Settle the Hard Agreements Before You Need Them

A business continuity plan answers the questions owners least like to discuss: what happens to the business, to its liabilities, and to its key people if an owner dies or becomes totally disabled. Every closely held company needs those answers. The owners who settle them early tend to spend the rest of their time on growth. The owners who put them off can find the whole company stuck during what should be its best years.

The Power Sweep

About fifteen years ago we gave a name to the set of recommendations we found ourselves making for nearly every client. We call it the power sweep. It covers three questions:

• What happens to the business if an owner dies or becomes totally disabled?
• What happens to the business liabilities, including the debts and guarantees that often rest on an owner personally?
• What happens to the key employees who keep the company running and who may wonder whether they still have a future there?

We found that every client needed these answers, whatever else they were working on. Today the power sweep is one part of a broader review we do with owners. That review also looks at how key people share in the value they help create, so the company is more transferable, and at the most realistic path for the ownership itself: to management, to family, or to an outside buyer.

Why Timing Is Everything

These agreements are easiest to reach when nobody expects to use them.

When owners are healthy, the business is stable, and no crisis is in sight, a buy-sell agreement or a disability provision is an abstract exercise. Everyone can think about fairness because nobody knows which side of the agreement they will end up on.

Once a triggering event feels close, that changes. An owner in poor health, a partner who is already pulling away, a dispute that has started to harden: each one makes every clause personal. Good luck getting an agreement signed when someone suspects it will be triggered right after they sign it. We have watched that dynamic stall a company during its strongest growth phase.

Settling early also lets owners get the details right. A workable agreement needs a valuation method everyone accepts, a way to fund a buyout if it is ever triggered, and payment terms the remaining owners can meet without starving the business. Each of those takes time to think through. Rushed under pressure, they tend to be vague, and vague terms are what families and partners end up arguing over later.

The core document for most of this is a buy-sell agreement. Its terms differ by entity type, so owners of a partnership should also look at how a partnership buy-sell agreement works, and owners of an LLC at the LLC buy-sell agreement.

A Company Stuck in Its Best Years

A general contractor had grown 30 to 50 percent a year for five years straight. The owners made the right moves to support that growth: they hired and promoted the right people into senior roles. Four or five of those people were driving millions of dollars in earnings.

The problem sat with the ownership group. The owners agreed on the direction of the business. They could not agree on how to value the company or how to reward themselves. And until the owners settle what the business is worth and how they share in it, they cannot design a fair way to reward the key people who are producing that value.

The roots of the disagreement ran deep: years of poor communication, emotion still attached to old decisions, and disputes over who deserved credit for which relationships and results. Trust between the owners eroded to the point where they had to bring in outside professionals to help them talk to each other. All the while the business kept growing, so every unresolved question carried a larger number attached to it each year.

Both sides knew the business needed protecting. Neither was willing to come to the table and make the decisions. Meanwhile the key people waited, and people like that do not wait forever without some sign of what is in it for them.

A Company That Sold on Its Terms

Around the same time, we worked with another owner whose situation looked different. The management team was already tied to the company's future, and a minority owner who trusted the majority owner left the operating decisions with him. The team underneath knew their roles.

When that company went to market, it sold to a third party at about twelve times earnings, and the owner largely set the terms. In the same stretch of time that one company spent spinning on its unresolved questions, the other prepared, went to market, and closed.

The second owner's advantage was a settled ownership group with its key people already tied in.

Settle It Between the Owners First

If you share ownership with a partner who has real authority, any disagreement between you will hold up progress on everything else. Our recommendation is consistent: settle it between the owners before you bring a plan to the team or make commitments to anyone.

That means agreeing on how the business will be valued, how the owners will be treated if one of them dies, becomes disabled, or wants out, and how the key people will share in the value they help create. Once the owners have a shared answer, the rest of the plan has a foundation. Our piece on the equity plan that makes your business worth more covers that last step.

Keep the Work Inside the Company

A plan like this touches attorneys, accountants, insurance advisors, and bankers. It is tempting to hand the whole project to outside advisors. The better results we have seen come when someone inside the company owns it.

In one family business, after the meetings with the attorney were done, we handed coordination of the plan to the founder's daughter, who was being named business manager of the combined companies. She did not know the construction side of the business, but she understood people, and she was learning finance. Over six months, a finance analyst from our team walked her through the language of the balance sheet, the income statement, and working capital, so she could sit at the table with attorneys, accountants, and bankers.

She kept a color-coded book of every outcome the family had agreed to, with the reasons for each decision and the administrative steps that followed. When anyone has a question now, she can answer it. The plan became part of how the company runs, and the family felt the relief of knowing it was done.

Understand What You Have Signed

Owners sign agreements over the years that they may not fully understand at the time. A shareholder agreement, a loan covenant, a transfer restriction. Those documents can affect the value of the company, whether the eventual buyer is inside or outside, and even the next buyer's ability to finance the deal. Finding and clearing those restrictions is part of what makes a business transferable, whether the next buyer is inside or outside the company.

This is also why the review should happen with the owner's attorney and CPA involved. We advise on strategy and structure. The legal and tax answers belong to them, and the best outcomes come when all of us work from the same picture.

How Trust Gets Built

Years ago, during a client's audit, one of our advisors committed to calling the company's CPA every Friday at 9 a.m. for six months to track progress. Some weeks brought real work to run down and document for the owner. Some weeks were a short check-in. The audit passed with no penalty. The consistency also built a relationship with the CPA, who then introduced us to another of his largest clients. That second relationship has lasted more than a decade, and the business has grown to about $50 million in value.

That kind of consistency is what turns a one-time project into a working relationship.

Where to Start

Start with the three questions of the power sweep. Write down what would happen today if you or a co-owner could not come back to work tomorrow. If the honest answer is "we are not sure," that is the place to begin. From there, a succession planning checklist turns the answers into tasks, and it helps to be honest about the cost of not having a succession plan.

Families weighing a transfer to the next generation face a further decision about whether to sell or gift the business to their children.

Once the answers are settled, review them from time to time, especially after a change in ownership, health, or the value of the business.

We discussed these stories on an episode of our podcast, What Transfers.