The business community has certainly felt the impact of the pandemic — so much so that the number of active business owners fell by 3.3 million between February and April 2020. That’s a 22% decline, the largest on record. Small businesses were hit the hardest, but nearly half have said they’re now taking steps to stay in business. Some found new revenue streams, while others could leverage technology to bring the shopping experience to customers. New safety measures, contactless deliveries, and BOPIS (buy online, pickup in-store) have also proven beneficial.
Take Katie’s Pizza & Pasta Osteria, for example. When indoor dining was restricted, the family-owned and operated restaurant turned to curbside pickup like many other restaurants. It also started offering frozen pizzas. Eventually, its owners were able to deliver products across the country. Talk about an innovative pivot to not just survive — but thrive.
How to best manage organizational changes is top of mind (and will be for a while), but it isn’t the only concern for today’s business owners. The pandemic has also made them question what would happen to their business should they fall ill. Only 30% of family businesses survive into the second generation, so this worry isn’t unfounded. Though it’s not easy to think about, now is the time to ask yourself whether you’ve done everything necessary to prepare your business for success after you’re gone.
How to Prepare Your Business for Tomorrow
A lot goes into planning and preparing for the passing of the torch. Family dynamics alone can present a challenge. Not all children want to take part in a family business, so you’re left to determine how to compensate them. This can be problematic when liquid assets are limited, which is often the case with smaller businesses.
Complicating matters even further are partnerships. If you own a business with other individuals, prepping for a change in leadership and getting finances in order are collective tasks. Everyone needs to be on the same page and in agreement if one partner chooses to exit the business. Is there a plan in place? Do you have the liquidity to buy a partner out?
All that’s to say: Business owners should be preparing for tomorrow today. While plans for managing organizational change in leadership vary from one person to the next, they often include a few key features. Here’s where to focus your attention to ensure your business endures after you’ve moved on.
1. Create a comprehensive estate plan.
Before you focus on your business, be sure to get your personal estate documents in order. Not long ago, I was working with a business owner who was hesitant to create an estate plan. He was so focused on his business that he never wanted to take the time to set up his personal estate plan.
Finally, I convinced him of the value of the process, and we collected the important documents for estate planning. Tragically, two months later, a major stroke left him unable to return to his business. Fortunately, the estate planning we accomplished ensured that his business went on according to his wishes. This shows that there’s no time like the present to prepare your business for the worst-case scenario.
The question you might be asking yourself now is: What estate planning documents should I have? These four documents are the most important documents for estate planning, and they should be reviewed regularly and updated as necessary:
- A will: A last will and testament allows you to list a guardian for minor children and dictates the distribution of assets.
- A living trust: A living trust serves a similar objective but is even more beneficial, as it allows you to avoid probate (which is time-consuming and costly) and provide instructions if something happens to you (e.g., falling ill).
- A power of attorney: A power of attorney designates someone to handle the financial matters outside of the trust (e.g., retirement accounts, tax returns, real estate transactions, etc.). You can give this person authority now or at a triggering event (e.g., incapacitation).
- Healthcare directives: Finally, healthcare directives provide instructions on your preferred medical and end-of-life care.
2. Prepare a business continuity plan.
Good business continuity planning involves more than creating instructions on how to proceed with operations in case of a disaster. It should also include guidelines on minimizing disruptions to operations should something happen to you, the business owner.
Generally, you’ll include a main contact and list of advisors to call — think an accountant, attorney, financial advisor, and so on. You’ll also want to provide instructions on how to use any insurance proceeds, who will take ownership of the business, and which stakeholders will need to be notified about the change in operations. Beyond that, make sure to share the location of important documents and keys to the business with a trusted person.
If you own a business with others, consider setting up a buy-sell agreement — which dictates that if one of the owners dies, becomes disabled, or retires, then that person will sell his or her interest to the remaining owners or the company itself. These agreements are often funded with life insurance or disability insurance, which provides liquidity to purchase the departing owner’s interest.
3. Determine how to provide for your family.
Oftentimes, the business is the greatest asset, but it doesn’t offer much liquidity. Part of preparing your business for change and getting your finances in order should include plans to support your family should something happen to you. Do you have life insurance and disability insurance that benefit your family? Think through how to provide income for them from the business — or another source — if you become incapacitated.
4. Understand the full value of your business.
How much is your business worth? Better yet, how much do you need your business to be worth before you leave it? If you don’t know the answer to either question, sit down with a financial planner to arrive at those amounts. It’ll give you a better idea of whether your business is in a good position when you retire or in case of an unexpected health issue.
If your business isn’t at the value you need, contacting a business advisor should be your next step. Also known as a business consultant, this professional can help come up with planning, development, marketing, and other ideas to help increase the value of your business before you exit.
Like anything in business, planning for an unexpected illness or departure is essential. Secure all the important documents for estate planning, work up a good business continuity plan, and get your finances in order. Tomorrow is never guaranteed, and you’ll rest easier knowing your family and employees are cared for should something happen to you.
Are you wondering whether you’re making the right financial decisions for your company’s future? Take Plancorp’s assessment today.
Disclaimer: This article originally appeared on Business2Community. This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice. All investing involves risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You should consult your own tax, legal and accounting advisors.