San Diego Business Owners—Are You Prepared for the 5 Ds?

According to the Exit Planning Institute, 79% of business owners have no written transition plan and 48% have not completed any exit planning. On top of that, approximately 50% of business exits are involuntary and forced by external factors. Working with San Diego business owners, CCMI advisors regularly see that business exits often do not happen the way an owner originally imagines. Many of these business owners have over 75% of their net worth tied up in their business, so protecting that value becomes very important for their personal financial planning.

At CCMI, we believe all San Diego business owners should plan for a perfect scenario exit as well as a worst-case situation that may involve the 5 Ds:

• Death
• Disability
• Divorce
• Disagreement
• Distress

It’s important to evaluate the tough questions about what would happen if you had to exit your business as a result of one of the 5 Ds. Here are questions that may need to be answered as you consider these possible scenarios:

Death:

• Do you have a will and trust that indicates what should happen to your ownership of the business?
• Do you have an agreement with business partners in the form of a buy/sell agreement? If so, have you funded it with life insurance?
• Can the business continue without you or do you have an agreement with another company to take over as a contingency?
• Can your spouse or heirs run the business? Are they capable of running the business or are their key employees who could continue the business? Does your spouse or heirs have access to the financial information and bank accounts to keep the business operational?
• Will the business be able to continue at the same operational capacity it is currently performing at without you?

Disability

• If you can no longer go to work due to your own disability, or because you are taking care of a sick or disabled family member, what will happen to your business due to your inability to come to work?
• If you can no longer communicate, does your family know what you want to happen with the business, or how to continue operating it? 
• Do you have key team members with access to continue to pay bills, work with vendors, continue operations, etc.?
• Does your disability trigger a buy/sell agreement, even if you are only temporarily disabled?

Divorce

• Would your interest in the company be divided due to a divorce?
• Does your buy/sell agreement force you to sell your interest in the company if you are divorced?
• How are your shares valued as part of the divorce?
• Will the divorce impact your potential cash flow coming from the business?
• Will a divorce place greater demands on your personal income, and therefore cause stress to the business?

Disagreement

• If you and your business partner no longer can work together, who leaves and what are the terms?

Distress

• What happens if the business is sued?
• What happens to the business if a pandemic shuts it down for an extended period of time?
• Do you have contingencies if ransomware destroys your computer systems, and how you might recover from a major hack of your systems?

An unplanned exit may impact the day-to-day operations, the tax and legal aspects, and your company value. You should create contingency plans for each of the 5 Ds and be prepared for each unplanned scenario. While each of these events will be treated differently, it is important to think through and plan for each of these possible contingencies. Think of it as a plan to help your family, clients, and management team know what you would want to happen if any of those events took place. Additional questions are included in the infographic.

While we hope most San Diego business owners are able to execute their ideal exit, statistics indicate many will be forced to exit due to external factors. Given that a business often makes up a large part of a business owner’s net worth, being prepared to exit in various scenarios may provide a range of outcomes to a business owner’s personal financial plan. If you are interested in understanding how a range of business exits may impact your personal financial plan, let one of our advisors know, as we would be happy to help you evaluate how a business exit will impact your financial future.