#106: The 4 Ds That Could Destroy Your Business

In the world of business ownership, we must tackle difficult conversations and discussions because being prepared in a bad situation is better than the alternative. That is why Katina Peters, partner and vCFO, is here to discuss some of the unfortunate circumstances that can arise. Of course death, divorce, disability and departure are never ideal or planned, but we are here to help you through how to possibly avoid the despair that can come with them if you plan properly to protect yourself, protect your business and partners. 

What we cover in this episode: 

• 03:32 – Death in a business
• 07:22 – Divorce for business owners 
• 10:05 – Disability 
• 11:59 – Departure
• 13:35 – Your contingency plan
• 14:59 – Types of documentation
• 19:24 – Key man life insurance

Death in a business

Death is always difficult, and it is rarely an expected occurrence. When it comes to the death of a business owner, things can get sticky, unpleasant and difficult if you and your company are not prepared. 

Questions to consider are:

• What is the plan in the case something like this happens?
• If you’re a solo owner, the family needs to know enough about the business to be able to have direction for their next steps.
• Who will this family member be communicating with to keep things running smoothly?
• Do you have a financial preparation plan available?

There can be many tragic situations that can occur and it is only made worse by lack of documentation and preparedness. To save your family, partners and employees the additional heartache, take steps to outline what the answers are to the above questions.

Disability

Disability for a business owner is an occurrence that is often overlooked. This can happen when a business owner is injured or experiences illness to the point they are unable to perform their duties as an owner in the business.

Questions to consider here are:

• Who is going to make the decisions?
• Do you have disability insurance?
• Do you have a medical determination agreement in place?

Having these specifics outlined can be critical to the ongoing success and functioning of your business. Take time to discuss these items with an attorney and document what should happen. This will help to alleviate stress and any scramble in the unfortunate event that this should happen.

Departure

The last but not least of the 4 D’s is departure. Departure from a business usually comes unexpectedly. No one enters into a business agreement with the assumption that they are going to leave it soon. Sometimes this can be a long time coming or it can happen very suddenly. People’s intentions, goals, the economy, and relationships change; so many factors can come into play with the reasoning behind one’s departure. 

When someone is departing, it is ideal for the business to have as little disruption as possible. This can happen by putting measures in place at the beginning. Business owners can be incentivized to stay and other times they are subject to fines if they leave. These are two ways to possibly avoid the departure of a business owner that is surely critical to the team. 

Your contingency plan

A contingency plan is the first step in putting the necessary measures in place in case of an occurrence of death, divorce, disability, or departure. The importance of this detail should not be overlooked.

Katina states, “So we need to look at that contingency plan from a structural perspective. If this person was all of a sudden not here… is there cross training? Can other people step in? Is there systems and procedures in place to help?” Documenting everything definitely helps for a smooth transition. 

Types of documentation

Paper trail, paper trail, paper trail! Documentation is a high priority in business ownership. It will save you a great deal of time and hassle in the long run if you get all your important agreements and plans documented at the beginning and then make changes as necessary. Katina talks about documenting what happens in case something goes wrong, for example death. “What happens in the case of death with regards to the ownership component?”

Katina expands on this thought with, “We’re not attorneys, so you definitely want to work with your attorney, but my recommendation is to make it very clear. This is what happens. This is how the payout structure works. This is how we’re gonna value the business. Then everybody agrees upon that and the spouses should sign off that they are in agreement with that too, because then everybody’s in the loop and understands what happens in that case. So again, that’s in the case of death, divorce, disability, or departure…”. 

Key man life insurance 

There are many types of insurance, but one Katina recommends is Key Man life insurance. “Key man life insurance is an insurance that a company takes out on their key people. Typically, that’s an owner. It doesn’t have to be though. Sometimes there are key employees that are very critical to the business, and if something happened to them, you may want to have a key man life insurance policy to help you pay ahead to hire somebody…”

This is an insurance policy on a person, but it funds back to the business, so it is for the business. “It also helps to look for a replacement. If you need to replace that person or fill in the gaps of the revenue that they’re not bringing in for the time being until you are able to restructure… “ It is a ‘key’ component in owning a business and really pays out in the long run-in case an undesired situation occurs. 

Conclusion

We understand that these are hard topics to discuss and, because of that, they tend to be put off and avoided. As Megan states “…you don’t want to keep putting it off until tomorrow because you don’t know what tomorrow will bring” and we’re here to help with that.

OTHER WAYS TO ENJOY THIS POST:

Join the CBG LinkedIn Group