What would happen if something serious suddenly impacted you and/or your business and your ability to run it?
This a great question to ask in trying to understand unplanned or emergency succession.
Unlike planned succession, which involves a deliberate, proactive process of identifying and preparing potential successors, unplanned succession happens suddenly and demands fast action to fill shoes and ensure business continuity
While you can’t prevent the unexpected from happening in business or life, you can have an emergency succession plan in place to protect yourself when it does.
Unexpected events leading to emergency succession
Before we get into emergency succession planning, let’s take a look at some of the unexpected circumstances that can lead to unplanned succession:
- Death or disability of the owner
- The owner decides to exit quickly
- Loss of key employee
- Liquidation or a major negative trading event
- Business and/or director facing legal action
According to a CPA source, 50% of small to medium-sized business owners exit due to ill health, divorce, disputes, financial distress, death, insolvency and various unforeseen events. That’s a significant figure.
So, what actions can you take to protect yourself against each?
Death or disability of the owner
While none of us like to think about either of these possibilities happening, life likes to roll the dice. We almost lost one of our directors a couple of years ago. So, don’t let the unsettling nature of it prevent you from planning.
How to protect yourself:
- Ensure you have a stakeholder’s agreement that deals with it – If you don’t, we recommend you seek legal advice ASAP. It involves setting out provisions to address how your shares or those of the deceased or disabled person will be managed and transferred.
- Know your business value – Ideally, seek agreement as to what the value is or how the methodology is to apply. This will help ensure assets are distributed appropriately and taxed efficiently. It will also inform insurance needs and financial decision-making in buy-sell agreements.
- Consider how the stakeholder’s payout will be funded – This refers to the distribution of funds or assets to designated beneficiaries or stakeholders. What is the timing?
- Take out relevant insurance – This is a good way to protect yourself and allows the payment to be funded or part-funded. Insurance isn’t available to everyone. It’s based on various factors such as age, health and prior medical history. So, seek advice from a risk insurance specialist.
- Prepare a succession deed – If you’re able to secure insurance, a succession deed or similar should be prepared by a lawyer to reflect agreement to the insurance funding and business value or methodology funding terms, especially to cover any shortfall.
What if there is a shortfall or no insurance?
Do the surviving stakeholders want to be in business with the deceased’s beneficiaries? Do the beneficiaries wish to have ownership in the business? The answer to these questions is probably not! This is why planning and a succession deed are so important.
The owner decides to exit quickly
While we’d like to think that some timeframe would apply in this scenario, this isn’t always the case. With mental health issues on the rise, owners wanting out without much warning does happen—we’ve seen it.
How to protect yourself:
- Avoid too much reliance on key people – Not only can being relied on too heavily lead to burnout and reduced productivity, but it also leaves your business at risk of losing your valuable knowledge, skills and relationships.
- Build skills within your team – Strive to build a strong team with a diverse set of skills and capabilities, develop clear processes and systems and foster a culture of collaboration and continuous learning.
Often, a shareholders agreement provides for a situation where an owner wants to exit a business in a short time frame, including where the business value has gone down in dollars or a percentage.
Loss of a key person
This is similar to the above. While they’re not the most critical person in your business, the loss of your senior management team can also strip you of valuable knowledge, skills and relationships.
How to protect yourself:
- Check your employment agreements – Consider any restraints, such as longer notice periods and non-compete and non-solicitation clauses, that prevent them from competing against your business or poaching clients.
- Build skills within your team – Again, strive to build a strong team with a diverse set of skills and capabilities, develop clear processes and systems and foster a culture of collaboration and continuous learning.
Liquidation or major negative trading event
Liquidation or a major trading event, such as a loss of a key client, pandemic or central bank decision, can sometimes be a worst-case scenario in terms of unplanned succession events. That’s because it’s unlikely you’ll exit with any value.
How to protect yourself:
- Monitor your financial performance – If you do notice anything concerning, act on it. The sooner you act, the better the outcome.
- Always be on top of cashflow – Regularly review your liquidity and working capital position. This will help you avoid running into a position where you don’t have enough cash to meet your needs. If you do have any concerns about your business’ liquidity, seek professional advice.
- Regularly review debtors – Don’t let doubtful debts turn into bad debts. Take action early.
Business and/or director facing legal action
If your business and/or you, the director, are being sued but you don’t have adequate insurance cover to protect against the claim, you could be at risk of liquidation—again, an unplanned succession event.
How to protect yourself:
- Ensure you have all relevant insurances in place – This includes directors and management liability insurance. Seek advice from an insurance broker.
- Comply with WHS requirements – By ensuring you have a safe work environment, you reduce the risk of employees taking action and/or work cover accidents.
- Keep on top of financial performance and liquidity – By monitoring your financial performance, you can ensure you stay solvent. If you have any concerns, take action immediately.
You can’t predict, but you can protect
You may not be able to know when an unplanned event will happen, but you can take action to protect yourself against it.
To ensure you’re protected, we recommend you seek professional advice to put a formal emergency succession plan in place.
Need help with succession planning, including unplanned succession? Reach out to your Maxim Advisor or contact our team to arrange an initial chat with one of our experts.
