Continuity Planning: Don’t Do This to Your Family

My dad died last year, which left me in charge of his business and estate. Before sharing anything, I want to express my father’s memory will always be a blessing to me. Until his last day on Earth, the ethos and ethic he had was always love for our family and anyone else fortunate enough to be in his world. For 32 years, he was the proud owner of a business that provided everything for our family.  But when we found out that he had a terminal illness it happened too fast and changed my life in ways I never imagined.

The purpose of this article is to share the very real and personal story of what happens when the owner of a company passes away without a succession or contingency plan. Whether voluntary or involuntary, there will be a day that you exit your company. You have the ability right now to plan, so it happens on your terms or, at the very least if unexpected, protects your family and employees instead of causing more pain after you are gone.

I love my father and don’t see him differently because of this, but the last nine months of my life have been the most difficult season I have ever faced. If you own a business and have dependents, please take this advice to heart and never do this to your family. Our life was completely uprooted not just because my dad is no longer with us, but because he didn’t have a plan for his business. I’ve consulted with families on how to sell their business after a loved one has passed but doing it for your own family is an experience I never expected to have.

Run a Good Company. Keep Up to Date Records.

Managing a small business yourself is a lot of work, but there are some things you should always prioritize that will help you run a good business and make it easier in the event someone must come behind you.

• Keep up-to-date financials. After my dad’s passing, I learned there were several years of missed tax filings and that his books were not current. Selling a business requires you to have good financials to know how the business performs. Creating historic financial statements for a business you were not running requires a lot of time and effort and costs money. It took me several months and cost tens of thousands of dollars in fees to an accounting firm for us to get his financials cleaned up.

TIP: If you don’t do it yourself on a monthly or quarterly basis, outsourcing is a great option to ensure you have current financials. A great accountant or bookkeeper is well worth their service fee. If you don’t do it now, it will cost that and more to clean it up later.

• Keep Clean Financials. I understand there can be strategies recommended to reduce taxes, but if you co-mingle heavy personal spending with business expenses it can be hard to unwind and reduces credibility if there are too many adjustments. When we approached banks and potential buyers for the business there was a lot of skepticism for the pro forma margin presented vs the actual financials and tax returns.

TIP: I always recommend keeping personal and business spending separate, but if you insist on expensing discretionary items collaborate with your accountant on a separate accounting class or division, so it’s easily segmented.

• Keep good client and operational records. Filing cabinets full of notes don’t do anyone favors. Having a basic CRM or AMS with client data isn’t difficult to use and critical for good buyers. The office admin and I had to manually create a client database from years of paper files to even present basic data for buyers to review.

TIP: It requires effort, but please take advantage of your AMS functions so that you have good data. Downloads, imports, and commission statements aren’t hard to process. Even outside of an agency principal’s death some buyers are becoming stricter in due diligence to compare AMS data and financials. Be prepared.

A company can be sold without these things, but the more uncertainty a buyer has in your numbers, the steeper the discount. Providentially, I have experience doing turnaround projects, but instead of coming in to position the company for sale, I had to undertake an almost six-month process to create something sellable. Within six months we implemented the most basic things like electronic time tracking and payroll, cloud-based accounting, and a CRM.

Don’t Ignore Succession or Continuity Planning. It’s Not hard.

My dad was the epitome of an unstoppable work ethic, one of the best salespeople I know, and never left a client unanswered when they were in need. I’m not saying that because he’s my dad, I say it because it’s true. Like most small businesses, he was the business. Sales, estimates, project management, client phone calls, fixing employee mistakes, and even after-hours service calls . . . it was him.

Because he didn’t have a plan, I was asked to make drastic changes in my life. Truthfully, I haven’t been able to properly mourn his passing because the burden placed on me, coupled with my already busy schedule, has taken all my energy and focus.

• Document, delegate, or at least involve others. The more dependent the company is on you, the harder it will be to take over if you aren’t there. Even nine months later I’m learning things my dad did that no one knew about. It was inevitable sales would drop off, client service would start to suffer, and admin functions would be missed.

TIP: Put your ego aside. Take time to challenge and train others to grow into new responsibilities. It also is the catalyst that can help you scale the business. While no one can do it like you, there is a chance that no one could do it when you aren’t here unless you empower them to do so.

• Licensing and compliance are required. Most states have emergency rules for professional licensing and a timeline needed to make changes, but 60-90 days can go quickly while you are trying to focus on estate needs or adjusting to your new “normal.” There was no one in my dad’s company who held the proper license or was qualified to take the exam. Luckily, the state was willing to grant us grace, but operations could be jeopardized if this isn’t planned out.

TIP: Many agencies have licensed staff but never talk about contingencies. Consider including in a contingency plan a qualified person to be appointed as interim principal for licensing compliance. This could be a licensed family member, a producer, or another key employee. Your family likely has a temporary grant of license assumption, but it’s difficult to sell an agency within the time frame before that expires so a bridge person is important.

• Any plan is better than no plan. Organizing a formal plan gives your family and staff direction on what should or can be done to move forward. Most family members don’t have business or M&A experience. Have a plan and professionals involved so that your family can mourn instead of having to step into your shoes.

TIP: Continuity planning takes effort to start, but documenting things like passwords, bank accounts, qualified professionals, and a plan of action is invaluable. Be open with key employees or even neighboring agencies on a “what if” plan. A reasonable buy sell agreement funded for a family member, key employee, or negotiated with a neighboring agency is one of the best gifts you can give your family.

Don’t Make Your Dependents Depend on Selling the Agency to Live.

By the time you are diagnosed with a terminal illness or are involved in an accident, it’s too late to put a plan in place. If you are playing 37 out of 38 slots on the roulette wheel chances are you’ll win 97% of the time, but the one time the tail risk hits, you lose.

• Distressed, owner-dependent companies sell for a discount. If the key person who drove sales and oversaw operations is no longer present, then the business’s value will diminish greatly, along with revenue and profit. My dad had great offers to sell years ago that he rejected.  The value of the business today with him gone is significantly less than if he were here.

TIP: We have sold agencies after the principal has passed away.  Those that had delegated responsibility and maintained current financial data sold for considerably higher multiples than the opposite scenarios.  Build a team and systems that function even if you are not there.

• Build an estate plan. We are fortunate that my family did not disagree on how to handle my dad’s estate, but we were still obligated to follow state probate procedures. Because he did not create an estate plan, some of my dad’s assets are still locked up in procedure which could have been avoided with proper planning.

TIP: Work with an experienced estate attorney and develop an estate plan that mitigates assets getting tied up in probate.

• Be smart with your income. If you are making great money, you need to diversify your net worth. Having little in savings or life insurance and expecting your family to benefit solely from the sale of your company is a risky bet. Luckily my mom was a frugal person who balanced out my dad’s desire to buy nice things, so they were smart about paying off their home, vehicles, and decent savings. But had they not done that her situation would be very different.

TIP: Be smart about saving, reducing debt, and keeping living expenses manageable so that your family isn’t saddled with a heavy burden in your absence.

• Don’t leave your kids carrying your load. We were fortunate that my dad had a life insurance policy and savings, but a good bit of my mom’s retirement still depends on a sale of the business, which requires that I deliver as the person charged with selling the business. I joke that I’ve aged ten years in less than ten months but managing my dad’s estate has been taxing. I’d do it again because I love my family, but it has not been enjoyable and much of the stress could have been avoided.

TIP: Manage your own personal risks and prepare for the unexpected. Be smart with your income to build tangible wealth, have sufficient life insurance for your dependents, and have professionals in your circle that can do the hard things so your family can focus on healing.

Take Action

Managing my dad’s estate has shaped my consulting approach with clients.   I experienced firsthand the challenges as a trustee and gained an understanding of how issues could be mitigated.  As I stated before, succession planning takes effort, but it isn’t hard. Some contingency planning and implementation now can be a life changer for your family if that day ever comes. If I had to summarize recommendations from my experience it would be:

1. Keep accurate and timely financial and operations records. Not only does it enable you to manage better today, but it also helps anyone that must step in to fill your role in your absence.
2. Document well and delegate responsibilities. The cliché phrase is “Work ON the business not IN the business” but it rings true. Building a system around you versus on you is the difference in an easy family ownership transition or an external sale if needed.
3. Be a good steward to those who depend on you. It’s easy to care for your spouse or children’s needs today while you are earning an income, but that situation changes if you are no longer there. Invest, don’t over leverage your personal life (or the agency), and work with good advisors so your family can be provided for in your absence.
4. Any plan is better than no plan. A buy/sell agreement funded by life insurance for a family member or key employee, a buy/sell with agreement with a neighboring agency owner, or even being in regular connection with an M&A advisor that knows your agency and could bring it to market. A batter on deck who is ready to swing is better than no one ready to step up to the plate.

If you are an agency owner, or prospective agency owner that doesn’t have a succession or continuity plan in place my challenge to you is take action. Just because a plan is in writing doesn’t mean that it can’t be changed, but if it’s never in place you can’t go back in time to change it after it’s too late.

I’m always open to share my experience so if something here piqued your attention and you’d like to connect, feel free to schedule an introduction.