Samuel B. Moses, Certified Public Accountant
Do You Have An Emergency Back-Up Plan In Place?
Have you ever considered how your business would continue if there was a natural disaster, or if something happened to you? Every business owner should carefully consider the following questions:
What happens if there is a natural disaster such as a flood, earthquake, long-term power failure or fire? If you lose access to your normal workplace, does your company have a back-up location or locations from which the business can continue? Your home or employees' homes are possibilities. If your place of business is your home, you will need to seek other alternatives such as hotels, many of which include modem hookups in their rooms and business centers within the location. Your homeowner insurance policy may even cover all or part of the cost of the hotel.
1. Do you maintain offsite back-up for your computer systems?
2. Do you have an offsite or portable computer?
3. Do you have offsite access to your key business software?
4. Do you have back-up manuals and material needed to continue?
5. How will your communications with clients and suppliers continue?
These are just a few of the many circumstances that you need to consider when preparing your contingency plans. Even though you may never use them, you should take the time to prepare your own contingency plan, including those unique circumstances that apply to your business.
Who will step in if the owner or key employee is temporarily disabled, or worse yet, dies? Have you ever stopped to consider what would happen to your business if you become temporarily incapacitated? Do you have contingency plans in place in case of permanent disability or death? Or, like so many others, do you believe only the "other guys" encounter these problems? Don't roll the dice; brushing these issues aside can lead to disastrous results. You need to establish contingency plans so that in an unforeseen emergency, your business can carry on or be sold for its true value.
Every business is different, so there is no one set of specific guidelines that apply to all. However, there are a variety of issues that need to be addressed when establishing your individual contingency plans.
Temoporary Disability - Who will step in and take your place? If your occupation requires licensing, are they properly licensed? Are they familiar with your operations, systems, computers, software, etc.? You need answers to these and other questions before the problem arises.
Death or Long-term Disability - Partnerships and multiple owner corporations generally have contingency plans built into the organizational documents, leading toward a smooth transfer of ownership. On the other hand, sole owners are generally the most vulnerable when death or disability strikes. Your spouse or heirs may have no understanding of your business and will be unable to operate or sell the business. A written contingency plan including the names of professionals who know the business, its worth and who would be willing to assist, would be of great benefit. This is especially true for personal service businesses where the clients will seek services, thereby eroding the value of the business to a potential buyer.
Every business owner should prepare a step-by-step business transfer including transfer documents and go over these plans with their spouse or their heirs so they know what to do when the time comes. This should include the name of a sales agent, if appropriate, an estimate of the business worth, transfer terms, pre-written transfer letters, pre-written sales agreement, a list of suitable prospective buyers that would be willing to acquire the business and the name of a trusted friend in the business that can provide assistance.
The Hazards Of Loan Guarantees
Generally, the bank will not loan money to a business, even an incorporated one, without securing a personal loan guarantee from one or more of the owners or principals of the business. The lender may require an owner to pledge personal assets, or use the assets from one business to guarantee a loan or lease obligation for another business. This can seem like a good strategy at that time, because it facilitates the loan agreement.
But what if the business borrowing the money becomes insolvent? In many cases, the owner could lose both companies or be required to liquidate their personal assets. Obviously, a lender or leasing company will take steps to satisfy their debt and may require the liquidation of the company that owes the debt. If the assets are not sufficient to settle the debt, the remaining liability becomes an obligation of the guarantor and payments can be require in a very short timeframe. Even if the payment time is spread out, these payments are mad of after-tax profits, which can put a tremendous strain on a business - sometimes, one too great to bear.
Always consider the worst-case scenario before guaranteeing a debt. If the obligation would result in a burden that the guaranteeing company or the owner could not bear, it may be best to seek the other business alternatives and pass on the loan.
100 Wilshire Blvd., Suite 1800, Santa Monica, CA 90401
Samuel B. Moses, C.P.A.
100 Wilshire Blvd.
Santa Monica, CA 90401