COVID-19 Resource Center

July 27, 2006

Business Continuity Planning

Like many of your clients, you may be a small business owner. We understand your problems and concerns, for we operate a small business, also. In the rush and stress of daily management, it is easy to put off or even overlook important strategic steps.. “Continuity Planning” is our way of referring to the preparations you should make for retirement, disability, death or even sale of the business.

The primary planning concerns for all business owners, particularly those who are nonrelated owners of the same business, are:

  • Creating a management position guaranteeing an income stream that is not double taxed.
  • Replacing your income with disability and life insurance proceeds free of tax, and providing for an orderly plan of liquidation.
  • Providing for the managerial skills of others who can perpetuate the on-going income stream.
  • Creating a plan that will provide for a purchaser of the business upon your death or disability.

In addition to dealing with the above concerns, family business owners must make plans to effectively continue the operations of the business, designate business successors, provide surviving spouses and children with sufficient assets, and provide sufficient liquidity for the payment of estate tax obligations so that the business will not have to be liquidated to pay those taxes at a severely discounted price.

In most family businesses, the business is built upon the personality, marketing/sales, and operational talents of its principals. The absence of a principal creates a void. While the grief?stricken family seeks to fill that void, customers will have anxieties and major concerns and often go elsewhere.

Post-death or post-disability problems are often complicated by internal family rivalry and disputes as to the ownership, control, and operation of the business.

In many states, unless specific authorization is provided to operate a business, the executor (or agent under a power of attorney) can only wind down the business.

As noted above, business Continuity Planning is strategic planning to assure that the business continues under responsible management to produce profits and maintain equity values for family members and, potentially, charitable beneficiaries.

If more than one child will be involved in the family business, one of the most important issues you should resolve is that of management roles and control. Advance decisions could mitigate or avoid the problem of dissension among children which could destroy the business and adversely affect the harmony of the family unit. Whether children will be involved or not, advance planning should also include such issues as:

  • leaving other or replacement assets, including the benefits of life insurance trusts, to create equality among the children;
  • avoiding a disproportionate estate tax burden upon the children who do not receive the business;
  • providing necessary legal authority to continue the business;
  • determining how business decisions will be made and who will make them;
  • instituting early involvement of family members in customer public relations; and
  • providing for funds such as "key person" insurance to provide needed capital during the inter-generational business hiatus.

Dave points out that you should not always plan to have family members take over a business. The contributors to GENERATIONS conclude, “It depends on what your goals and objectives are. If family members are active in the business and doing a good job of running it, the answer is obviously yes. If, however, they are uninterested passive inheritors, you might consider the following:

  1. Passive owners are often inept owners who will not be likely to attract or keep good management.
  2. If you have good management, it is likely they will want assurances that at some point they will have a meaningful ownership stake in the business after you are gone. If not, they will likely leave for a better equity opportunity elsewhere.
  3. Questioning whether your family's financial security would be better served if you sold the business and had the more liquid proceeds invested and managed by professionals.
  4. Whether or not you would be happy with a more diversified portfolio that did not include your business interests and headaches.”

You should start with the question, “Does my family really want to continue the business?” This is an obvious question that many clients forget to ask themselves as they ponder various succession alternatives.

You should make sure to meet with each of your family members, and ask the following questions:

  • Are you interested in working in the business?
  • Are you capable of running it, or handling various senior management functions?
  • Are you interested in learning about it?
  • Would you enjoy hiring and overseeing capable professional management.
  • Do you foresee problems with the business if something happens to me?
  • What would you advise me to do with the family business?

You may be surprised at the answers you get.

The first concern of many individuals who undertake Continuity Planning is protection of the life style and income of their surviving spouse. The small business owner frequently receives a significant cash flow from the family business. If the business owner desires to pass his or her business to children, arrangements must be made to provide sufficient replacement resources of that cash flow for the benefit of the surviving spouse. Advance planning for the purchase of life insurance, as well as preparation of installment sale notes, private annuities, and self?canceling notes, is therefore essential.

If you want to protect the life style of your surviving spouse, review these suggestions. There are several ways to do this, ranging from life insurance to nonqualified deferred compensation plans including:

  • Creating a management position guaranteeing an income stream that is not double taxed.
  • Replacing your income with disability and life insurance proceeds free of tax, and providing for an orderly plan of liquidation.
  • Providing for the managerial skills of others who can perpetuate the on-going income stream.
  • Creating a plan that will provide for a purchaser of the business upon your death or disability

Should you make a friend or potential investor an equity owner in order to have an experienced person standing by to take over the business? Taking on a new owner in a closely-held business can require major business adjustments which require significant deliberation. We consult with business owners about these issues and about the legal requirements that must be met before making an offer of an interest in a business to anyone. These same issues apply when the question of granting stock options is considered.

Existing shareholders need to assess their feelings about sharing management authority while they are still active in the business. After having operated a business for many years, most owners become accustomed to making all of the management decisions and otherwise do pretty much as they please on an informal basis. However, when there are other stakeholders involved, the atmosphere is often not conducive to that informality or dominance.

New owners will undoubtedly have the right to participate in dividends, the election of directors, and all other rights which flow from ownership, and these rights must be respected.

It is important to understand what motivates a particular key employee prior to offering ownership rights. What does he or she really want? Is the employee interested in financial rewards; or a say in management; or recognition and a special status in the company? If financial rewards are the paramount concern, issuing stock may not always be the best solution. 

What It Means to You

After considering the above issues, owners should consult with their professional advisors to explore all of the what if's which could occur, and all too frequently do in ill-thought-out business plans. These usually include: What if the employee takes a job with a competitor? What if the employee dies, encounters marital difficulties, files for bankruptcy, gives shares to someone else, etc.? What if the employee has a difference of opinion about the future direction of the business and refuses to cooperate? What if…? Dave Radcliff, J.D., is an attorney working “of counsel” with Cipriani and Werner, P.C. Dave is one of the contributors to the book GENERATIONS: Planning Your Legacy. He recommends that business owners review their Continuity Planning as part of their annual corporate legal check up. E-mail Dave Radcliff ( if you would like to receive a brief review of the tax considerations applicable to Business Continuity Planning. You may also wish to schedule consultation with his at the Cipriani and Werner office nearest to your business. At Cipriani and Werner we welcome the opportunity to assist you with your important business and estate planning matters.


GENERATIONS: Planning Your Legacy