March 30, 2021

The 5 D’s of Transition Planning: Why Business Owners Need to Plan for the Worst-Case Scenario

Whether you own a growing startup or a multi-generational family legacy, business owners understand that planning for the future is key in reaching business goals. While there are certain factors we actively plan for, including revenue goals, strategic growth plans and the future state of the company, there are other unknowns that require just as much planning. “De-risking” the company is a pivotal first step in preparing for the unexpected. While the owner may think they’re 10 or 20 years out from exiting, circumstances beyond their control can happen at any time. We refer to these circumstances as the 5 D’s: Death, Disability, Divorce, Disagreement and Distress. 

According to the Exit Planning Institute, nearly 50% of all business exits are involuntary and forced by dramatic external factors, and 79% have no written plan. Planning for the 5 D’s will not only give you peace of mind but could have a significant long-term ROI.

The Cost of Not Having a Transition Plan

It is important to run through the tough questions about what you want to happen to your business if you have to exit your business prematurely. Statistics from the Exit Planning Institute have shown that in the four years following an owner’s death, sales decline 60% on average and employment falls around 17%, resulting in a decline in the business’s overall valuation. Additionally, two years after an owner’s death, companies are 20% more likely to fail or file for bankruptcy. Having a plan in place can lower the risk of catastrophe happening to your business in your sudden absence.

Creating Contingency Plans

What do you want your family, clients and management team to know? What do you want to happen if you die or become disabled? What should happen if you or your spouse wants a divorce? What happens if there is a disagreement between business partners? An unplanned exit can not only impact the day-to-day operations of your business, but also the tax and legal aspects of it, along with the value of your company. Creating contingency plans for each of the 5 D’s can help owners properly prepare for any unplanned scenario.

While each of these unplanned events will be treated differently, an important step is creating and communicating the action plan for each contingency. This is done through a contingency letter, which serves as a playbook that is a shorthand to your operating agreement and your estate planning documents. Your contingency letter should outline what you, as the owner, would like to happen if you can no longer operate the business.

Have you planned for these contingencies? At Anders, we partner with business owners to create a personalized plan to de-risk the business. Having a written plan on how your business will handle situations out of your control can protect your business’s value. Anders Business Transition Planning can work with you on a personalized transition plan based on your Value Builder assessment. Contact an Anders advisor below to learn more.

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