If own a business like we do, our hats are off to you. You are a rare breed that understands that the risk of being a W-2 wage earner for someone else holds a very different type of risk than owning your own successful business. Employees can be fired – if you have a successful business based on recurring or at least repeat revenue, a lot may have to go wrong before you are out of work. As W-2 employees seem to be greater expense liabilities as they age into their 50s and 60s, you know your value to your business can be at its peak in your 50s and 60s. And, if you are lucky, when you are ready to give over the reins of the business, you will end up with a nice payout that can help provide for you and your family’s long-term needs.
But here is the key- your business probably needs you more than you want to admit at this point. And if something happens to you, will you lose it all? Here at The Planned Approach, we have more personal experience with this that we ever wanted to have, as one of our key partners faced life threatening cancer in 2016. Because we practice what we preach, we were prepared and made it through this trying time in the black. Because of this experience, we believe even more strongly in our mission, and part of that mission is helping successful business owners like you make it through as well.
The question is, can your business (aka YOU) survive a catastrophe? Are you legally prepared? Do you have a supportive team in place? Do you have ample liquidity? Do you have risk management tools in place? And worst case, do you have identified buyers who would be interested in your business as is? If the answer is yes to all of these questions, move along to our “Are You Ready to Sell Your Business” article and work toward that goal.
Still here? So is everyone else. No one has it all perfect, as it’s a process that continually needs review. Let’s start with your legal work. A catastrophe can strike at any time. This can be something external to your business or something internal to you. In either case, your legal work should be up to date and books and records should also be clean- always. Your legal work, if it hasn’t been reviewed in the past three years with your CPA and attorney, should be. For the cost of one meeting, you’ll know if you need updates, if your filings have been done correctly, and if there are changes that need to be made. Your legal work should include your operating agreement and how the business is transitioned in a crisis situation where you can’t make a decision, such as your own disability or death. It should provide guidance to your surviving partners and spouse or heirs on how to transfer the value of the business to you or your heirs. If there are no partners, it should entail how the process will work for selling the business, and who will oversee that process. This is critical for your family, but also for your employees and clients. Further, you’ll want to keep the books and records updated and reviewed in case your team needs to move quickly.
As part of that process, you also want to identify who core members of your team to run or transition the business in an emergency. You want to provide for them financially and consider giving them incentive to stay through the transition or until you are back at the helm. Clear, documented direction to those team members will go a long way towards getting through the process. You’ll want to identify outside buyers as well, as part of this step. Obviously, competitors change, and so will your business, so this list of potential buyers should be reviewed annually. It doesn’t hurt to keep up relationships with them, either. There are benefits to this for growth as well.
Liquidity is also an area that needs to be addressed as part of your risk management strategy. Most banks suggest that a business have two months of liquidity on hand at all time. We’d agree with that, and suggest more, if you possibly can. Retained earnings can go a long way to evening out bad fortune. But as a business owner, we’d suggest that you have one year of personal living expenses in cash outside of the business. Maintain your lifestyle and regular retirement savings within your normal salary range instead of counting on distributions and profit taking. That way, when you do have profit taking and distributions, you can use that to build wealth that is liquid and assessable in case your business doesn’t sell big someday.
If you are disabled, how long can your business survive? How about your family? Disability insurance for business owners is critically important. Individual disability insurance is important to your family, but not all policies are the same. They may not insure your entire income, and the definition of disability can vary greatly. Group policies can be cheaper, but as the owner, you want to make sure that the cap on the benefit isn’t going to reduce your benefit greatly. Further, if you have less than 50 employees, and you are key to the business, you may want to consider Business Overhead Insurance which can give the business income should you not be able to contribute for a time. These policies can pay a key income stream for up to two years to help the business through transition. Buy Sell Disability Insurance is designed to provide the partners or the business a lump sum in case of your disability. This lump sum buys out your share of the business in the event of your disability.
If you die, life insurance can also provide a lump sum to keep the business going and to buy you out of the business. Your family’s needs and the value of the business will help you determine how much you should get. There are many types of life insurance, so this should be considered with a specialist. With both life and disability insurance, it must coordinate with your legal work and the titling and premiums should be paid correctly.
None of this is rocket science, but it’s complicated enough that you shouldn’t go it alone and important enough that it should get 5 to 10 hours of your time each year. That’s not a lot of time to make sure that you are protected in the event of a catastrophe. We are certainly glad we did and will continue to be diligent about planning for ourselves.