In this episode: What happens to your business if you can’t show up tomorrow? Jon Peyton walks through business estate planning in four parts: a power of attorney, a succession plan, the effect both have on what your company is worth, and a buy-sell agreement if you have partners.
Key insights
- If you’re the only person who can sign contracts, run payroll or pay bills, a short illness can stall the whole business.
- A power of attorney, or a manager role defined in your operating agreement, lets someone you trust keep the lights on.
- A succession plan names who steps into every key role, so people move up one rung instead of leaving a gap.
- Investors and buyers discount businesses with no backup plan, and a forced sale usually benefits only the buyer.
- Partners need a buy-sell agreement so one owner isn’t left with an unplanned, unfunded buyout.
Episode timeline
- 0:40 Planning for death and disability
- 1:54 Part one: the power of attorney
- 3:20 How to put one in place, and choosing who
- 7:04 Part two: the succession plan
- 7:53 Grooming successors at every level
- 11:47 What a gap in sales really costs
- 12:57 Part three: the impact on company value
- 13:55 How a missing plan cuts a valuation in half
- 17:01 Why fire sales favor the buyer
- 17:23 Lifestyle entrepreneurs versus value creators
- 19:12 Building an owner-independent business
- 21:01 Part four: the buy-sell agreement
- 22:24 Bringing it all together
The episode in brief
Two guarantees. Last episode was about taxes. This one is about the other certainty, death, along with disability. The goal isn’t to be morbid. It’s to make sure your family, partners and employees aren’t left scrambling if something happens to you.
The power of attorney. In many small businesses the owner controls everything: contracts, deliverables, payroll and bills. If you’re suddenly unable to act, someone has to ask a client for an extension, make payroll and keep commitments on track. The “how” is simple: an attorney can draft a power of attorney, or your operating agreement can name a manager who can act for the company without owning it. The “who” is harder. Pick the person you trust to protect the company’s reputation for weeks or months.
The succession plan. If you can’t come back, someone has to replace you. Very small firms may need an outside business to step in or buy them. Once you reach roughly ten people, build succession inside: every leader grooms a replacement, so when someone leaves, gets promoted, becomes disabled or dies, everyone moves up one rung and you only hire at the entry level. That keeps disruption low, and disruption can cost more than the hire itself. Lose a salesperson who brings in $500,000 a year with no one ready, and you could lose most of that while a newcomer ramps up.
What it does to value. Investors look for these plans. Jon’s example: you want to raise $1 million at a $10 million valuation by selling 10%. An investor who sees no succession plan may value the company at $5 million instead, so the same $1 million now costs you 20%, possibly with terms that let the investor take control if a principal dies. Without a plan, a disability or death can force a fire sale at a steep discount, and some buyers watch for exactly that.
Lifestyle entrepreneur or value creator. A lifestyle entrepreneur takes most of the profit out to fund their life. If something happens to them, there’s often little to sell and too little coverage. A value creator takes what they need and reinvests the rest, building a business that can run for months or years without the owner. Those owners also tend to put a power of attorney and a succession plan in place, which helps maintain value.
The buy-sell agreement. When partners split the work and one leaves, retires, becomes disabled or dies, the other can be on the hook for a buyout they never planned or funded. A well-drafted buy-sell agreement, revisited as the company grows, protects both sides.
Key action items
- Name your stand-in. Decide who could run the business for 90 days if you couldn’t, and ask an attorney about a power of attorney or a manager role in your operating agreement.
- Map succession by role. For every key position, write down who steps in next and what training they still need.
- Review your operating agreement. Confirm it says who can act for the company if a principal is unavailable.
- Update your buy-sell agreement. If you have partners, check the valuation method and how a buyout would be funded.
- Get qualified help. Work with an estate planning or corporate attorney. C-Suite Planning™ can help you think through exit and continuity planning.
Listen next: Episode 34: How Entrepreneurs Protect Their Family’s Legacy
Value Creation Consultancy™ has since merged into Founder’s Accounting™.
This episode is educational and isn’t legal, tax or financial advice. Speak with your own attorney and advisers about your situation.