Activated: What Happens to my Business?

By Dick Yemm

Being activated has been an age-old concern of military members, especially those in the Reserves and National Guard. Many a soldier has lost their business that is left to flounder with the advent of extended active duty deployments. Their stories can be heartbreaking. Resulting family bankruptcies and the stress disrupting family units are not the rewards due someone fulfilling a patriotic commitment.

Let’s consider your options as time becomes a critical element. You can either shutter the doors hoping to pick up where you left off, close the business never to open again, sell it for distress value or implement your contingency plan. With adequate planning most companies can survive and even prosper until the soldier returns.

Today’s massive global communications capability provide an owner opportunities never available to prior generations. Email, the Internet with web-cams and phone cards give the soldier 24/7 access to their company and advisors equal to that of a senior executive of any major corporation. Granted, there are still times when certain operations may limit an individual’s access to the frequent use of these capabilities.

The basics for setting up one’s company is similar to developing any business succession plan. In essence you want to organize your company to operate as any absentee owner would do. The number of owners in the company and what role each performs is important. A one-owner single employee business certainly has a greater contingency planning challenge than a company with multiple owners and employees. Accepting that each company is unique, the following guidelines are general in application. Individual legal and tax issues need to be reviewed by your respective professionals for those areas.

As a minimum every owner needs to have the basics of any estate plan. A limited power of attorney (durable for those states whose statues provide for one) should you be incapacitated and a will should you die. One gives authority to a personal representative to manage your personal assets during your absence or incapacity while the other takes effect in the event you die. Everyone should have these whether they own a business or not. The JAG office will be able to help.

The approach used in drawing up a contingency plan is similar to that employed when drawing-up any operations plan. You first define your objective. In this case you are creating a plan to operate your business for a temporary period of time during your deployment. What separates this planning from a succession plan is that it is temporary in time. A succession plan implies a permanent transfer of management and/or your owner interest. Good business planning dictates that a succession plan be created while you are developing the contingency plan.

The stated objective of your plan is to protect the survival of the business without creating a competitor. In a contingency plan you need to distinguish the fact that you are transferring management authority, not your ownership interest. This can be done using three distinct parts.

First is the legal part wherein you give someone legal permission to act for you. This can be accomplished in a contingency plan through a limited or general power of attorney depending on your preference as determined through discussions with your legal counsel. Be careful about to whom and how much authority you want to give your personal representative. You may want to divide the oversight authority giving limited power to several people. For example you may want to give limited powers to your spouse or close relative for your personal assets while giving operational oversight of your business interest to a partner or close friend.

The bottom line for appointing anyone to these positions is Trust. A word that is easy to define but in many cases hard to fulfill. Appointed spouses, relatives or even the closest of friends have been known to run off with the cookies when the lid to the cookie jar is left open. You can achieve your basic protection through diversification of control and limited oversight.

Today you have a tremendous advantage over deployed soldiers of prior generations through the capability of global communications. Part of your operations plan, the second distinct part, is determining how involved you can be in the business’s operation even if you are on the other side of the world.

The amount of oversight you want to have will be limited by the co-operation of those you depend on for supplying your desired information, the parameters associated with your military job and your access to the communications net. For example, you can track the success of your business by having emailed weekly a list of new and finished jobs, monthly bank statements, changes in employees, or whatever else you need to see. Though costly, you can have a forensic audit done to ensure the authenticity of the reports being sent to you.

When designing your contingency plan you first need to list all the jobs you perform. You now have your personal job description. This is operationally what you are temporarily trying to replace. Very key to the implementation of your plan is the person or persons you choose to be your successor(s) in management. Care must be taken to ensure that you are only positioning a substitute, not creating a competitor. There are several ways that might help.

One way is to split the management job you have been doing among several people. This diminishes the control and influence any one person can have on the business. A long- term benefit is that you are creating diversified management that can contribute to larger growth as you rejoin the company.

Another way is through a non-compete agreement. Best use of this is if you are hiring one person to replace you. These agreements are hard to enforce and normally the damage has been done by the time you can have it enforced. A suggestion that makes sense is to utilize a specified substantial dollar penalty for infringement - in essence an amount equal to the value of your business. Legal costs to get a judgment on a debt collection are substantially less than trial costs to establish damages and their value plus collection costs.

Create a list of potential candidates. Consider family members, friends, employees (your own and those of competitors), or a professional from a temporary employment agency. There are plenty of retired executives looking for a short-term job.

Draw up a list of qualifying requirements. Define desired character traits. Does the candidate have the necessary education and required licenses? Do they share your vision, goals and strategy? Most importantly, are they available for the time you need them? Your list of qualifying questions should be detailed and extensive. Don’t forget to negotiate your success’s compensation up front. Think about setting-up an incentive package for them to grow the business. They may show you a new wrinkle.

The final part of your contingency plan is detailing operating information you think is necessary for your appointed successor to perform the job. Limiting the information to “need to know” is another means against creating a future competitor.

Most importantly, one must remember that there is more than one potentially good way to pass on a business. Only one way is guaranteed to fail - doing nothing.

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