Press Room

April 1, 2011 - Planning As If You’re Not Immortal

“If you don’t properly plan for the business during your lifetime, your attorney, accountant, and banker will, three cars back from the hearse.” Leon Danco, PhD. protect-company

This point was written in a book published in the 70’s. I was reminded of it a couple of months ago when Pete and I met with a widow who had to take over her husband’s business when he died. For this article I’m going to call her Beverly. We had been asked to meet with her by one of our clients who thought we might be able to help her.

Beverly’s husband had built a specialty manufacturing company over a 30 year period. Upon his death a year ago, Beverly became the sole owner. Up until 8 months ago she had never worked in the business. Her understanding of the business was limited so she relied on the key people to keep it going. She was dependent upon the business for her income. She was very concerned the business was running out of cash.
Pete and I agreed to look into the situation, so we met with the key people and reviewed the financial situation. Here’s what we found.

Like most businesses in our country, it had suffered with the economic downturn.
The key people were good people, but they lacked the instinct and training to properly guide the business.
The key people had focused on managing the sales in the pipeline, but had done nothing to find new business, so the pipeline was drying up.
When revenue started to reduce, nobody had done anything to reduce expenses.
Cash flow was very bad.

What we found was there was no one to guide the business. Beverly hadn’t worked in years and she wasn’t trained to run a business. The key people were good managers, but they lacked the knowledge and skills necessary to lead the business. None of Beverly’s outside advisors provided any clear leadership. Pete and I suspect everyone hoped for a miracle, but it never happened. Instead, the sales dried up, expenses remained high, and cash drained.

This is the point of this article. Every business owner needs to develop a contingency plan. Let me draw an analogy. When I went for my pilot’s license I was taught what to do if my engine failed in flight. This was drilled into me this over and over, not because we expected to lose an engine, but if we did, my flight instructor wanted me to be able to land safely and walk away. Business owners have to develop plans that enable their companies to survive their death or disability. There are three key elements of every contingency plan, The Management Letter, liquidity, and Advisory Board.

The Management Letter
The first step in the contingency plan is developing what Pete and I call “The Management Letter”. This letter is the owner’s suggestions for a game plan in the event of their pre-mature death. We use a fairly extensive questionnaire to develop it, but the gist of what should be covered is as follows:

A current assessment of the business, the direction it’s heading in, any major challenges to consider.
A recommendation on whether the business should be kept or sold. If sold, a list of potential buyers.
An analysis of the strengths and weaknesses of the key people and recommendations on the best way to work with them.
Recommendations on who can serve as the leader.
A list of successful business people and professionals who can provide the family with support and advice.

Liquidity
Since most businesses rely on credit to operate, any contingency plan should assume the banks will restrict credit if an owner dies. This can be mitigated by building substantial cash reserves in the business. If these don’t exist, consider purchasing term insurance on the owner. If the owner dies, the insurance proceeds can provide the necessary liquidity.

Advisory Boards
All business owners should consider establishing a working advisory board. An advisory board serves as a think tank for a business owner. They are comprised of the business owner and 3-4 other successful business owners. The board meets several times and year to discuss any issues the business owner wants to address. These include new opportunities, or any problems and challenges facing the business.
By meeting periodically, the outside advisors learn about the business, its opportunities and challenges, and the key people that work within it. The business owner should also discuss the Management Letter so the board can then serve as a resource to the owner’s family upon his death.

As for Beverly, that’s a work in progress. We found someone from outside the business who had the necessary leadership skills to guide the business and installed him on an interim basis. He is working with the team to see if enough new business can be contracted quickly. He is also working on major expense reductions. We meet with him in several weeks and we’ll see how things are progressing.

Bob