Don’t let your spouse be the victim of an unplanned business

It’s normal for business owners to focus on growth and the future. It’s an instinctual mindset that makes them great leaders, but it’s not without its drawbacks. Too many plan their future without thinking about what would happen if they died suddenly or became sick or hurt. Time for some succession thinking.

My good friend “George” was one of these businessmen and his story turned from success to tragedy in the blink of an eye.

George built his construction business carefully over 20 years, starting with a single vehicle and eventually growing to a fleet of more than 20 vehicles, a crew of 60 workers and annual revenues north of $6 million. And he wasn’t done. At 57, he was planning his next move —  buying a competitor.

George and his wife, “Pam,” were meeting an adviser to discuss how they could lock in their key employee and reward him for taking over the new division. At the end of the meeting Pam made an interesting point that might have seemed out of place amid all the talk of growth strategy.

“This talk about growth is important, but I’m concerned that we haven’t covered the basics,” she said. “We don’t have a living trust and we don’t have enough life insurance. Shouldn’t we be discussing that too?”

Everyone agreed to take those topics up at the next meeting, but tragedy struck first. Two weeks after the meeting, George died while exercising on a treadmill. The heart attack and trauma to his head after he fell rendered him brain dead. All plans for growth were halted immediately. The company was now in survival mode, and the following questions became absolutely crucial:

1. How will the family get income? Pam was listed as an officer (secretary) in the corporate documents, although she had not worked in the company for years, so a resolution was created that named her president and allowed her to receive George’s salary. (A salary continuation agreement implemented before the owner’s death would have also accomplished the purpose).

2. Should the family sell to the key employee? George didn’t leave any business continuity instructions stating his wishes. The immediate inclination was to sell to the key employee. However, he did not have the money or the aptitude to buy the company. He later became a detractor and resigned.

One solution would have been to have a buy-sell agreement between the key employee and the owner specifying the purchase and sale terms and backed by a life insurance policy on the owner.

3. Is the business easy to sell to an outside buyer? A business intermediary did an audit of the company’s books, processes and systems and found them to be woefully inadequate. With these items in place, the business would have sold much faster at a higher price.

The due diligence process took four months due to the sloppiness. Investing time every month to ensure orderly records would have kept the business ready for sale and saved time and heartache.

4. What about estate planning? Without a living trust, Pam had to go through probate to get George’s name off the business and property records. This easily could have been avoided with a living trust.

5. How much life Insurance is there? Pam would have had more options and been under less pressure to sell the business if George had 10X to 20X his annual income in a term life insurance policy for Pam. As it was, he had about 3X his salary, so the business had to be sold for top dollar to give her enough capital for income.

Business continuation planning isn’t as sexy as planning for acquisition and growth, but in this case it would have saved a year of agony and tens of thousands of dollars had George invested a few hours planning for his potential death or disability.

Bill Black, “The Exit Coach,” is a certified exit planner endorsed by the Business Enterprise Institute and the Exit Planning Institute. On his Internet-based Exit Coach Radio show, accessed by more than 40,000 listeners each month, Black has interviewed 1,000 professional advisors from disciplines such as law, accounting, insurance and banking for their best tips, ideas and precautions for business owners. Black also hosts the Exit Coach Radio show on the LA Angels radio station, KLAA 830AM Los Angeles, with two shows, airing Sundays at 10 a.m. and 6 p.m. Black has authored several books, including “Business Continuity: Five Steps To Protect Your Family,” now available as a free download at http://exitcoachradio.com/5steps. For information, visit www.exitcoachradio.com and follow Black on Twitter.