What Is Your “Plan B”?

The importance of contingency planning for business owners

Do you remember learning your ABCs as a young child? What if I told you that in regard to business planning, throw out everything you learned from your earliest days. Specifically, in the language of the business owner, the letter “B” comes before the letter “A.” Skeptical? Let me explain...

The Dream

Have you dreamt the following to be your story? You have a vision and start a business. The beginning weeks and months are tough. You secure financing, develop and execute your business plan. A small amount of luck and planning intertwines. Months become years. You begin to hire more people and profitability increases. Buyers are interested in your products and process. A buyer is secured for more money than you ever imagined, and you and your family live happily ever after. That being said, maybe selling your business is not your dream. Maybe you want to pass your business to your children or transition it to your key employees. The opportunity to execute any of these options would result in complete gratification.

“It is surprising how many business owners we encounter who do not have a basic contingency plan in place. A contingency plan is the first thing I address when working with business owners through the planning process.”

So, do you believe this dream is in reach? If so, would you want this dream threatened by something unexpected and potentially out of your control? Even if your dream is not currently within reach, have you thought about the ramifications if your envisioned transition does not turn out as planned? So how do you protect your dream and future business transition? The answer is a well planned and executed contingency plan. Such a plan can provide you and your family significant protection from the unexpected events life may bring.

I before E? No, B before A!
Elements of Your “Plan B”

There are generally three elements to consider implementing when creating a viable contingency plan. These elements include the creation of a “business will,” execution of a buy-sell agreement, and access to liquidity through personal resources.

Creation of your “business will”

The creation of a “business will” is not the same as the execution of your last will and testament. Your “business will” is created through an array of formally executed and informal directives that state your wishes and intentions regarding future decisions for your business if you die or become disabled. The first component of your “business will” is the review and execution of your estate plan. A formally executed estate plan under state law (last will and testament and trust planning including the adoption of a credit shelter and marital trust) will provide tax efficiency and income options for your heirs. Your estate plan must have flexibility to account for changes to your business (your “Plan A,” or how you ultimately would like to transfer your business) and changes in federal and state tax legislation.

Second, the execution of a limited power of attorney is prudent to ensure decision-making power is placed in the hands of an individual (or individuals) of your choice. Careful thought needs to be given to the issues and depth of decision-making ability you want to grant as a “limited power.”

Third, a formal succession plan should be considered to ensure all management and production positions in your company are covered. The goal is to ensure that operations can be maintained as close to normal as possible. This step is vital to protect you and your heirs from the value of your business being more vulnerable to a significant decline, especially if you are the only shareholder or are a majority shareholder.

The execution of a buy-sell agreement

If your business has more than one owner, the creation and implementation of a buy-sell agreement is arguably the most important element of your contingency plan. The purpose of a buy-sell agreement is to preserve and balance the continuation of ownership in the business with the treatment of all parties involved (buyer and seller). The goals of a buy-sell agreement are manifold, including but not limited to, setting a price for your business interests, providing structure for a funding source (life insurance is likely the best choice), and the identification of triggering events to prompt a sale. These events may include death, disability, voluntary termination, involuntary termination, and divorce.

Care should be taken in the type of buy-sell structure chosen. A buy-sell may be structured based upon an “owner purchases from owner methodology.” This method is known as across-purchase buy-sell. A buy-sell may also be structured through the use of a trust or through the business itself (known as an entity buy-sell or redemption). The tax ramifications and maintenance for each of these options vary. In turn, professional guidance through the use of a business transition strategist, attorney, CPA and other financial advisors is warranted to ensure that the proper buy-sell structure is chosen.

Creation of access to liquidity

One of the biggest issues a business owner and his/her family may face, if an unforeseen circumstance occurs, is access to liquidity. Most businesses utilize some form of commercial loan or line of credit to maintain operations, inventory, or for expansion purposes. An unforeseen circumstance may threaten access to these funds. Further, your family may be subject to a sharp decrease in business value if proper planning has not been implemented. This fact may threaten the standard of living that you and your family have worked hard for and are accustomed to.

The purpose of the Emergency Liquidity Trust (ELT) is to hedge against these negative contingencies while preserving business value for the family of a deceased business owner. The ELT may accomplish this hedge through specific powers granted to the trustee. The most important power granted to the trustee is the power to permit the lending of trust funds to the business for a stated period of time. This access to liquidity allows the business to have an additional “credit line” in the case of a contingency emergency. The ELT should provide income and principal options and benefits to its beneficiaries. The beneficiaries of the trust are generally the surviving spouse of the business owner and his/her children.

I recommend that the ELT be funded with life insurance to meet these objectives. The insurance that funds the ELT may be either term or permanent. The insured should be the business owner for whom contingency planning is being created. The value of the business should be taken into account when determining the amount of insurance purchased by the trust. In turn, the insurance proceeds paid to the trust provide the liquidity needed for the business and your loved ones to maintain lifestyle and preserve business capital.


It is impossible to plan for perfection regarding your business and personal future. The adoption of a personally tailored contingency plan based upon your goals and objectives provides protection against the imperfections that life and business may present. While it is not possible to stop contingency events from occurring, proper planning can result in a secured continuation of your business and personal legacy.

So thinking back to learning your ABCs, are you now convinced that “B” precedes the letter “A?" In the language of the business owner, “B” should always be letter number one.

This article originally appeared in the Summer 2011 issue of Wealth magazine.

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