What happens when the owner of a business suddenly dies or is incapacitated? Businesses without a plan can quickly go down the tubes. Employees leave, customers desert, and before you know it, the company is forced to shut down. The owner’s family gets no value from the business he or she spent so much time and effort building.
Companies with two or more owners can at least partially address this scenario through the buy-sell agreement. But what about companies with only one owner? Sole owner businesses need the equivalent of a buy-sell agreement. I call it the Hit by a Bus Plan. The Hit by a Bus Plan includes the following elements:
- Interim operations plan
- Who runs the business while the owner is out? Who signs checks and pays bills? Who contacts customers and assures them their needs will be met? Who assures the employees that their jobs are safe? Having a plan that addresses these issues avoids chaos should anything happen.
- Transition instructions for the owner’s spouse
- This is a document the owner gives to his or her spouse, to be used in an emergency. It lists the key advisors the spouse can rely on (e.g. banker, accountant, lawyer), the key employees who can be trusted, the employees and/or customers who are flight risks, and potential buyers of the company.
- Salary continuation plan
- This designates a beneficiary (typically the owner’s spouse) to receive the owner’s salary for a certain period after his or her death or disability. Having this plan in place allows the spouse to continue paying the bills until the ownership transition is complete.
- Ownership transition strategy
- This sets forth who will take over ownership when the owner is gone. Will the spouse/estate continue to own the business indefinitely? Will the spouse try to sell the business to a third party? Or will the spouse sell the business to one or more key employees? In the last case, an employee buy-sell agreement is prepared, obligating the employee(s) to buy the shares from the spouse.
- Employee retention strategy
- Key employees can be incentivized to stay through a combination of employment agreements (ensuring employment for a certain period), stay bonuses (payable only if they remain with the company for a certain period), and equity. The equity portion will tie into the ownership transition strategy (see above) if the key employees are to be the new owners.
It may seem like a lot, but the Hit by a Bus Plan can be put together with less time and effort than you may think. Business owners owe it to their families, their employees, and their customers to have a plan in place. Trusted advisors, consultants, and others who advise sole owner businesses should talk to their clients about the importance of planning for such contingencies. Feel free to contact Randel Law, Inc., if you have any questions or would like some guidance on developing a Hit by a Bus Plan.
This article is not intended and should not be relied upon as legal or tax advice pertaining to any specific matter. You are encouraged to seek competent legal and tax counsel before proceeding with any transaction involving any of the matters discussed above.