Column: Protect against the five D’s of business

John Warrillow, CEO of The Value Builder System, a coaching organization that helps companies identify and improve their value drivers and ultimately the value of their business, tells the story of Erica Douglass, who was too young to feel so old. Tired and sick every time she ate, her doctors told her to slow down, spend less time at her company, and take a break.

Struggling with what would later be diagnosed as Celiac disease, a condition that damages the lining of the small intestine, Douglass was frustrated with why her body was failing her. Unable to get an accurate diagnosis for her condition, and seeing the first signs of the recession along with some major industry shifts on the horizon, she sold her business to a competitor in a hastily arranged agreement that paid her $1.1 million over a three-year period. She was 26.

As Warrillow notes, luckily for Douglass, her business was sellable when she fell ill. A lot of companies today would not be able to claim the same — they can’t function without their owners. That’s a business that is not transferable.

Most business owners envision exiting their business on their terms, whether it is at retirement or at some other juncture in the business. Nobody plans to get sick, but the No. 1 reason businesses get put up for sale is a health scare suffered by the owner.

Turns out there are the 5 D’s that account for more than 50 percent of business exists. They are: Disability (sickness); death; divorce; distress; and disagreement.

When one of these 5 D’s happens, everything is a crapshoot if the business is not prepared. Keep in mind, close family members suffering any of these 5 D’s will also change the game.

Prepare for absence

So how do you protect the business and net worth locked inside the business from the 5 D’s?

The key is to make sure your business is transferable at all times. Building your business so that it can run without you (the owner) not only makes your company more valuable, it is also the best insurance you can have for the things you hope will never happen.

In addition to this, one of the most important documents you can develop in your company is an emergency management plan (aka a contingency plan). This will give your family and leadership team a roadmap to follow if a crisis hits.

Without continuity of leadership, your business will probably fail. If ownership transition for the business is uncertain, business continuity is seriously threatened. Your unexpected/unplanned departure can have a significant effect upon the company’s ability to retain key employees, maintain its financing and relationships with key customers and vendors, and its relationships with other parties who are important to the ongoing success of the business.

Successors who are not ready to lead may be prematurely thrust into leadership positions, drastically reducing their chance of success. Other employees may sense trouble and begin to seek employment elsewhere. Important customers and suppliers may react in the same way.

Failing to understand the consequences that your unexpected/unplanned departure can have upon your business can result in the unintended death of the business.

To minimize the chance of this type of panic or power struggle, an emergency management plan should be developed to account for the sudden absence of leadership. Responsible individuals (such as corporate officers and board members) should be made aware of and empowered to implement the plans should such an occasion arise.

Building your business so that it can run without you not only makes your company more valuable. It is also the best insurance you can have for the things you hope will never happen.

Tom Garrity is managing partner at Compass Point Consulting LLC in Hanover Township, Northampton County. He can be reached at tgarrity@compasspt.com.

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