Succession Plan

[AmyQ]

My husband and I met with our lawyer/cpa last week and he gave us some advice about forming a succession plan - a plan for what we would do in the event that my husband/head of the company died.

While not a pleasant topic, it is important for those of us who own businesses and have family/dependents or investors/partners. Our lawyer/cpa said that he has seen more thriving businesses fail from failing to have an sucession plan than from any other reason (barring forgetting that they were in the customer service business first and foremost).

Here is a summary of his advice:

1. Key man insurance - Your company should have a separate life insurance policy on you to replace you if you are key to the operation of your company. In our case, we would be able to continue to operate without my husband, but would need enough funds to hire a high level CEO for two years to get us to/take us through a liquidity event. Being able to tell our staff that we have separate funds to higher a top performer would help us retain staff, which is important during a business sale.

2. Who will inherit the company and are they able to run a business? I would receive all of my husband's equity. Our partner and investor are comfortable with this because I currently help run the company and have knowledge of our industry. However, if we both died in a plane crash, the business would go to our relatives who are not equipped nor interested in running a company. We will have to create an agreement with our investor/partner that would allow them to control the business and increase their equity (since they would be doing more work) in that event.

3. What information/processes are only known by the key man? This could be complicated things, but it could also be simple things, such as passwords. Your business could get de-railed quickly if no one has access to some fairly simple information.

4. Business bank accounts - Personal accounts allow you to designate a beneficiary if you die. Business accounts (at least at our bank) do not. You need an amended operating agreement or another signer on the account in case of death.

5. Who will have power and over what? Our partner has a relatively small equity position. On paper, I would have more power. However, he has more knowledge of our industry and I have more knowledge of operations and financial management. We sat down and discussed what each of us would handle. It was an easy discussion since neither of us were in an emotional state, but having that discussion after a tragic event would be much less productive.

Hoping that we all stay healthy and enjoy our businesses for years to come!

 

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[Michael Raphael]

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