The blog continues today with our ongoing discussion of the six common mistakes that can destroy businesses. The third mistake is failing to have a succession plan that spells out who takes over the company if the owner becomes temporarily or permanently unable to run the business.
Answer the following questions to see if your company is vulnerable:
• Is there a formal succession plan on file?
• Does the succession plan address disability?
• Has the owner involved key employees and family members in succession planning?
• Has the owner identified in writing who he or she wants to take over the company?
• Do the owner’s family members and employees know who is going to run the company?
• Does the owner have disability buy-sell or overhead expense insurance?
• Does the owner have contribution protection for his or her retirement account if disabled?
The more “no” answers, the greater the risk. How does your company look?
The impact of losing an owner or high performing employee on a temporary – or permanent – basis cannot be overstated. Two steps that will help avoid these problems are disability insurance to provide needed funds to avoid drawing down cash reserves and a written succession plan that provides an interim or new management.
Disability insurance can help replace after-tax income and may also provide benefits to pay ongoing overhead costs of the business. Some policies also have a lump-sum payout option similar to a death benefit on a life insurance policy which might be used to buy out an owner’s interest if the disability is permanent and he or she can’t return to the company. Emergency or short term contingency planning – which usually requires cross-training or cash reserves to hire replacement employees – is also essential to make sure that the company can survive a temporary loss.