As a business owner, putting plans in place in case you die, are incapacitated or want to exit is a no-brainer, but few business owners do it. By Rachel Smith
Imagine a multi-million dollar business that has no contracts in place, no continuity plan or succession plans—and no insurance. On paper, it sounds crazy that any business owner wouldn’t take care of this critical ‘business hygiene’ stuff. But it’s surprisingly common.
“It takes discipline to do it, and in my experience most businesses haven’t dealt with it,” says succession adviser Adam Smith from Succession Matters. “Business owners might say, ‘Yeah, we’ve done that stuff’, but I’ll then find out their ‘succession planning’ might be an email, a few notes on a piece of paper, or a conversation the partners had 10 years ago.”
Lawyer Sarah Bartholomeusz from You Legal adds that such planning is essential if your business has any value or if you have a business partner. “I’ve seen how much litigation can cost and how stressful it can be—you’re better off having these hard conversations up front.”
What’s a business succession plan?
A good business succession plan will consider what might happen to your business in the event of your death, incapacity, sudden exit or retirement.
“From a business perspective, it’s about making sure the business can continue with the least disruption possible,” says Smith, “and from a personal point of view, if you’re in partnership with another vet and your business is worth a million dollars, it’s about making sure that the exiting partner and their family is fairly compensated.”
As part of putting your plan together, Bartholomeusz suggests all business owners have a legal will and enduring power of attorney. “And if you’re in business with someone else, you’ll need a shareholders agreement, a unit holders agreement or a partnership agreement, depending on how your business is structured legally.”
Smith adds that you need an insurance-backed buy-sell agreement (sometimes referred to as a put and call option agreement) or a business succession agreement. “Say one of the business partners dies—the insurance that’s built into the agreement would pay out that partner’s share of the business to the spouse, and she would be required by law to give the shareholding back to the surviving business partner.”
No contracts? Here’s what can go wrong
Imagine you’re in business with another vet—and one of you is hit by a bus. You have no strategic business succession plans in place, so you may suddenly find yourself in a situation you never asked for, due to a simple lack of planning, says Bartholomeusz.
“The spouse of the vet who died might be your new business partner—and it might be too expensive to buy them out,” she explains. “This kind of thing can cost you an absolute fortune if you end up in dispute, as lawyers’ fees quickly add up.”
Smith, too, has seen a lack of business planning go horribly wrong. “You and your partner might be on the same team today but if something happens, you can very quickly be on opposite sides of the ledger—and without a legal framework in place, you’re vulnerable.”
You can’t neglect this stuff if you’re a sole owner either, adds Bartholomeusz. “If you were to die suddenly, what would happen? Would your practice manager get a locum vet in, then hire someone so your family could run the business? Or would they close the business and pay out everyone’s notice, get out of the lease, move all your customers over to other vets? Winding up a business is a lot of work and if there’s no formal plan in place, you’re leaving a nightmare for others to deal with.”
Broaching the topic with your business partner
It’s a tricky one, and there are endless reasons why business owners resist putting these plans in place, says Smith. It might be overwhelming to do, too costly, or just not a priority.
“Some business owners don’t want to have that mortality discussion, or there may be health reasons they don’t want their partner knowing about, especially if they wouldn’t qualify for insurance,” he adds. “Or maybe there are differing personalities resisting the process.”
He suggests broaching it by asking, ‘Does our business have a value?’ And if the answer is ‘yes’, asking the following: What would happen if something happened to one of us? Do we want to be in business with each other’s spouse? Do we want to make sure our families are well looked after? “It’s about looking at the big picture and getting on the same page by establishing a shared vision.”
Mapping the future: 4 essential steps
Putting a business continuity plan or succession plan in place isn’t something you can rush. Here are the steps to getting it done, says Adam Smith.
Visit your accountant. “This is the person who inherently understands your business and would be able to establish what the business is worth.”
Establish a shared vision. “Ensuring you and your business partner agree on what to do if one of you dies, chooses to leave or is forced to exit the business is essential—and a succession adviser can help get you aligned if you have different perspectives.”
Start the process. “If you’re using a succession adviser, they act almost like a project manager, facilitating the process of working with the accountant, drafting documents with the lawyer and implementing appropriate insurances where required.”
Review your plan periodically. “It’s not a set-and-forget thing; businesses change, the value goes up and down, new partners come and go so you do need to review your continuity or succession plan semi-regularly to ensure it’s still relevant to your business.”