Half of all businesses fail because of an unexpected divorce, disagreement, disability, distress or death, according to research by the Exit Planning Institute.
Financial advisors may want to relay this alarming statistic to their business-owner clients as part of a discussion of succession and exit-plan issues. Any of the above "five Ds" can lead to bankruptcy, layoffs and ultimately an unplanned exit as the business is forced to shut down or transfer at a price that's much less than what the owner wants, needs or even deserves.
By failing to create detailed contingency plans and legal safeguards in the in an case of an unplanned exit, businesses owners stand to lose the a significant portion of their wealth
To most effectively mitigate the impact of the five Ds, advisors should work with their entrepreneur clients to help them fully contemplate the negative consequences these events can have on a business.
Divorce
Divorce is a tricky topic to broach with any client. But with divorce lawyers pegging the entrepreneur divorce rate at 5% to 10% higher than that of non-business owners, it's crucial to consider the impact a marital split could have on both a client's company and financial plan.
While divorce may not be the direct cause of a business failing, it will impact a business more than the owner might think, especially if the client and their spouse are in business together.
When one spouse chooses to exit the business due to divorce, it can create additional pressure on the remaining employees. If both spouses elect to stay in the business, it can create tension in the workplace.
Even if both ex-spouses are not both involved with the day-to-day operations of the business, the division of marital property includes financial assets, including the business. Depending on how the assets are distributed, the owner may end up with a significantly lower stake.
To limit the chances of business failure due to divorce, business owners should create a
Disagreement
While partner conflicts can appear suddenly and unexpectedly, they more often build to a climax gradually over time. This is because conflict is frequently rooted in fundamental differences between the partners in the form of contrasting leadership styles, goals, client or customer approaches, communication styles and other differences.
Yet serious conflict is inherently personal. Partners can quickly fall into a pattern of criticism and blaming as a result, which can undermine the partners' ability to make decisions, agree on recommended value-creation strategies and actions, erode trust, keep them from operating together effectively, and take the necessary steps to prepare to eventually transition the business.
To avoid personal conflicts and overcome disagreements, partners must clearly define roles, establish goals and communicate effectively. Advisors should stress the importance of creating a transition plan that involves all partners before any disagreements arise.
Disability
Unfortunately, disabilities and illness are part of life. Without proper plans in place, a sudden medical emergency could cause a business' value to plummet. When a business owner becomes disabled, the financial impact on their personal and business finances is significant.
Without properly planning for the possibility of facing a medical condition or disability, an owner effectively sets the business up to face uncertainty after their exit. Advisors can play a key role in ensuring that clients' personal and business finances are secure by discussing ways in which business-owner clients can protect their future in the case of disability.
One option is disability insurance to ensure that the owner's income and the value of the business are protected. Additionally, a strong succession plan can lessen the financial impact of an owner or key employee's disability on a business by outlining how the business will operate while the owner or key employee is out.
Distress
Good contingency planning includes risk-reduction strategies and policies to protect against everyday disaster situations that lead to distress that can be both financial and personal in nature. These situations include, but are not limited to: data breaches, property disasters, supply chain disruption, work safety incidents, legal battles and critical employee loss.
To limit the impact of these stressors on a business, owners must incorporate contingency plans into their business processes. Most people don't deal with distress until it reaches a critical level. Discussing these potential crises as part of the succession planning process can help business owner clients identify the root of the distress early, making it more manageable and less of a detriment to the business's value and success.
Death
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The goal is for the business to be ultimately independent of the key person or owner. If it isn't, there can be a loss of important skills and expertise that can ultimately lead to a decline in revenue, profitability and overall value.
Advisors can facilitate this planning by helping their business owner clients create a successful
Dealing with divorce, disagreement, disability, distress, or death can create unexpected disruption to any financial plan, but this is especially true for business owners. Financial advisors can help their business-owner clients avoid unplanned exits through proper succession and exit planning.
Even without the five Ds, the best way for a business owner to ensure they are prepared for an eventual transition is to create a well-organized exit plan that addresses their business, personal and financial needs. By serving as a business owner's most trusted advisor, financial advisors can help put their clients' business in the best position in case of an unexpected exit.
