What You Need to Know About Business Continuity Planning

Business continuity planning basics

If you’re running a business, you should have a contingency plan in case one or more key people leave, no matter if it’s because of retirement, death, a disagreement over strategy or a job opportunity at another firm. In some cases, such planning is crucial to ensure an orderly transition in ownership. It is an important part of any business plan, and can come in handy in the event of the unexpected.

Companies that address continuity planning are more likely to continue their success. They’ll have the skilled leaders in place to maintain their momentum. Those that don’t pay enough attention to this important task may struggle as they try to figure out next steps.

To be sure, it takes time and a thorough analysis of your workforce to develop bench strength at key positions throughout an organization. You’ll need to pinpoint individuals who seem well suited to serve in more senior jobs. It may also require an examination of insurance products that can protect a company against personnel losses. But the benefits are potentially significant. Below you’ll find a number of issues to consider as you develop a continuity plan.

Developing a business contingency plan

Every company is different and it’s important for businesses to develop continuity plans that address their circumstances. Managers must determine how the departure of a person can affect the company. They should examine key roles throughout an organization and how the absence of an able replacement might weaken the organization. Such an analysis might take this form:

  • Business impact: Identify how a key person or persons leaving the company would affect sales, revenue and business processes.
  • Current provisions: Ensure that there is an able replacement for important jobs and a policy for them to seamlessly assume their new position. What are the gaps in succession planning; that is, if someone were to leave, who would take charge?
  • Develop a plan: Establish how you can fill in gaps in your succession pipeline. That can include training additional people for that role or backing up sensitive information so it’s available to more than one person.
  • Training/updates: Train potential replacements for the jobs they might fill. Have them perform some of the responsibilities they may one day assume, or give them exposure to a higher-level position through projects and training programs. Assign one or more people to review succession planning and the progress of promising employees. Revisit the process at regular intervals, such as yearly or more frequently.

A business continuity plan, in a sense, is emergency planning. The loss of talented managers can hurt a company’s performance as much as a computer virus, a misguided strategy or a warehouse accident. Smart companies are quick to say that they are only as good as the quality of their workforces. That’s why it’s crucial for you to ensure that you have processes in place to ensure your company has the best talent at all times.

Key person insurance

Insurance is designed to protect you from possible threats that are expensive to pay for on your own. Of course, traditional business insurance policies can cover some of the disaster scenarios and protect your company from unanticipated losses and liabilities.

But for business continuity planning, you’ll need key person insurance. Key person insurance is a life insurance plan that provides the company with funds should the insured person die. Companies find that taking out policies on top employees is beneficial because in the event of their death, the company receives money that can be used to recruit a replacement and cover other financial losses that can happen when a key person is suddenly gone.

The cash value of the insurance policy can sometimes be used for loans or withdrawals, as well. Key person insurance has another benefit. While the policy ensures that your company and its owners feel safe and secure, it assures investors, clients and contractors that you are a good risk as a business partner.

Buy/sell agreements

One way to fund the purchase of a partner’s business share is through a buy/sell agreement. This can take the form of a different type of life insurance arrangement. For example, in cross-purchase plans, each partner buys a life insurance plan for the other partner. If one partner dies, the beneficiaries are the other business partners, who then have the funds to buy out the deceased person’s business interests. The policies can also be transferred (exchanged) if the owners retire, so that each insured person’s estate becomes the beneficiary, rather than the other owners being the beneficiary.

Another option for a buy/sell agreement is the entity purchase or stock redemption plan. In this case, the life insurance policy is taken out by the business, insuring the business owner or owners. If an owner dies, the policy provides funds for the other owners to buy the business interest from the deceased person’s estate or heirs. The heirs then have a guaranteed buyer for that business interest, and the owners have the funds to purchase the rest of the shares, and don’t have to worry about a forced sale or business involvement by new, unchosen partners.

While continuity planning can be complicated, it’s best to be proactive about it before a key person leaves. It demonstrates an understanding of the inevitable personnel changes that occur and the importance of having a talented workforce at all times. To learn how to create a business succession plan to protect your company, speak with a Nationwide representative.