Dave’s assistant plant manager didn’t have a lot of good news to report to Dave’s wife, Jennie. The explosions which had rocked Dave’s chemical plant in New Elm City, and the resulting chemical fires, had killed Dave, the plant manager and two plant inspectors. They had also seriously injured a dozen other employees and forced the evacuation of residents within a 5-mile radius of the plant, many of whom were checking into local hospitals with complaints of lung irritation.
Dave had just told Jennie that morning he was concerned he may have deferred the maintenance program for too long. He had lined up an inspection for that day.
Fusion Blend Chemical Corporation blended oilfield production chemicals and then distributed them through several distribution sites in the United States and Mideast. Dave had worked for the company for twenty years before purchasing it ten years ago. He had paid off the purchase price in four years, had doubled the company’s size and was looking forward to his and Jennie’s retirement in 5 years, when he planned to put Fusion Blend on the market.
Besides the tragic loss of her beloved husband, Jennie was about to face the effects of Dave’s “Mulligan” Exit Plan – which had been based on his assumption that he’d always have a second shot at overcoming whatever befell him and his company. However, there would be no do-over for Dave or Jennie.
Research shows there are 12 principal reasons business owner transitions, successions and exits fail. Each of these reasons impacts the company’s longevity and ongoing annual profitability as well as an owner’s transition and future exit results. This article addresses the fourth of these 12 reasons:
Reason #4. Insufficient Company Structure and Key Asset Protection. Your company is not properly structured to protect assets or to deal with contingencies, and you have failed to identify your key intangible assets or to adopt the legal safeguards to protect your key intangible assets (such as your key employees and intellectual property rights).
Of what use is a Transition Plan or Succession Plan or an Exit Plan, whichever you choose to call it, if the plan fails to include the actions needed to protect and safekeep the business so the owner has something to profitably transition or exit from on his or her terms.
As a Transition and Exit Planning Advisor, my job is to ask and act on two key questions:
What will be the probable, almost certain, future exit outcome of your present course, if left unchanged?
What’s missing, the presence of which would make a substantial difference in producing a better exit outcome?
If we had had the opportunity to visit with Dave and Jennie ahead of the accident, the first question would have been answered as follows:
“You operate a potentially very dangerous business – based on the statistics which show a surprising number of chemical plant explosions. Absent the right precautions, you run the risk that such an incident, in addition to risking human life, could financially cripple Fusion Blend and both of you personally.”
Dave had been operating Fusion Blend entirely in one corporation – which included the plant real estate, equipment and operations, as well as his distribution operations (which distributed both his products and various products of third party suppliers). His insurance coverage was riddled with holes and exclusions. And his safety program (which Dave insisted on running himself) was deficient and poorly managed. The production facility would now be offline for months and the lawsuits and government fines would quickly show up.
What was missing – the presence of which would have made a substantial difference in producing a better exit outcome? Under Step 4 of our Next Move Program™, we would have recommended:
- A thorough Safety Program overseen by a full time Safety Officer.
- An annual review and detailed report by a capable P & C insurance advisor which would address all the potential risks and available coverages.
- A corporate structure which provided limited liability protections if the above two protections leaked. The production facility operations, the production facility itself, and the distribution business could have each been held (and protected from each other) in separate legal entities.
- A Succession Plan which had enough bench strength to respond quickly to this type of situation.
- A Contingency Plan which would have included pre-written directions naming Dave’s successor, the steps needed to activate a Board of Directors (if not yet activated), and the trusted advisors to be called upon, along with pre-written press releases and pre-written notifications to employees, bankers, customers and suppliers regarding Dave’s Succession Plan.
When Jennie came to see me, we were left with picking up the pieces – to mount our defenses, to re-evaluate the company’s financial capacity, and to try to preserve and re-start what was otherwise a viable business.*
*This Newsletter contains no information that can be used to identify a specific client. So, this illustration was not the actual business in which our specific client was engaged.
Next Newsletter – How Eric’s “Holding The Bag” Exit Plan left him and his family with a huge buy-out debt and a company that couldn’t cash flow it.