7 Deadly Assumptions of Emergency Transition
Is your business prepared for an emergency transition if something happened to you?
Over the years, we have experienced the shock that death or serious illness or injury of an owner has on a private business. The result can be devastating. Without a comprehensive plan, business impacts include:
· Confusion and stress on the owner’s family
· Loss of revenue to competitors
· Negative reputation caused by a lack of customer confidence
· Staff becoming nervous and leaving for greater security
· Growth slowing or stopping
· Important business alliances falling apart
· Valuation of the business falling
A comprehensive Emergency Transition Plan helps to minimize these business impacts when an emergency happens.
The loss of an owner is one of the greatest risks a business will face. Our process of developing an Emergency Transition Plan includes an assessment tool to help protect your business from 7 deadly assumptions:
1. “I have a strong team; they will step up while everything gets settled”
Reality: Employees don’t normally like uncertainty and during an emergency, they will worry about whether they have a job. Good talent is desirable, and people may leave. Also, the talents and experience the owner has will create a gap which may be difficult to fill.
Remedy: Evaluate the holes that would exist if the owner can’t work and pre-determine how they would be filled. For key people, consider financial incentives like a “stay put bonus” to encourage retention.
2. “The person I trust the most is my decision maker; they will know what I want”
Reality: If this person is close to you, they will be grieving. High emotion puts the mind into a fog, which is a terrible time to be making decisions about the business. People often freeze in an emergency when there is no time to waste.
Remedy: Create detailed instructions for different scenarios to guide a clear course of action on how to steer the ship back on course quickly. This will reduce the number of on-the-spot decisions that will be needed.
3. “Our customers will understand and give us time to recover”
Reality: While customers will have a level of attachment to the owner, the longer the business experiences the emergency, the less patient they will become. It’s also not unusual for competitors to be active in offering value during the recovery period. A client called this “the wolves at the door.”
Remedy: Communication guidelines move the team to action quickly and enables them to build confidence with customers. Proactive and reassuring messages will help with retention.
4. “I will direct the business if I get sick or injured, it won’t be an issue”
Reality: An emergency transition plan isn’t for a broken ankle. It’s for serious issues like an accident that causes a coma, or an owner on heavy medication fighting for their life. We can’t count on being mentally capable of making big decisions. While ideally the owner returns, the business will suffer if we wait too long.
Remedy: Create guidelines on interim coverage based on the passage of time and the severity of the situation. And ultimately determine when the business should be sold.
5. “We don’t need to write out a plan, we will manage and figure it out”
Reality: Owners are used to handling issues and making decisions on the fly. In an emergency, the owner or key people aren’t available. And with so many stakeholders (families, business partners, employees and customers) involved, all with different opinions and needs, it can get messy fast.
Remedy: Ensure the plan is well documented and the key stakeholders are fully aware of what would happen. By removing confusion, the team can focus on mitigating risk and row in the same direction.
6. “Financially we will be fine - revenue and cash flow won’t be impacted”
Reality: Most businesses experience a decrease in revenue and have additional expenses. It may be challenging to generate new business when a key person isn’t available, and the team is over allocated retaining business. We often call this the cost of distraction.
Remedy: During emergency planning, you assess the risks and create mitigating plans with an eye to maintain profitability. If you have the right resources, doing the right actions the business recovers faster so the impact financially is reduced.
7. “If it comes to it… valuation and buyout of the business won’t be a problem”
Reality: Many shareholder agreements are out of date and unclear about areas such as valuation and definition of a disability. The business may have some insurance in place, and it may not provide enough funding for all scenarios. Access to money is great but it doesn’t give direction on its own.
Remedy: Read your agreements to ensure they will provide clear direction in all scenarios. As an example; evaluate through the lens of an owner becoming mentally incapacitated. Review your insurance to understand your coverage, how it will be used and if there are any shortfalls for the various buyout situations.
Being prepared is good business. You prepare in advance so the team can improvise if needed later. The goal is to not just survive the emergency, it’s to thrive during the recovery.
If you’d like to explore your degree of readiness and review where is your business vulnerable, drop us a line for an introductory call.
Kim Siegers-Robinson, CPA
Partner, Park Place Advisory