Why business owners should de-risk their business.
What does De-Risking Mean?
In my opinion, de-risking means "protection". Protecting yourself and your business from what can be considered unanticipated life events that can happen to either one of us, at any time. In fact there are 5 specific risks that all of us business owners should be aware of and have a written plan for in case they become a reality.
What are the five risks business owners should protect against?
The five risks are known as the "The Five D's". Death, Disability, Divorce, Disagreement, and Distress.
Why should business owners de-risk their business?
Per the Exit Planning Institute 50% of business exits are involuntary. That means 50% of exits are FORCED! That is a shocklingly high number. Just being human, a lot of us look at the five risks and tell ourselves, "this won't happen to me." Until it does and there is no documented plan for our loved ones, business partners, or employees to follow in a time of high emotion and uncertainty.
How to de-risk your business?
Death - get a life insurance policy. Very simply it works like this....The healthier and younger you are, the cheaper the cost will be. The less healthier and older you are, it's more expensive. Shop around and do your research.
Disability -get a Disability Insurance policy and consider a Business Overhead Expense policy. A personal disability insurance policy replaces your personal income if you become incapable of working (depending on the definition of "disability" in the contract). A business overhead expense policy reimburses a business owner for business expenses incurred during a disability. Typical expenses covered under these policies include mortgage or rent, salaries, or utilities.
Divorce - this can be a difficult one to plan for especially if you and your spouse have a "solid" and "long-standing" marriage but it does happen more often than you think. Consider having a prenuptial agreement in place. Consider how changes in your finances impact the cash needs of the company. Document a non-adversarial process to make decisions needed to unbundle your financial affairs at the end of a marriage and mitigate the impact of your business.
Disagreement - When multiple partners enter into a business, it's not all roses and rainbows. Rarely do they prepare for conflict with a productive exit clause. Document a non-adversarial process to work through how the business will be run going forward so all partners can hopefully walk away "on good terms." For example, how will your interest be valued? How will it get paid?
Distress - The year 2020 has taught all of us some painful lessons on regarding business interuptions and external threats that we could never imagine. Many suffered disruption to their business's productivity and the delivery of their products. Develop a contingency plan which includes risk reduction strategies and policies to protect against everyday disaster situations, including data breaches, critical employee loss, work-safety incidents etc. Having thoughtful and well documented Contingency Plans in place can help preserve and protect the value of your business when the unexpected happens.
If you enjoy this content, check out the "Business Exit Success" Podcast! We'll bring you episodes weekly on topics laser focused on how owners can grow the value of their business and position themselves to exit successfully on their terms.