Every business owner will eventually leave their company. Ideally, it happens according to a carefully considered plan and on a timeline they choose.
But not every transition is planned.
Exit-planning professionals often use the Five D’s to describe circumstances that can unexpectedly change an owner’s relationship with the business: death, disability, divorce, disagreement and distress.
Thinking through these scenarios isn't about expecting the worst. It's about asking an important question:
Could the business continue if your plans suddenly changed?
1. Death
If you weren't here tomorrow, what would happen to the business?
Who would have the authority and experience to lead it? What would happen to your ownership interest? Would your family inherit an interest in a company they don't know how to operate?
These questions become particularly important when a significant portion of the family's wealth or income is connected to the business.
An estate plan, succession plan and appropriate business agreements can work together to address what happens to ownership and management following an owner's death. Insurance may also play a role depending on the structure and needs of the business.
The key is making these decisions before someone else has to make them during an already difficult time.
2. Disability
What if you're still here but temporarily or permanently unable to run the company?
A disability affecting a key owner can create immediate operational and financial questions:
- Who is authorized to make important decisions?
- Who oversees employees and operations?
- Who can communicate with customers, vendors and financial institutions?
- How does the business continue operating without the owner's daily involvement?
- How are the owner's personal income needs addressed?
A continuity plan can help establish who steps in and where critical information can be found if the owner becomes unable to manage the business.
3. Divorce
For a business owner, personal and business finances can sometimes intersect during a divorce.
Depending on the circumstances, ownership interests and the value of a privately held company may become part of the financial and legal issues that need to be addressed.
That's one reason it's important for owners to understand how the business fits into their broader estate and financial plans and to keep business documents and agreements current.
Because divorce laws and individual circumstances vary considerably, owners facing these questions should work closely with qualified legal and financial professionals.
4. Disagreement
Businesses with multiple owners face another kind of risk.
What happens when partners who once shared the same vision eventually want different things?
One owner may want to retire. Another may want to keep growing. Someone may want to sell while another wants to transfer the company to family.
These situations can become particularly complicated if the owners haven't established how an ownership transition should be handled.
A properly structured buy-sell agreement can address certain triggering events and establish a process for handling an owner's interest under circumstances covered by the agreement.
And it's not enough just to have one.
As the business changes, owners should periodically discuss with their legal and other professional advisors whether existing agreements still reflect their circumstances and objectives.
5. Distress
Sometimes the event affecting an owner's exit isn't personal at all.
Economic conditions, the loss of an important customer, changes in an industry or unexpected challenges inside the company can alter the owner's plans.
The specific risks will look different for every organization. But the underlying question remains the same:
How prepared is the business to respond when circumstances change unexpectedly?
Building financial resilience, developing capable leadership and reducing unnecessary dependence on any one person, customer or relationship may help create greater flexibility when conditions become difficult.
Tools That Can Help Owners Prepare
The right protections will depend on the company and its owners, but several areas are worth discussing with your advisory team.
Buy-Sell Agreements
A properly structured buy-sell agreement can establish how an ownership interest will be handled following specified triggering events.
Existing agreements shouldn't necessarily be viewed as "set it and forget it." As ownership, business circumstances and objectives change, the agreement may need to be reviewed with legal counsel.
Insurance
Depending on the circumstances, life, disability and other insurance solutions may play a role in a broader business-continuity strategy.
The appropriate type and amount of coverage depends on the owners, business structure, agreements already in place and the financial needs the coverage is intended to address.
Estate Planning
A business owner's estate plan should consider what happens to the owner's business interests along with personal assets.
Wills, trusts, powers of attorney and beneficiary arrangements should be evaluated with qualified legal counsel as part of the owner's broader estate-planning strategy.
A Written Continuity Plan
Even relatively straightforward planning can be useful.
Who should step in?
Who needs access to important information?
Who has authority to make decisions?
Who should employees, customers and professional advisors contact?
Documenting those answers ahead of time can give the people around the business a clearer starting point if the unexpected occurs.
How a Financial Advisor Can Help
Preparing for the Five D's often requires more than one professional.
At Seapoint Wealth Advisors, we can help business owners look at how an unexpected transition could affect their personal financial plan and coordinate, when appropriate, with attorneys, CPAs, insurance professionals and other members of their advisory team.
The objective isn't to predict what will happen.
It's to understand where you may be vulnerable and prepare for circumstances that could change your plans.
Because having an exit strategy isn't only about preparing for the day you decide to leave.
It's also about being prepared if that decision is made for you.
Next in the Business Owner Exit Planning Series:How to Increase the Value of Your Business Before You Sell: Closing the Value Gap.
This article is for general informational purposes only and is not intended to constitute personalized financial, tax or legal advice. Consult appropriate financial, tax and legal professionals regarding your individual circumstances.
Frequently Asked Questions
What are the Five D's of exit planning?
The Five D's are death, disability, divorce, disagreement and distress. They represent circumstances that can create an unexpected ownership or business transition.
What happens to my business if I die?
What happens depends on factors including the company's ownership structure, governing documents, estate plan and any agreements between owners. Business owners should work with qualified legal and financial professionals to determine how ownership and management would be handled.
What happens to my business if I become disabled?
An owner's disability can create questions about who has authority to make decisions, operate the company and handle financial matters. A written continuity plan and appropriate legal, financial and insurance planning can help prepare for this possibility.
What is a buy-sell agreement?
A buy-sell agreement is a legal agreement that can establish how an owner's business interest will be handled after certain triggering events. The terms and appropriate structure depend on the business and its owners, so agreements should be developed and reviewed with qualified legal counsel.
How often should I review my business succession plan?
There isn't one review schedule that's appropriate for every business. Owners may want to revisit their plans when meaningful changes occur in ownership, business circumstances, valuation, family circumstances or long-term objectives.