum of understanding before you open your doors and bring in your first sale for each scenario.
Partners have different timelines in mind for moving on to the next venture or retiring. Where does the money come from to pay off the departing partner(s)? Who will do the work to ensure business continuity? How do fairly compensate or buy out a departing partner without handicapping the business to do so? How do you make a departure amicable or avoid contention? Do you have a partners’ contract of commitment, requirements, and constraints?
Planning for your transition to reinvention takes planning from the outset. Identify all partners/founders criteria and timelines early. Document the continuity plan for the business in the case of each one moving on.
Founders and Partners in a business are like spouses in a marriage. They don’t agree on everything, nor do they need to for the business to thrive. However, major unforeseen disagreements can cause rifts in the organization that may harm the company, team, even client relationships. Spelling out a policy and procedures early, before there’s an issue, to work through critical disagreements on such decisions as: reinvesting for growth or taking dividends, how to structure benefits or taxes, when to sell, which buyer option to pursue, etc.; provides expectations and structure to be able to address and resolve these issues effectively.
No one ever wants to face death, divorce, disability, departure or disagreement as a possible risk to their business when everything is going well. Contingency planning is about making strategic decisions for eventualities that may never happen, but if they do, you are prepared. You can’t buy a house or a car without insurance coverage. Developing a contingency plan for all 5 Ds takes time. Document each element as the policy is decided and executed. That’s how you can monetize the policy and reduce the risk to business continuity when faced with any of these 5 Ds.
Ideally, exit planning occurs before action in every area.
Too often business owners/CEOs assume that because they want to exit the business soon, that they just have to act to make it happen. In fact, they are often surprised by how extensive the planning is that they must work through before they can get out and transition to reinvention.
Exit planning must include each parameter on this list.
Exit Objectives – Before you proceed, you must identify your exit objectives for the business and for your life beyond the exit.
Value Drivers – You must identify your value drivers, the value drivers that will make the business buyer attractive and the value drivers that secure the future growth of the business and protect your employees.
Transfer Control/Ownership/Management – Control, ownership and management are not the same thing. So planning how to transfer these different skill sets to successors is essential. You need to break them into distinct skill sets before you decide who you will train to succeed you in each area.
Contingency Planning – When things are running smoothly, owners think contingency planning is irrelevant. But if illness or an accident incapacitates you, your valuation will plummet unless you have a contingency plan/continuity plan established, documented and ready to activate.
Wealth Management/Preservation – You have to decide how much of the illiquid wealth of your business you want to leave in the business, to maximize valuation and secure future company success vs. how much do you need to liquidate to achieve your exit criteria and the financial freedom to pursue your reinvention.
Successful Exit – Defining and planning what a successful exit means to you is important. There is no vanilla answer. It’s unique to you, your family, your goals, your business, the lifestyle of your dreams. If you can’t describe it, you will never know when the package on the table meets your needs.
Exit Options – The earlier you start exit planning, the more options you have, the wider range of exit vehicles, wealth vehicles and reinvention options you can have.
Along the lines of ‘begin with the end in mind‘, start this new year with an eye towards identifying who will be your successor and how you will implement your succession plan – even if you anticipate it will be decades into the future.
Here’s a personal story to make my point:
At age 34, my father launched his business with two partners in 1960. The business grew to 5 locations, received many accolades, awards, interviews, etc. In 1982 my father was diagnosed with cancer. By 1984, he was too jaundiced to appear at the office or be seen by clients. That’s when he invoked the buy-out clause in their partnership agreement. He had that exit strategy established from the day they opened their doors 25 years prior when he was young and healthy.
He knew his partners would be his successors if anything unforeseen should happen and vice versa. They had structured their agreement that way from the outset. He never dreamed he would be the one to have to invoke that paragraph of their business plan. But when he needed it, he could and did. They bought him out and the business continued without a hiccup. And my father was able to secure my mother’s financial future quickly and easily.
Many if not most business owners avoid, postpone and in the end fail to plan for their business continuity in the event they can no longer work due to death or illness.
- They subscribe to the naïve theory that they’re too young to worry about succession or retiring or their exit strategy – even after age 65!
- They assume nothing will ever happen to them, they’re too healthy, to vital and too important to the business. The logic they use is: “If I don’t think about the ‘what if’s’ – they can’t happen…”
- They don’t bother to create a business succession plan to address an unanticipated event such as disability or death – which can occur any time.
Ideally, every business owner should start planning their succession, and work himself or herself out of a job from the outset, even in the business plan.
It’s never too late to start today.
With an eye for hiring, grooming and cultivating successors in various aspects of the business, you have time to instill your strengths and values wide and deep throughout the organization.
For CEOs of small and medium size businesses, the business is a primary asset they will need to liquidate to fund their retirement and provide for the financial future of their families.
If you intend to sell your business to a third party, then becoming detached from the day-to-day operations is a straightforward strategic process you need to put in motion.
As the seller, in order to maximize the value you can realize from the business and produce a financial gain, you must shift the value of the business from you personally, to the business itself. The sooner you start focusing on this long-term objective, the better the outcome for both you and the business.
Alternatively, if you wish or intend to keep the business in the family, your choices for successors can shift or be constrained by family requirements, needs and politics.
Succession planning is the responsibility of you the owner, not your management team or the next generation. You must develop your succession plan in sync with your own transition plan to balance the best interests of the company with all its employees, vendors and clients; and the requirements of you the exiting owner who needs capital to fund the rewarding lifestyle you deserve as the fruit of your labors.
Succession planning is only one piece you need in place for a strong integrated strategic plan including operations planning, transition planning and contingency planning.
Don’t start on the finish line. There are five arts to master to build wealth and exit your business. That takes time.
Strategic Planning – The Art of Direction and Decisions
Building wealth and exiting your business don’t start when you are closing in on the finish line. It’s proven that when you focus on selling your business two to five years before initiating the sales process, you will almost certainly realize a much larger return. Developing a systematic approach to growth with a focus on your long-term goals makes every decision along the way easier, even in the face of risk, incomplete information, or unexpected change.
Continuity/Succession Planning – The Art of the Changeover
A systematic approach to succession planning gives you control, choices and sufficient time to choose, train and transition management, of your business. Your job here is to maximize the value you receive when you sell or transfer your businesses. You need to identify an owner-centered approach to exit planning based on your goals, objectives and concerns.
Exit Planning – The Art of Monetizing Your Business
Exit planning for wealth is all about maximizing and preserving the transferable value of your business. It’s extremely important to integrate personal, financial and estate planning goals; and then coordinate them with the growth goals and opportunities of your business; to maximize profit and minimize tax liability on both sides. Your fiduciary objective is to transfer ownership and corporate value as profitably as possible.
Contingency Planning – The Art of Structuring Your Business For Opportunities, Possibilities And Growth
CEOs in general never take time to develop contingency plans. They are building a prosperous business not planning for a crisis or its demise. Skipping this one element of their business minimizes the value they can expect a buyer to pay for the business. You must develop those contingency plans and build the foundation elements to maximize valuation and make the business buyer ready.
Transition Planning – The Art of Reinvention
When you stop and think about it, most entrepreneurs do not measure success in terms of the financial rewards, but rather by the freedom and potential legacy that these financial rewards confer. But entrepreneurs often postpone transition planning because they struggle with how they would use their new freedom and how they want to define their legacy. You need to learn to find new purpose, community, and structure for your time; and then how to master wealth management and its new challenges and responsibilities.
Your mindset going in to exit planning is the most critical determinant of your successful outcome. There are a number of mindset factors that you must recognize and consider. Your mindset will determine your ability to set and achieve your hopes and dreams. You have to be able to recognize and adhere to the process to achieve them. Most CEOs have dreams and goals of the outcome they want from their business. Many fewer CEOs reverse engineer their goals into a timeline, process, and a sequence to get to that exit.
Challenges will occur that could derail your exit plan, guaranteed. Fighting or resisting those challenges is an unproductive waste of time and energy. Instead, install and master a mindset to address, overcome, resolve, and circumvent each challenge as it arises.
Attitudes/mindset are often ignored or minimized when exploring what we need to learn to achieve our goals and get to an exit.
Most CEOs trained to emphasize the strengths of left-brain thinking, resist addressing or developing the right-brain skill of mindset readiness. Mindset readiness requires the most time to develop and is not easily measured or demonstrated. But your mental and emotional attitudes are the most important of all learning components because your attitude/your mindset is the gatekeeper that determines how well you acquire, master and apply any other skill set and knowledge.
Entrepreneurs stubbornly adhere to tired outdated thinking which in turn sets up their business to continually struggle, not achieve its full potential and settle for selling their business for only a fraction of its worth. That downfall is totally preventable.
In the area of mindset, attitudes and beliefs, do you experience any of these? Make note of the ones that apply to you.
- Have no exit goals
- Can’t set exit goals
- Don’t know how to set exit goals
- No consensus on exit goals
- Can’t delegate/afraid to delegate
- Prisoner of the entrepreneur’s trap – Trying to wear all the hats
- Scared to grow – because of past experience, old belief systems, systems or staff that slow or prevent your growth
- Scared to share control, responsibility, ownership or profits
- Scared to lose control
- Easily distracted – by environment, people, events, equipment
- Minimal goals/easy goals/short-term goals that don’t stretch individuals or the organization – to play it safe
- No personal accountability of the leadership team/ of you
- Still running the business as an opportunist
- Resist building a strong business foundation for growth or increased value
- Ignore or deny the need for exit planning
- Ignore or deny the need for contingency planning
- Ignore or deny the need for continuity planning
- Ignore or deny the need for succession planning
- Ignore or deny the need to plan for your transition
- Ignore or deny the need to plan for your reinvention
You’ve heard the phrase:
Your attitude determines your altitude.
Your mindset is the key to everything you will achieve to exit your business when you want to. When you decide each of these elements is important enough to the business and to your future beyond the business, only then will you take action and:
- Develop the skill sets
- Acquire the necessary knowledge (direct learning or surround yourself with experts)
- Develop plans, strategies, and tactics to achieve everything you want for your business and from your business when you exit.
- Apply the discipline and leadership to accelerate growth and maximize value on your timeline.
“It’s a mindset – you’re only limited in scope by your own imagination and your ability to see through problems, challenges and roadblocks to the opportunities.”
Whether you address it from the outset of your business or later down the road, every business owner needs an exit plan. Some business owners intend to sell the business for maximum profit, some want to sell it to successors or employees, others want to go public, and still others intend to keep it in the family.
In each case, taking the time to prepare the exit plan now will allow you, the owner to reach your ultimate goal with a comprehensive 360 view with all the pieces in place. Business-owner exit planning should begin five to 10 years before you want to retire or pass your business to your chosen successors.
Unfortunately, 95% of all business owners NEVER do exit planning. And they wonder why they end up with nothing when, on the day they get fed up and want to sell it as fast as they can; they accept the first offer they receive – at a discount of 30-50%.
That doesn’t have to be you.
Plenty of expert advisors will tell you that exit planning starts with your exit objectives and the retirement income you want to have – because that’s where they start working with clients.
There are a few other pieces you need to define BEFORE you can answer those two questions. They are core pieces of having a strong business foundation long before you consider implementing any exit strategy.
Before you can define your exit objectives, you must identify:
1. Your long-term ultimate goals for the business – with you or without you
2. How you want to secure your legacy now, before you leave
3. How you want to ensure your dynasty once you exit the business
4. Who you want to take leadership of your business (as owner, non-owner manager, or transition staff)
What still needs to be done in terms of business planning, contingency planning, and succession planning to position the business for maximum growth and value? Work on that planning first, as a prerequisite to detailed exit planning.
You may have multiple exit objectives. Be sure they are consistent. Then prioritize the outcomes. Selling fast, selling for maximum value and selling for 100% cash up front can be conflicting goals.
As part of your transition planning process, when you define what your next step will be after you exit, you’ll get a better idea of how much funding you need: for a new venture, to invest or for philanthropy; not just your personal retirement income. You’ll also get clear on your goal timeline and your options for what format the transaction can take.
The lifestyle you intend to pursue after the exit may expand or restrict the exit options you consider.
‘You don’t have to have a plan today.
You do have to start planning today.”
The more lead time you invest in building a strong business to achieve your ultimate goals, the more fruitful and fulfilling will be the exit strategy you can choose to implement.
Working in a vacuum, the assumption is that Exit Strategies Are Difficult.
Most CEOS assume exit strategies are difficult. That assumption discourages anyone who is considering an exit from getting started early.
As the CEO of your growing enterprise, it’s easy to be so consumed with the day-to-day operations of the business, that you never find time to think about your exit strategy (knowing it is going to be difficult). So naturally, it simply gets shuffled to the bottom of your TODO list and never rises to the critical path until it’s too late.
You can minimize how difficult your exit is by being proactive, starting early and committing to the bigger plan to achieve your ultimate goal. As a discerning entrepreneur, you know your business is your largest asset that you need to monetize if you are going to secure your reinvention (fka retirement).
Exit planning requires numerous conversations and then an integration of solutions in all the following areas:
- Peak performance
- Succession planning
- Contingency and continuity planning for management and leadership transition
- Business valuation strategies to make the business buyer attractive and buyer ready
- Transition planning to your reinvention (fka retirement)
- Tax planning for both the business and the CEO
- Estate planning goals and options from wealth advisors and insurance advisors
- Deal structure options both legally and financially
Your exit strategy will be specific to you, your business, your timeline and your goals.
- There is no ‘cookie-cutter’ approach.
- It doesn’t happen overnight.
The difficulty in exit strategies comes from the multitude of possibilities and recombinations you have to explore and choose from. That’s also where the fun and freedom come from.