Family businesses are typically operated by a principal shareholder whose involvement may be extensive. Should that principal be lost to death or disability, the main priorities become continuing profitable operations and maintaining the company’s value.
Will your business continue to prosper in the event of your death or disability? Your answers to the following questions may clarify this important issue.
- Who will vote your shares upon your loss to the business? How will those voting rights pass?
- Who will replace you on the board of directors, and how will that be accomplished?
- If you are the sole director, are there formal provisions for the election of a full board?
- Who will succeed you as chief executive or president?
- How will your successor be compensated? If successor owners choose to sell, have you made provisions for stay and deal incentives?
- Have you made stay incentive provisions for other key executives and employees?
- Given that your loss may have adverse consequences on loan agreements and other contracts, have you reviewed them for that possibility?
- Specifically, will your death or disability adversely impact terms of loans or lines of credit?
- How, if at all, will your loss affect pending transactions or negotiations?
- Will your business’s cash needs change in the event of your loss? Have you made provisions for this eventuality?
- Similarly, have you considered the same questions with respect to your and/or your family’s cash needs?
These questions merely scratch the surface. Other critical considerations include who should receive beneficial ownership, their attendant rights and restrictions (if any), and, importantly, how your business might be sold in a way that captures its full and fair value should a sale be necessary.
If you can’t answer the above questions or if most of your answers are unfavorable, it’s time to develop a Business Continuation Plan with guidance from your attorney, CPA, valuation expert, and other appropriate professionals.
A well-crafted Business Continuation Plan will greatly increase the probability that your business will continue to thrive and maintain its value for months…or years…to come.
Failing to plan is planning to fail.
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