When business owners begin succession planning for the future of their companies, it is important to consider what strategies need to be prepared in the event you must transfer ownership of your business due to one of the five Ds. Knowing these and having a plan in place for each can ensure that your business is prepared for successful transitions, no matter what the cause:
Death. If you, another owner, or key stakeholder of your business were to die unexpectedly, what would happen to your business? Is there a succession plan in place? Are your wishes for the future direction of the company documented and communicated to key leaders? Planning for death may seem macabre but requires your family, management team, and ownership to understand and be prepared in case the unthinkable happens. There are financial issues, such as loans, life insurance, and testamentary issues to consider. Business obligations need to be spelled out, too, to ensure a smooth transition in the face of tragedy.
Disability. Crippling personal disabilities can have a devastating effect on a business. If you are no longer able to complete daily business operations due to a new, or worsening, disability, there needs to be proper accommodations in place. It’s also wise to have a power of attorney in place that allows others to make financial and medical decisions on your behalf if you are unable to do so. Financial documents, legal documents, and passwords may need to be located to allow access to applications, financial holdings, and other sensitive materials. Planning in this case also means having clear language for who can vote on your behalf and what events may trigger a sale of your shares in the company.
Divorce. The end of a marriage can be traumatic for everyone involved. When one or both spouses have an ownership or leadership stake in a business, things can get complicated quickly. Prenuptial agreements can help mitigate some of the issues if decisions regarding the business impact are spelled out in advance. Decisions need to be made about the distribution of shares, if there is a liquidity issue, and how financial issues related to the dissolution of a marriage may impact the business. These issues arise not only for the owners, but in family-run businesses it can become an issue if divorces arise in younger generations. While prenups are useful, they are not a guarantee that ownership issues will not change as a result of divorce proceedings. Proper succession planning should be accounted for in the result of a divorce.
Disagreement. Business partnerships are typically built on a shared visions and goals. However, things can change, and disagreements at an ownership level can have serious consequences on a business, especially when there’s a desire for an exit from one or both parties. Family-run businesses can also face disagreements as more family members join the company, especially when there are assets to be transferred or leadership positions to be filled. It’s crucial to have defined termination and transitions plans in the event a disagreement leads to the exit of one or multiple owners or key stakeholders.
Distress. Natural disasters and other business interruptions such as cyberattacks can derail even the best of companies. In the past year, the pandemic has meant other stressors, such as health considerations for the workplace, remote work, and supply chain disruptions. Prevention management, contingency planning, insurance coverage, and sound risk reduction policies are the best way to prepare your business for what may lie ahead incase heightened distress leads you to exit your business.
While the five Ds are not pleasant issues to consider, they’re critical for your business. Addressing these issues before they occur is essential and requires strong communication, transparency, and ownership transition planning expertise. At Prometis Partners, we help companies manage the complexities of succession planning to ensure that everyone knows the course of action when difficulties occur. To learn more about our business succession planning services, contact us today.