Owner Hot Button No. 4: Unexpected Death of a Client

Fri, 02/04/2022 - 09:01


A business owner client dies, and their business dies with them.

In this post, we meet another business owner who looks to a trusted advisor to help resolve an issue that keeps her up at night. Separate from the challenges of losing a customer or the departure of a key employee, this owner wants to avoid the chaos that her business owner friend’s death caused for his family and business.

Once again, we’ll illustrate how you can help business owners to resolve their hot-button issues and in the process, gain more than clients: you’ll gain Exit Planning clients.

Kate Day was visibly upset when she sat down with Marcia Posada, her friend’s business advisor.

“Three weeks ago – totally out of the blue – my best friend Harvey Winslow died,” Kate started.

Before Marcia could offer her condolences, she continued:

“About 10 days ago, his wife asked me to help her sort things out. Before I had a clue what that might involve, I agreed.”

“I’m sorry for your loss, Kate,” Marcia responded. “As you know, I represented Harvey for over 15 years, and I’m the one who referred Harvey to an estate planning attorney to prepare his will and trust. I also made sure he had sufficient life insurance. Is there anything else I can do?”  

“Unless you need a full-time job straightening out a mess of mammoth proportions, I don’t think so,” Kate responded.

“Tell me what’s going on,” Marcia prompted.

“Harvey had a will and some life insurance to supplement the business’ income, so he had assumed he’d done his job as a husband and father,” Kate explained. “But he hadn’t done anything to prepare his wife or his business for what would happen if he died. The problem is that Harvey’s very successful business was only successful because Harvey ran it… and only Harvey could run it!

Marcia thought she knew where this conversation was headed but asked Kate to give her a few more details.

“The business is a mess without Harvey!” Kate explained. “His wife has never been involved, so she can’t answer any of the legitimate questions the employees have about their future – two of them have already given notice – and the future of the company. The bank is already making noise about the repayment of its $600,000.”

Without taking a breath, Kate continued, “There’s no way for me to know what Harvey would have wanted done with his company. As far as I can tell, there’s no one there who can step into his shoes, so everything is in shambles.”

Kate then paused before asking, “Wasn’t there something you could have done to prepare Harvey’s family and his business for what could happen should he die before his planned business exit? As his advisor, did you ask him to think about the effect his death would have on his business and to his family?”

Kate’s questions made it clear that Marcia had failed Harvey - not intentionally - but by neglecting to consider the consequences his death would have on the ability of his business to continue.  There are some basic tools that advisors use to mitigate the repercussions of an owner’s premature and permanent departure from a business, and Marcia didn’t know how to recommend of use any of them.

Much can be done to prevent disaster when an owner dies, but prevention takes planning. Exit Planning Advisors create and implement two invaluable strategies that reduce the severity of the consequences when owners die before their planned business exits:

  1. Written business continuity instructions
  2. Stay bonus plans designed to retain important employees until a business can be transition or successfully liquidated.

Let’s look briefly at each.

Strategy 1: Business Continuity Instructions (BCI)

Business continuity instructions act as a non-binding guide that explains how family members and advisors should address personal and business issues that arise from an owner’s unplanned departure. Most owners simply don’t think about these issues that would arise if they were to lose control of their businesses, so it is our job to ask them to consider questions like the following:

  • What would their families do to address any outstanding business debts?  
  • Is there a plan to sell or dissolve the business so that the owner’s family can access liquid funds?
  • Whom could the owner’s family consult to fix problems that are likely well out of their wheelhouse?

A host of additional issues are addressed in the BCI and are based upon our experiences and those of the Exit Planning Advisors BEI supports.

Strategy 2: Stay Bonus Plans

Exit Planning Advisors often recommend that their owner-clients reward – described in a written stay bonus plan – important, named employees who stay with an owner’s company for a pre-determined period (usually one or two years) after an owner’s death. The bonus, in our experience, must be significant, meaning approximately 50% of an employee’s compensation. To assure covered employees that the money will be there should the owner die, bonuses are usually funded with life insurance on the owner’s life.

Had Marcia used these tools, Harvey’s family and business could have avoided disaster.

Takeaways - All Business Owners Need Exit Planning Advisors!

  • Most business owners simply don’t think about the issues that would arise if they were to lose control of their businesses, unexpectedly and permanently.
  • Exit Planning Advisors provide a great benefit when they make business owners aware of what can happen to their companies and families should they die before their planned exits.
  •  Exit Planning Advisors use a variety of planning tools to ensure that their client’s businesses can continue until they are satisfactorily transferred.

Preventing your client’s most pressing problems requires planning. Let’s talk about how BEI can prepare you for these conversations. Contact us today.

Image removed.

Follow us on LinkedIn, Facebook, and Twitter to stay up to date on all current Exit Planning news and trends.