by Noah B. Rosenfarb, an EO South Florida member and Founder of Freedom Business Advisors
Take a second to envision what would occur in your company if you could never communicate with your team again. What would happen if you didn’t show up for work? If tragedy struck, how would your business and family cope? Disability and death aren’t the stuff we want to think about, but the truth is bad things happen. Unfortunately, 100% of entrepreneurs die. While chaos is unavoidable, here are some things I always consider should something happen to me or my clients.
Who’s Going to Run the Place?
Whether it’s making payroll or deciding on compensation and capital projects, someone on your staff has to have the authority to make decisions. A “Continuity of Operations Plan” addresses these issues and more. Beyond being able to use it in an emergency, this type of plan can serve as a roadmap for who you should be training to take over critical responsibilities as your business grows.
Your New Owner is….
Most of the time, I see the ownership of a business transfer to a family member or a trust for the benefit of the family. All too often, these people have no experience acting as an owner. They don’t know if they should sell the company or continue to own it, either. For one of my businesses, I structured an agreement where a trusted competitor will pay my wife a price that makes it a great deal for them and fair enough for her. While my wife knows many of my clients, she doesn’t have the technical expertise or licensing to own and operate the company. By implementing a buy/sell provision in my operating agreement, I can enable an existing owner to purchase the ownership at a predetermined price.
Don’t Spook the Herd
You won’t imagine things I’ve heard after a surprise heart attack had an owner incapacitated in the hospital. Rumors abounded both in the office and with customers—the son was taking over, the dad was selling, the management team was going to run it—and everyone thought something different. But the one thing nearly every employee had in common that day was that they were open to leaving the company for a competitor because they just didn’t know what was going to happen. This can be avoided if you have a written “Continuity Story,” a game plan for who calls whom and what they should say if something happens to you.
Keep Your Talent
When a local marketing firm owner was putting his plans in place, we structured a stay bonus to reward loyalty. Funded by US$900,000 in life insurance that only cost US$4,500 a year, a pool of cash would be created if the owner died. That pool would pay out US$150,000 each quarter for six consecutive quarters to those employees that remained (based on a pro-rata percentage of total compensation paid). Since everyone is aware of this, should something happen to the owner the team is motivated to stick around to earn the bonuses.
Cash is King
Most EOers derive the majority of their income from their efforts and have the bulk of their net worth tied up in their companies. How would your cash flow and net worth be impacted if tragedy struck you? After years of being “begged” by his close friend, an EO member I knew purchased US$6 million worth of life insurance and, sadly, died in an accident two weeks later. When the agent delivered the check, the wife was crying tears of gratitude that this friend never gave up asking the EO member to protect his family. She knew she would face many challenges in her new life, but was relieved knowing that money was not going to be one of them.
All of us should have a plan to protect, grow and transfer our business that ties into our financial and estate plan. We may rightfully focus on growth for the goal of increased profits, but EO’s values remind us to “make a mark” and leave a legacy. Protecting what we build is a sure way to do just that.
Noah B. Rosenfarb, CPA, (pictured) is an EO South Florida member with a long history of advising entrepreneurs on their investments. Contact Noah at [email protected].