Transition Planning With The Four D’s

Heart attack, auto accident, illness, a resignation, family dispute. Most of these unanticipated, but by no means unusual or uncommon events, fall under ‘The 4Ds’ – Death, Divorce, Disability or Departure. The occurrence of any one of them can instantly throw a business into disarray.

Unpleasant though they are to consider, when one of them befalls the owner of a business that doesn’t have a plan in place for dealing with the fallout, then the result can be more than unpleasant – it can be catastrophic. Disorganization, loss of business opportunities, loss of customer or market share and a decrease in employee morale and productivity are the least of the repercussions. Family or partner discord, heirs left unprovided for and the demise of the business are real possibilities as well.

An Example

When Kenneth Wilson, the owner of Wilson Products Inc. died unexpectedly his three daughters found themselves in charge of his US$12 million aircraft parts business. While all three had grown up around the company they had never been trained to take on the management of the business and no other arrangements to cover a hiatus in personal management by their father had been arranged either. The business was completely vulnerable and, with the aerospace industry also going through rapid change, the business floundered. Soon it had to file for bankruptcy. With US$20 million in orders on the books for work through the next five years, the Wilson’s couldn’t find a buyer, and the company’s assets were auctioned.

Where management knowledge about how the business works is restricted to one person the death of that person leaves the business rudderless. Continuity of management can be maintained only if there has been a long term plan for training up family into their eventual managerial responsibilities or using a board of advisors that has had a long term association with the business and can steer it until more permanent arrangements are made.

Death can leave heirs financially unprotected. Will business partners pay the owner’s heirs the value of their interest in the business? Maybe. But not in the case of Terri Gettman. When her father died without any written plan outlining what was to happen to his minority stake in a Georgia based paper making machinery manufacturing business, it was an opportunity for the other partners to cut the family out of the business without due recompense.

Death entails payment of estate taxes on the value of a business. If they haven’t been planned for it can involve hurriedly trying to raise finance to cover them. But in many instances banks aren’t prepared to come to the party when the business has just lost its major asset – the owner. The business may have to be sold simply to pay its tax liability.

The Other 3 D’s

Rarely do you see divorce listed as a cause of business bankruptcy, but with nearly half of all marriages ending in divorce, in circumstances that frequently turn ugly, subsequent litigation has destroyed many privately held businesses. In the absence of any type of divorce planning, such as a buy-sell agreement, all assets may be legally required to be divided 50-50. To come up with the cash to pay their divorce settlement owners have had to sell their business. That may not be the worst part of the story. In a court enforced sale the owner may have to accept a discount price. In one case, with offers from two potential buyers to choose between, the owner was forced to accept the lower bid because it was for cash on the spot. The judge agreed with his ex-wife and her attorney, who argued that it wasn’t fair for her to have to accept whatever financial risk might be attached to the higher bid because, unfortunately, it had provisions for an extended payout.

Disability and departure are equally problematic for the survival of a business that hasn’t developed a contingency plan to handle them. Partners can decide to leave for a number of reasons. They may decide to leave for another opportunity or simply to take life easier. But the same issues remain. Who is going to do the work? What is owed the leaving partner? Where is the money coming from? Both disability and departure can bring huge financial and emotional pressures in their train.

Planning for the 4Ds

Emotionally charged as it may be to contemplate the 4Ds, planning for them should be an integral part of overall business and personal financial planning for business owners.

The last thing you want to happen is to be forced to sell your business in a hurry because of unforeseen circumstances or to leave the business in a dire position when you die. Failing to consider unpleasant circumstances or to plan for dealing with their consequences is a sure way to put the future of the business and the welfare of the family stakeholders at risk. An estate plan, a buy-sell agreement, a succession plan, a pre-nuptial agreement can each feed into an overall transition plan that protects the business and its dependents in the eventuality of one of the 4Ds occurring to the owner.

The key to avoiding difficult situations arising from the 4Ds is to start succession planning as early as possible, revisiting the plans on a regular basis and dealing with ownership and management issues separately.

(Copyright RAN ONE Business Advisor Member Content 2007)

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