As entrepreneurs, we’re taught to have a solid business plan - to know what problem we’re solving, why we’re best equipped to solve it, and why we’re uniquely positioned to succeed versus our competitors or incumbents. But most business plans neglect one key element of it: business succession and estate planning. Everyone plans to hand their business over elegantly through a sale, or by handing the reins to someone after we retire - what we don’t expect is to pass away unexpectedly and leave our business in limbo. But just like we buy life insurance to protect our families in case the unexpected happens, as entrepreneurs we need to put plans in place to ensure our business lives on. Here are a few elements to consider when making your succession plan.
1. Discuss your wishes in the event of an emergency
While none of us wake up expecting to get in a car accident or suddenly pass away, it’s important to think about your wishes related to the business if you were to become incapacitated or die. Would you want the business to shut down, continue independently, or be sold? Who will replace your role - an existing employee or external hire? What’s the legacy you want to leave with the business, and is there anything else they should know about making those decisions? It’s likely you haven’t even thought about these things, so putting them on paper - or at least considering them - is a good way to start.
It’s important to have discussions with your executor about your funeral and end-of-life wishes, and it’s just as important to discuss your wishes for your business. Providing your executor with the answers to those key questions will ensure you have a clear plan that can be followed in the event of an emergency. In addition to your executor, you should consider talking about succession planning with your Board of Directors, key investors, and key members of your leadership team, and put together a plan for process and communications in the event of your passing (for example at Willful, this is part of our issues management plan).
2. Document Critical Information
As entrepreneurs we hold so much of our business plan and daily operations in our head - in an ideal world we’d have every account, password, and process documented and shared with key people, but the reality is there’s often information that only you know. Part of planning for the unexpected is ensuring you’ve documented critical information, and shared it with either your lawyer, your co-founder, a senior team member, or a family member who can provide access to it in the event of an emergency (for example using a password management platform like 1Password, or ensuring all company info if stored in the cloud and accessible by other key team members).
We saw the worst case scenario play out with the case of Quadriga founder Gerald Cotten. The founder of the cryptocurrency exchange died unexpectedly, and took with him the digital keys to his clients’ crytpo holdings, leaving over 76,000 customers out of pocket to the tune of $200 million. While most of us don’t have crypto keys floating on our hard drive, you most likely have business critical info you haven’t passed on.
3. Build it into your shareholders agreements
Succession planning is often about us planning to pass on our business - but it should also encompass all of your shareholders, including co-founders, investors, and employees. If you’ve drafted shareholders agreements, you should include a provision that pertains to what happens in the event of a shareholder passing away. Your lawyer can help you build provisions into your shareholders agreements so there’s a clear course of action for how those shares will be dealt with in the event that someone passes away.
4. Consider key person life insurance
If you were to pass away, it would be a big hit to the company, and to team morale. Key person life insurance is a way to offset the inevitable period of uncertainty that would follow the death of a founder or executive. By taking out a life insurance policy for founders or key executives that’s payable to the company, it ensures that the company would have an injection of cash that could help them weather the death of a founder or executive. It would also give your team breathing room to grieve, instead of forcing them into business as usual. These policies are an affordable way to have the peace of mind that if you were to pass away the business would have the financial support it needed to carry on - and they’re often required by investors at a certain stage of growth.
5. Make sure you have a will
While we’re focusing on business succession planning, estate planning is just as important for entrepreneurs. Every adult with assets (whether a home, a business, or investments), minor children or pets, or who is married or in a common law relationship should have a will. A will dictates who gets your assets and who cares for dependents when you pass away, and not having one means the courts make those decisions for you, and it means your family members are left to guess at what you would have wanted (not to mention it could be extremely tax inefficient for your beneficiaries).
As an entrepreneur, you should have a will since your business is likely one of your biggest assets. A will typically includes a carry-on business clause, which allows your executor to make decisions about the business (for example selling it, winding it down, or selling your shares), and you can also include specific instructions about what you want to happen to your business. Business owners can also create a dual will, which separates your business interests from your personal assets in order to avoid probate fees. You may want to get advice from an estate lawyer, financial advisor, or tax advisor depending on the complexity of your business.
The bottom line
At Willful we conducted research that found that 57% of adults don’t have a will. That means there are about 16 million Canadian adults who haven’t protected their families by creating a will, and a large number of those people are entrepreneurs, freelancers, or side hustlers who need to worry not only about their family, but about how their business lives on. Taking the time to think about succession planning means you’ll have peace of mind that your family is protected, but your business is too.