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Business Owner: This Fire Drill is Essential for Your Company, Family and Employees’ Well Being

Kevin Donohue, CFP®, AIF® | January 8, 2021

We carry an umbrella when the forecast calls for rain.  We apply sunscreen on the beach to protect us from the sun.  But when it comes to something as important as our business and exit plan, we often overlook the simple, routine, and essential steps needed to ensure ongoing health and wellbeing.  I share an example in this recent article.

We each did it in grade school several times a year.  While learning our multiplication tables we’d suddenly hear that ear-piercing fire alarm.  Once the initial scare wore off, we would be thrilled at the prospect of a 15-minute break from the school day.  We would then prepare for exactly what to do in the event of a fire, which fortunately never happened in my 18+ years of school.

Regardless of the less than 1 in 10,000 chance of a fire happening during the school day, we practiced each step of our exit from the building until we were safely out of harm’s way.  

But what if we knew with 100% certainty that during our time in school there would be a devastating and life-threatening fire?  We likely would have increased the number of times we held drills and paid much closer attention to what we needed to do to make sure we survived.

For business owners, that fire is coming in the form of their exit from the business, and with that exit will likely come a tremendous amount of stress to the company, your family, and the employees.  This event will threaten everything you have worked so hard to build unless you have a carefully designed and rehearsed exit plan.  

The Challenge 

·         Finding the time – Most business owners are extremely busy and find it difficult to dedicate time to this issue.  So, while they may have an idea of how they will transition out of the business, very few have given the topic its due attention and fully explored the options available to them. 

·         Where to start – In addition, many business owners don’t know where to begin. 

The Answer

Delegate the Fire Drill exercise to your advisor team.

The Fire Drill

Allow your advisor team to do the heavy lifting.  Your team should at least include your business and estate attorneys, your CPA, and a financial advisor with exit planning experience.  The exit planning advisor will quarterback the process with the assistance of the other advisors.  They will prepare for and then schedule a meeting during which your job is to listen, provide answers to questions when asked, and of course ask questions of the team.  The following is a generic outline of the topics evaluated:

Personal Wealth Assessment

  • What’s your “number”?  In other words, based on your goals, how much money do you need set aside to be financially independent?  
  • Based on the above number, how much of that wealth will you rely on the business to provide (your wealth gap)?  Is the business worth that much?  
  • If the company is not yet worth what you need, how do you achieve that value over time?
  • If the business is worth well beyond that amount, by how much?  
  • And if you don’t know what the business is worth, your team will find out. 

Based on current circumstances and your goals today, when would you like to exit and how? 

  • In other words, if everything goes according to your plan, explain your exit based on the facts as they are today.  Who would you sell to?  When would you sell? How would they buy it…etc.? You don’t need to commit to this but communicating these thoughts to your advisor team is a critical step. 

You wake up tomorrow morning and decide you want out of the business immediately.  

  • How quickly could you make that happen?  How might this impact your family? Your partners, shareholders, and employees? Do you have a buyer lined up? 

What if you die or become incapacitated?  

  • Your advisors will brief you on what would happen to the business according to your legal documents.  You will also think through the practical implications of such an event.  Is there a succession plan?  Is the company capitalized sufficiently? Would there be an effect on revenue? Leadership bench strength? Would key employees panic and leave?  Is there a communication plan to maintain employee confidence?  Would the company be vulnerable to competitors?

What are your exit options?

  • There are 5 ways to exit your business and each way has its own characteristics.  Understand each path and whether it’s right for you.  Clarity around which paths may be best suited for your situation is a big step towards a successful exit, no matter how far in the future the exit may be.  

End of Meeting Action Plan

  • Effective Fire Drill meetings will result in a list of action items which your exit planning specialist should summarize in a memo.  That memo will highlight who owns each action item and the timeline for turnaround.  

The Mind Set

The more you hold such meetings the greater the odds of successfully exiting the business on your terms, i.e., getting everything you and your family desire. Even if your plan to leave the business is over 10 years away, having one thoughtfully put to paper, which can be in pencil, will provide you peace of mind and serve as a blueprint for action should you need to exit sooner than planned.  Business succession is one of the single greatest risks to all companies. Thinking through the best succession strategy is not a simple conversation or decision.  The sooner you have advisors who understand your long-term succession goals (or short-term succession goals if you want to exit within a year), the more likely a plan can be designed to deliver the greatest success. Also, understand that planning to exit does not mean committing to exiting.  Planning is not the end. Ideally, it is the key to a new beginning. 

Post-Game

We have seen and heard about hundreds of mistakes made when selling a business. Our process accounts for what is needed from the business, the desired legacy, what options fit best, value acceleration for the business, and what is needed so you can successfully transition to your next life phase.

Selling a business is about a lot more than selling a business. It’s about financially preparing for all aspects of one’s next life phase. That’s where we can help.  Let us make sure it happens on your terms.

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Kevin Donohue is a partner at Legacy Planning Partners who specializes in helping families with complicated finances organize their affairs, document their goals and identify strategies to help them reach these goals more effectively. He combines nearly 20 years of financial services experience with cutting edge technology to deliver his clients integrated solutions to simplify their complex financial reality.

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