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CONTINUITY PLANNING: IS YOUR COMPANY
READY FOR THE UNEXPECTED?
By Mike Specht and Paul Batt
The tragedy of 911 confirms that anything can happen. We know
that it is impossible to prevent certain events from taking
place. However, one can be ready for the unexpected. If a
business is not prepared, how would unexpected death or disability
of an owner affect the business?
There are three events that a business owner could face that
may cause the business to close its doors, and they include
death, disability and retirement. Upon the business owner's
death, disability or retirement, the business may be continued,
sold or liquidated. A well-written succession plan will deal
with the retirement of the owner, while a well-structured
and properly funded continuity plan will assist in the difficult
transition that is usually involved with the unexpected loss
of an owner due to dearth or disability. This article will
focus on continuity planning.
A continuity plan should provide answers
to the following questions:
Do I know the value of my company?
There are many reasons why the owner of a closely held business
should know the value of his or her company. Aside from valuing
the business for estate planning and loan purposes, a valuation
will help in establishing a price for the business when it
is sold upon the death or disability of an owner.
Do I have a properly funded buy-sell
agreement?
What is a buy-sell agreement? A buy-sell agreement is simply
a legal agreement that is established to facilitate the transfer
of ownership in the event of the death or disability of an
owner. A properly funded buy-sell agreement will provide the
parties involved with the financing needed to complete the
disposition of business interest upon the death or disability
of an owner.
Is the heir capable of producing
the same results?
Will the replacement(s) in the business be capable and available
to continue the business upon the unexpected dearth or disability
of an owner? This person or persons could be a key employee
or family member. Regardless of who the person is, their expectations
should be realistic as to their abilities and commitment of
providing the same results.
Could profits be withdrawn from the
company for the family on a tax-favorable basis?
As long as the business is a corporation, payment of a salary
to the stockholder-employee may be considered a deductible
expense. However, these same payments to a surviving spouse
may be characterized as non-deductible dividends.
These are just some of the questions that continuity planning
should be able to answer. A properly structured continuity
plan that is adequately funded can be the difference between
a business surviving and not surviving the loss of an owner.
Let's face it, the loss of an owner is a traumatic experience.
The lack of a plan and funding will make a difficult event
even more challenging. If there is no plan in place, how
will the organization deal with such an event? If there
is no funding in place, how will the firm meet its financial
obligations? If there aren't answers to these questions,
the heirs, partners and business will be facing an up hill
battle in continuing the business.
Most contractors have bonding and banking partners. A company's
ability to meet the challenges brought on by the loss of
an owner, will be reflected in the firm's financial statement.
Can the company continue to be profitable? Is there adequate
funding in place to purchase the shares of a deceased or
disabled owner? The surety and bank will be forced to react
to any decrease in the firm's financial condition that is
caused by a lack of profitability and/or new debt obligations.
Will the business be able to survive with the reduced bonding
and banking capacity?
If a business doesn't have a formal continuity plan in
place and/or it isn't adequately funded, the heirs, partners
and business are at risk. To protect them, one should take
the time to visit with a financial advisor about continuity
planning. It is critical to be proactive and get prepared
for the unexpected.
Mike Specht is vice president
of the Bond Department at Minard-Ames Insurance Group, and
Paul K. Batt, CFS, CLU, is director of the Financial Services
Division of Minard-Ames Insurance Group
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