Considerations for small business owners
You’ve nurtured your business from a small startup to become a success in your field. Then, without warning, your world implodes when (pick any of the following):
•You’re in a serious accident and can’t work;
•A loved one gets a serious illness and much of your time must be devoted to caregiving;
•You develop a medical condition that significantly affects your ability to perform your business duties;
•One of your biggest customers goes into bankruptcy, leaving you with a mountain of unpaid invoices;
•You and your business partner(s) disagree about how to manage your company;
•A client who fell and was seriously injured at your store/office sues you;
•Your business location is damaged or destroyed in a flood or other natural disaster;
•Your spouse files for divorce and claims half of your business assets.
These are just a few of the scenarios that could take you from being a success to losing everything virtually overnight. Taking time to consider what you’d want to happen in crisis situations before they occur – planning for the unplanned – can assure you and others involved that your business will continue to run as smoothly as possible.
With that in mind, here are some things to think through before a crisis occurs:
1. Get covered. Running a business without adequate insurance is like driving without insurance. As long as nothing happens, you’re fine. But if a calamity occurs, having no insurance – or inadequate insurance – could wipe you out. You could lose everything you’ve worked so hard to build, not to mention the effect on your family, employees, and clients who rely on you. Talk with your insurance provider, and read your policies to be sure you understand their limits.
•Purchase business owner insurance. This special policy covers both liability and property damage (including damage to or loss of personal property brought into your workplace). Get quotes from different insurance companies to ensure you’re getting a good price.
•What would happen if you were to be disabled or to die? You wouldn’t want your investors or your family to bear the brunt of the costs of replacing you or winding up the business. Solution? Purchase “key person” life and/or disability and business interruption insurance to assure your business will have the funds required to continue or to close smoothly. This is essential in a service business where clients and customers rely on your unique skill set and experience. The policy should cover everyone essential to running your business. In fact, some lenders won’t make loans to a small business unless it has key person insurance.
•If you’re in a flood plain, flood insurance is a no-brainer. Fire and casualty policies don’t cover flood damage. Plus flood insurance is relatively inexpensive, especially if you consider the costs of recovering from even a minor flood.
•Ensure that your business fire, theft, and casualty policy will cover cash-on-hand, inventory, onsite and offsite records, special office equipment, external signs and fixtures, and security systems. Analyzing your property to determine your insurance needs is a good way to stay current on what’s required to keep your business running smoothly. Do this least annually to be sure that you’ve covered any changes to your operation, such as purchasing a major item of equipment or making a significant change to your facilities.
•If you operate out of your home, with few exceptions, your homeowner’s policy won’t cover your business supplies and equipment without a special rider. Likewise, your auto policy generally won’t cover business use of your car without a rider. Make sure your policies cover both loss of income and loss of use.
•If you have employees, you MUST carry workers compensation insurance. Check with your state authority in to determine the required coverage.
•You may want to consider other special policies, such as errors and omissions, check fraud, and embezzlement insurance.
2. Have your documents in order. Your business can rise or fall on the documents you use as a basis for its operation. Here are some tips:
•Use plain English. Your important papers should be easy for the reader to understand. If your contracts are clear and unambiguous, you’re less likely to get into disputes. And when a dispute does arise, having well-drafted provisions will save you time that otherwise might be spent fighting over ambiguous terms.
•Include a force majeure clause to protect your business in the event of strikes, natural disasters, acts of war, or other unusual events beyond your control.
•To the extent the law permits (depending on your business type), disclaim express and implied warranties of merchantability or fitness in your contracts. The disclaimer must be conspicuous – bold, all in capital letters, and underlined – and readily visible in your contract.
•Read EVERYTHING in the contracts others want you to sign. Be particularly cautious of indemnification/hold harmless provisions, but see if any fine print provision is unclear or undesirable. Wherever possible, negotiate changes to terms you dislike. Your success will depend on your relative bargaining position: if you provide unique or highly sought-after products or services, you have a stronger position than when numerous others offer the same products or services of similar quality.
•Written contracts are almost always preferable to oral agreements, and some contracts (for example, transfers of real estate by sale or gift or assuming another person’s debt) may be invalid unless they’re written.
•If you use form documents, make sure they’re appropriate to your business and free of redundant or unnecessary language.
•Consider hiring an attorney to prepare documents tailored to your business needs. If you use self-prepared documents or generic forms, take them to a transactional attorney (one who works with document drafting and negotiation) for review and suggested revisions. Spending a few hundred dollars on legal advice up front could save you thousands – even millions – in legal fees and lost revenues down the road.
•Keep copies of all of your important documents in a safe place. Consider scanning your important legal documents and using secure online storage as well as physical offsite backup in your area. Ditto for your financial records. Back up regularly (some programs do this automatically whenever you go online). Then if your business suffers a disaster – fire, flood, explosion, or any other calamity – you’ll be able to recreate your business records and pick up the pieces without worrying if you’ve missed something. The peace of mind this can provide when disaster strikes is invaluable.
3. Think ahead from the start. A solid succession and contingency plan can make or break your business survival, even before you begin operations. When you plan for the unplanned, you’re creating your own insurance policy to you through tough times.
•Be proactive in drafting and amending your organizational documents. Your business form has a direct impact on what will happen to your business if you die. Corporations have perpetual existence: if you’re not around, the organization continues, unless you’ve provided in the articles of incorporation that it will dissolve in the event of your death. Limited liability companies and limited liability partnerships can have perpetual existence, but only if the organizational documents provide for it. For a partnership or sole proprietorship, clarify how your death or incapacity will affect the continued operation of your business, and who will be your successor in interest. Your documents should:
•Provide direction to cover changes in ownership and sale or liquidation of assets.
•Establish procedures for others to follow in the event key personnel are unavailable.
•Determine how your ownership interest will transfer to your beneficiary in the event of your death or permanent incapacity.
•Specify triggers for contingency arrangements. “If x happens, then….”
•If you’re single and considering marriage, consider a prenuptial agreement dictating what, if any, interest your future spouse will have in your business in the event of your divorce or death.
4. Communicate your plans. Finally, and most important of all: inform those who in the event of your unavailability will take over the business of your contingency plans, including where to find insurance policies and business records. The best plans in the world won’t be of any value unless your designees know the plans exist and are prepared to carry them through.
All of this may seem burdensome, especially if you’re a new business working to establish your market presence. But taking the time to examine your business and prepare for emergencies can provide the life preserver to carry you through hard times. So grab that ring! You’ll be glad you did.
About the Author:
Jan Matthew Tamanini is a Pennsylvania attorney concentrating her practice on small business and nonprofit transactions, with an emphasis on plain English business documents and contingency and succession planning. She has served as an expert for the Ladies Who Launch national organization and as a speaker and consultant on government and business legal issues for various groups and firms. For more information, please visit www.plainenglishlaw.com.