I am often told by business owners that if they become sick or disabled, their spouse will step in to run the business until it can be sold. This sounds like a logical succession plan when discussed rationally in a comfortable office as part of an overall retirement and estate discussion. Unfortunately, reality most often does not meet these expectations. To understand the flaw in the logic, you have to look at the situation not from the owner’s point of view, but from the perspective of your employees.
Regardless of how loyal your employees are, usually the first thing they do upon learning of the owner’s illness is update their resumes and start looking for a new job. The uncertainty created by such circumstances motivates them to look at their own situation in case the owner’s goals do not line up with theirs.
From the employees’ point of view, any potential change in ownership means new management and old relationships could be challenged; and worry sets in. When there is even a tiny risk of layoffs, employees often act in anticipation of the worst possible outcome.This is particularly true of your best employees. Often these employees are already being solicited by your competitors, and the smartest employees are aware that it is easier to get a new job while they still have their old one.
The net effect is that your employees may leave just when you need them the most. This could paralyze the business. This means that cash flow could be cut off and the value of the business could decline dramatically.
And let’s not forget that your suppliers, customers, and bankers may also be asking questions at this time and keeping these stakeholders in the loop is vital.
So … what are the solutions?
First, there is the reactive solution. This is better than nothing, but unfortunately it can’t be expected to make a dramatic difference. This involves meeting with your employees and other stakeholders as soon as possible after the disability incident has occurred and having an open and frank discussion of your plans. You should first meet with your advisors, anticipate the questions, and rehearse so that you sound as strong and confident as possible in these meetings. Again, this will not eliminate your problems but could minimize the damage.
The other solution is to be proactive – which means putting plans in place now in case something untoward does happen. Such a plan serves all stakeholders much more favourably.
The proactive solution is to employ disability and key person insurance to protect the business and the family. Depending on the detailed plan that you put together with your advisors, you would still hold a meeting with your employees and other stakeholders, but the message at that meeting would be a whole lot stronger than the passive approach. Confidently outlining plans and contingencies that were set up years before the incident serves to strengthen relationships and helps keep the business intact.
The disability plan can be designed to make payments to the business to maintain cash flow and keep it running until either the business owner returns to work or a buyer is found. This is not the same plan that pays the owner for loss of income.
It is one situation when the sick or disabled owner has the potential to recover and come back to work. It is entirely another situation when the owner dies. This is the reason for ‘key person’ insurance. The speed and depth of the problems which arise when the owner dies is infinitely more dramatic. On top of the problems outlined above, add in that the spouse will be going through a grieving period that could take up to a year. This means, quite frankly, that not having a proper plan in place in the event of death of the business owner is a great disservice to your family.
Of course, putting together such a plan takes time and expertise; and most of all – it requires the will to address the problem up front. It is ironic that business owners think nothing of buying insurance on a highly unlikely event such as insurance against fire on their home, but ignore the need to insure against a highly probable event such as their own disability or death. Regardless, your advisor should broach this issue with you and ensure that you are aware of all of the implications for your specific needs.
This article was prepared solely by Larry Short who is a registered representative of HollisWealth®, a division of Industrial Alliance Securities Inc. (iA Securities), a member of the Canadian Investor Protection Fund (CIPF) and the Investment Industry Regulatory Organization of Canada (IIROC).The views and opinions, including any recommendations, expressed in this article are those of Larry Short alone and not those of HollisWealth®
BComm, CPA, CGA, CIM®, CFP®, FCSI
Portfolio Manager, Executive Director, Private Client Group
HollisWealth, a division of Industrial Alliance Securities Inc.
Hollis Insurance Inc.
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HollisWealth® is a division of Industrial Alliance Securities Inc. (iA Securities), a member of the Canadian Investor Protection Fund (CIPF) and the Investment Industry Regulatory Organization of Canada (IIROC). iA Securities is a trade name and business name under which Industrial Alliance Securities Inc. operates. This information has been prepared by Larry Short, Portfolio Manager for HollisWealth®, a division of iA Securities, and does not necessarily reflect the opinion of iA Securities. The information contained in this document comes from sources we believe to be reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces where he is registered. For more information about HollisWealth®, please consult the official website at www.holliswealth.com . ShortFinancial is a personal trade name of Larry Short.
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