Life-changing events such as injury, illness or death of an owner can make or break the success of your business. As Benjamin Franklin said, “If you fail to plan, you are eplanning to fail.” Having a plan for “just in case” is always a great idea and helps to cement the future of those you love.

Whether you leave your business to retire or move on to life’s next great adventure, you should begin planning your exit or succession well in advance.

A critical piece of your exit or succession plan should include planning for the unexpected. What would happen to your business if you’re diagnosed with a life-threatening disease or you’re critically injured in an accident — or worse?

To help guide you through the process of contingency planning, we’ve consulted exit-planning experts Kevin Kennedy and Joe Bazzano, who have more than 50 years of combined business planning experience. Kennedy, CEO of Beacon Exit Planning, specializes in exit and succession planning for private business owners. Bazzano, COO at Beacon, is a certified public accountant, certified valuation analyst and certified business exit consultant who shows business owners how to increase the value of their businesses and save on taxes.

In the final piece of this three-part series — which also includes articles on exit strategy and succession planning for roofing contractors — we’ll explore the importance of buy-sell agreements, timelines, common mistakes and strategies, and risk management, plus how to find a reputable advisor.

Buy-Sell Agreements

One of the most important parts of a contingency plan is a buy-sell agreement, which governs what happens if one of a company’s multiple owners and/or shareholders dies or experiences divorce, disability or voluntary or involuntary departure.

This type of agreement allows co-owners to decide who else can buy into the company and how the process will work. It also provides an opportunity for owners to discuss potential scenarios ahead of time instead of potentially ending up in pricey litigation down the road.

Despite the importance of creating a buy-sell agreement, more than 70 percent of business owners do not have documented succession plans for senior roles, according to the 2014-2015 U.S. Family Business Survey conducted by the consulting firm PwC.

Timeline

Bazzano says contingency plans and buy-sell agreements are living, breathing documents. They should be started as soon as the business is established and reviewed regularly to accommodate changes in the company’s structure, value or owners’ intentions.

“A lot of times, you’ll see a document that was prepared 10, 20 or 30 years ago, and it’s just sitting on a shelf,” he says. “And the reality is, any event that triggers that document could have some unintended consequences because the company won’t necessarily be what it was when the original document was written.”

The most difficult situation, of course, is death.

“Typically, in a situation with a disability or something like that, the business owner can still communicate,” Bazzano explains. “But in the case of a death, what’s the family legacy?”

Death is not only an emotional burden to a family, but often be a financial one too. Without the proper planning, a family could lose its income stream, causing financial turmoil.

“We always say that time can be your best friend or your worst enemy,” Bazzano says. “If you start planning early enough, time will be on your side and you can make a plan that allows you to make modifications if needed. Unfortunately, if you wait too long, it can be difficult to not only create a plan but also to execute it in a timely fashion.”

Common Mistakes And Strategies

One of the biggest issues Bazzano and Kennedy see in contingency plans is improperly structured documents.

For instance, the owner of a roofing business may think everything is in place — a will, trust and insurance — yet each document was set up by a different person. Perhaps one attorney set up the will, another set up the trust, and the financial advisor sold the insurance — and nobody talked to each other during the process.

“Companies are underfunded with their buy-sell agreements and insurance. Say something gets triggered and all of a sudden, a company’s worth $5 million and the owner has $1 million to buy the insurance. And there’s a widow waiting there, and she’s not getting paid the real value of the company or can’t be paid by the company. She may have expectations of what the company’s worth, but when reality sets in of the company’s real value — and the definition of value — there can be some significant issues.”

Bazzano has been called into many of those types of situations and has had to testify on valuations.

“It could be a great time for a business owner, but it could also be a very nasty time if it’s not done properly,” he says.

Risk Management

In addition to issues that can arise from improperly structured documents, many business owners also fail to understand how to manage their risk.

“The older you get, the less adverse to risk you should be with your investments,” Bazzano explains, “because you want to protect the company. You’re getting closer to retirement so, therefore, your risk tolerance should be less. Unfortunately, business owners don’t really understand that so, as the company builds value, there’s more at stake — there’s more risk to be had.”

He says business owners need to do a better job of protecting their wealth and the companies themselves, which involves understanding insurance requirements and asset protection, and knowing how to structure their estate and the business to limit exposure to frivolous lawsuits and creditors.

“It’s an area that doesn’t get addressed enough, but I think it needs to be a key component in the exit planning process because a company is essentially the goose that lays the golden egg,” Bazzano says. “You want to do whatever you can to protect it. It’s difficult enough to keep the company operating in difficult economic times. The last things you want are frivolous lawsuits and some claims against you that can bring down the company. A lot of that can happen without the knowledge of the business owner.”

One of the key areas, he says, is vehicles and equipment. Many business owners have vehicles with their companies’ names on them. Mix those with employees using a cell phone while behind the wheel, and the result could be detrimental.

“Should an employee be on the phone and get into an accident and create substantial harm, it could put the business owner’s wealth at risk,” Bazzano explains. "That's where asset protection or asset insulation becomes a vital component of the planning."

Getting Quality Advice

To avoid the headaches and hassles that can arise as you plan to move on from your business, be sure to enlist the services of an exit-planning professional.

How do you find a consultant you can trust?

Kennedy learned the hard way. He and his two business partners thought they were doing the right thing, consulting with an advisory group for more than 20 years over the course of exiting their roofing business. Turns out their advisors were not specialists in exit planning, Kennedy says.

“We received cookie-cutter advice that cost us millions,” he explains. “They didn’t know what they didn’t know.”

Kennedy suggests asking potential consultants questions such as:

• What is your training in exit planning?
• How many exit plans have you delivered?
• How much have you saved your customers in taxes?
• Do you have any referrals from existing clients?

Bazzano says while many advisors profess to be exit planners and have good skills in their respective fields (e.g., accounting, mergers and acquisitions or financial planning), their solutions tend to revolve around those skill sets and don’t necessarily consider a business owner’s goals.

“For example, if a business owner is not emotionally ready to exit his business but wants to take some chips off the table and cash out a portion of the value in the business, using a business broker or mergers and acquisitions advisor would not be the most appropriate advisor to use.

“A broker will only get paid if he sells a business. If the owner sells the business but is not happy in his post-exit lifestyle, then has the advisor really provided appropriate solutions? Alternatively, there are many financial planners who suggest that insurance is the solution to most planning alternatives, without consideration for taxes or other factors.”

A good advisor may cost $20,000 to $30,000, but if he or she can save you $500,000 to $1 million in taxes, Bazzano says he would argue that’s a pretty good investment.

To learn more about Kevin Kennedy and Joe Bazzano, and for access to more in-depth information about the exit-planning process, visit BeaconExitPlanning.com.