As a chronic entrepreneur, I am proud to belong to a fierce bunch of people who risk everything to provide jobs for other people and a quality life for my family. No one ever taught me how to be an entrepreneur, but I have certainly gained the equivalent of a Ph.D. from many past failures and a few successes.
In my role with Brokers Clearing House I see one consistent theme when I work with my fellow entrepreneurs—they are typically great at building a business but not so great at protecting it. As a result, they are exposed to many risks that could easily be eliminated but rarely are because the business owner is focusing on operating the business itself.
In any given business, there are generally four areas where the owners are exposed to risk. Many of their advisors try to slow them down enough to acknowledge and address these risks but are told things like, “After the holidays we can talk about it.” Tragedy doesn’t acknowledge the holidays and has no regard for anyone’s convenience. Below is the second topic in a four-part blog that will address four areas of risk exposure often unaddressed by business owners and describe ways you can address these issues.
What will you do if your business partner can no longer work at the company?
Owning a business has many ups and downs. So, too, does having partners in your business. Often, partners help round out your abilities and bring additional ideas to the table. In a lot of cases they are not just contributing ideas but playing critical roles in operating the business. But what happens if your partner suddenly becomes unable to work again due to an untimely death or disability? Can your business survive, and do you have a clearly written plan that describes exactly what will happen to your partner’s ownership and income after these untimely events?
Most business owners are so busy working in their business that they don’t plan for the future. A good friend of mine opened a business with his long-time friend and colleague about a year and a half ago. At the time they opened the company, there was a great deal of buzz around what they were bringing to our part of town. Immediately after opening, the business took off. It was quite common for the business to be at or above capacity on a daily basis. Both owners played a very active role and worked day and night at the operation. After just one year, they were already planning to open a second location. They bought the land and started the process.
Then one day a car ran a red light and collided with the car of one of the owners of the business. He was hospitalized for months, but he didn’t make a full recovery. Instead, he is permanently disabled and will never work in the company again. Unfortunately, my friend and his partner had failed to plan for this unfortunate circumstance.
After grieving and finally accepting that half of the ownership would no longer be able to work, they had to hire additional staff. This cut into the bottom line significantly. To add to the stress, the spouse of the owner who had become disabled showed up continually wanting to know where her husband’s paycheck was. The situation quickly became ugly, and the business has suffered. The land for the second property was returned to the bank, and the owners’ dream for the future may never be realized. They had not protected the business or its owners well.
When two or more people own a business together, it is absolutely critical for them to sit down with a qualified financial advisor and walk through all of the various “what if” scenarios. In my last blog, I asked, “What if a key employee is never able to work again?” and I described some simple steps you can take to alleviate the financial burden that such an event can place on a company. Likewise, purchasing disability coverage and life insurance on each owner of a business should be an absolute first step to planning for the future. There are additional steps that you will need to walk through with your advisor, but none of them are complicated or difficult to carry out.
The scenario above happens every single day in every single state in the country. Most businesses are not well equipped to survive an incident like this and haven’t laid out an appropriate plan for the untimely death or disability of a partner, despite the fact that this planning is incredibly simple to do and inexpensive to implement.
If you have a partner in your business, block out some time with your advisor to map out the “what if’s” in your lives. Although thinking about these scenarios is never fun, it’s worth the effort to make sure you are prepared for things that you hope will never happen to you and your business. Having a well-thought-out plan in place can alleviate much of the stress that comes from taking unnecessary risks, and if the unthinkable happens, it will make a difficult time less emotional.