If a bus hits you today or if you get hurt from a terror attack, will your business continue its normal operations while you recuperate? How will your business be affected if something more serious happen to you?
Morbid thoughts, I know. But let’s face it; there’s always the risk that something untoward will happen to you– whether it is death, long illness and hospitalization, family problems, or even getting stranded abroad without cell phone or Internet access. And when it does, how will it affect your business? Do you have a backup plan?
You may realize that you are not as well prepared as you should be for the “what-if-you-drop-dead” scenarios. With you gone or sidelined for long, your business could be seriously affected. Your customers could be left hanging dry, your commitments to clients’ unfulfilled, payments to creditors and suppliers delayed, and the business’ capacity to earn significantly diminished. The implications are significant: operations may slow down. Sales might suffer. Key clients may take their business elsewhere. In circumstances like these, it will be hard for your business to recover.
And you’re not alone.
Many home business entrepreneurs (especially the one-person businesses) do not have any plans in place in the event that something untoward happens. Like many self-employed individuals, you may not even think of these scenarios and how it will affect your business. If you do, either you simply push it away or have way too many things in your to-do list to actually do something about it. Then again, you may even be thinking that these things will not happen to you.
Having a clear plan on how to handle these unforeseen events can make it easy for your business to continue operating, and result in fewer headaches for your family. Adequate preparation is especially critical if you have a family and you are their sole provider, and suddenly your capacity to provide for them is seriously diminished (or in the case of your death, gone). The last thing you’d want is for your family to be scrambling and confused as to what to do with your business. If you are not prepared to meet the business’ financial liabilities, your family’s sound financial future may be adversely affected.
Preparing for these untoward eventualities vary from business to business. But generally, you’ll need someone capable of continuing operations until your return; or if you are unable to continue operating the business any longer, someone needs to know what accounts need to be settled and what relationships would need to be maintained or terminated.
Whether you are a small business owner, a mom and pop operation, or a one-man shop, you really need to have contingency or disaster plans in place. Here are some ideas to consider in the event that you are unable to continue working on your business:
1. Educate a family member about your business. Teach your spouse, child, or parents as much as you can about your business. If they are unable to fully understand how your business works, at least direct them to a person or organizations that can help them in the event that you are unable to work on the business yourself. Also, let them know what needs to be handled immediately, what accounts need to be closed, what accounts need to be paid, and what relationships need to be maintained. Your goal should be to give them the right information, knowledge and tools to help them decide what to do with the business, and be able to take care of all the loose ends.
2. If not family, designate a person you trust. Assign a friend or a third party you trust as executor of your business if you don’t have a family, your family is not interested or your business is too complicated for your family to understand. Your designated executor can be empowered to make decisions on what to do with the business, including selling it, closing the accounts, or taking over the business.
3. Document everything you can about the business. Make an effort to write down what you’ve been doing in the business. Develop standards for various processes in your business. Write down all your passwords to everything – whether your business bank accounts, web hosting, domain names, computers – and keep them in a safe place while letting someone know where and how to access these passwords.
4. Backup your documents. Create a backup of everything – including all your computer files, emails, website, financial documents, and databases. Keep a copy of your important documents preferably offsite. This is especially important if your business relies on the computer for operations. Having a backup is a crucial part of any disaster recovery plan of any business, including the demise of the business owner.
5. Automate as much as you can about your business. To the extent that you can automate as many of your business processes as you can, taking over your business temporarily or permanently can be handled more smoothly. Automating business process can involved anything from setting up your revenue collection through direct deposit and giving your wife access to the business account to ensuring that you have business operations manual that documents all your business processes.
6. Have a buy-sell agreement. If working with business partners (including spouse), ensure that a buy-sell agreement is in place. If you were unable to work on the business any longer, your partners would want to ensure the continuity of the business without being forced to inherit your replacement (e.g. your spouse). They will want to have control the business and ensure its liquidity, while you need to make sure that your family is fairly compensated for your share of the business. This is best accomplished by having a written buy-sell agreement, which is a binding contract between the partners that defines what events will trigger a buyout, price that is to be paid for the disassociating partner’s interest in the business, and who can buy the disassociating partner’s interest (e.g. outsiders vs. other partners in the business).
7. Invest in a life insurance. Finding affordable life insurance is a challenge for many self-employed folks and entrepreneurs, especially for their relatively high costs. However, you need to consider the benefits of getting a life insurance policy that will cover not only the business, but for immediate personal bills, and capital for your business in the future (e.g. some insurance products allow you to borrow against the cash value should you need cash flow, which could be used for business purposes if you are a sole owner). There are life insurance products that can help provide for your family, as well as pay off any liability that you’ve taken on to start up, and run your business.
8. Assess your legal structure. When an entrepreneur dies, some business forms such as sole proprietorship and even LLC technically means that the business is dissolved as well. If you are running a sole proprietorship, the business automatically terminates upon your death. The property used in the business is disposed of according to the terms of your will or a court order, because it is considered your personal property. Understand the legal ramifications of your legal structure, and make sure that your interests, as well as that of your family, are adequately covered and protected in the event of your untimely death.
9. Consult a lawyer. Talk to a lawyer to help you prepare the necessary documentation, including the drafting of a will that transfers your property at your death to designated persons. You can then designate how the ownership of the business will be transferred in the event of your death. The lawyer can also help you specify the provisions on how the revenue/profit will continue to provide for your family and heirs.
10. Grow the business. As a one-person entrepreneur, your business can die with you in the event of your untimely demise. However, if you grow your business to the point where you will need employees or business partners, you can be more confident that the business will continue after you’re gone. Just make sure that the interests of your family are taken care of through proper legal documentation.