Did you know that 50% of businesses fail due to unintended consequences? These consequences can lead to bankruptcy, layoffs, and ultimately an unplanned exit, forcing the business to shut down or transfer at a price much less than what the owner wants, needs, or even deserves.
The Exit Planning Institute refers to these factors as the 5 Ds: Divorce, Disagreement, Disability, Distress, and Death. Without preparing a business for these stressors, owners potentially risk their livelihoods. With 80% of an owner’s wealth locked up in their business, failing to create detailed contingency plans and legal safeguards can result in losing the majority of their wealth in an unplanned exit.
To best mitigate the impact of the 5 Ds on a business and the owner’s life, owners must first fully understand the negative consequences each can have on their organizations. Let’s take a closer look at each of the 5 Ds, and what you can do to help protect against them.
Divorce can be a major disruptor. To mitigate its impact, have a signed and detailed pre-nuptial or post-nuptial agreement dictating how assets are to be divided should you and your spouse separate. Avoiding the use of collateral from your home to invest in your business can prevent confusion during asset distribution. If your spouse plays a pivotal role in the business, ensure your team is prepared to take over their responsibilities if they decide to quit.
Disagreements with business partners can lead to significant issues. Effective communication is paramount for conflict resolution. Review your Buy-Sell Agreement annually to ensure the most up-to-date business valuations are considered. Clearly defined roles, responsibilities, and desired actions will limit opportunities for disagreements.
Disability can impact your ability to manage your business. Ensure your Buy-Sell Agreement includes Disability Insurance and Life Insurance. Select your Medical and Financial Powers of Attorney to limit stress and confusion. For degenerative disabilities, prioritize strong documentation of business processes to limit the impact on business value and operations.
Distress from unforeseen financial declines can be mitigated with proper financial contingency plans. These plans should include risk mitigation measures for legal issues, data breaches, supply chain issues, and more. Review your insurance policies to ensure your business is covered for interruptions.
Death of a key person can be devastating. Ensure you have a Key Person policy in place and the appropriate funds to hire someone of similar caliber. Create and update your Estate Plan well in advance to mitigate tax implications and legal difficulties for your family and dependents. Strong structural capital and documented processes are crucial for the continued success of the business.
By understanding and planning for the 5 Ds, you can better protect your livelihood and help to ensure the longevity of your business. Check out our other videos on business owners and visit our website for more information. We would love to talk with you about how we can help reduce the risks of the 5 Ds and help you secure your legacy across generations.
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