Planning for the 4 Ds in Business: Death, Disability, Dispute, and Divorce

Death, disability, dispute, and divorce are unpleasant things to deal with ordinarily, but when you add a business to the mix, it can make what was already a stressful situation unbearable. As business owners we have a responsibility to those important to us, to those we love, to not cause unbearable situations when we could assist by just a bit of planning. Without proper planning around these “4 Ds” businesses can suffer from disrupted operations, unexpected management changes, cash flow issues, or in the worst case, total destruction.

A sobering statistic to ponder at the outset: half of all business exits are unplanned and are triggered by one of the 4 Ds.

Death and Disability

The good news is that knowledge is the first step to preparing for these undesirable possibilities. Here’s what we recommend you do, in this order:

1. Update (or create) your buy/sell (or operating) agreement. You can specify exactly what the next steps are in case of each of the 4 Ds, including valuation method for the business, purchase price and terms, who can (or must) buy, as well as restrictions on transfers to outsiders.
   1. All these steps have to be funded. The preferred method is with a life insurance policy for death or a disability buy-out policy in case of disability. These measures provide immediate liquidity to keep the business going and fund its transition.
   2. While we most often think of the 4 Ds as applying to owners specifically, don’t overlook the importance of key man insurance in the case of any of your critical team members. The funds from the key man insurance should pay for a search for a replacement and there should be a short list of potential replacements that is periodically updated.
   3. You will need to get granular on what is meant by disability and how that relates to the disabled party, e.g. if someone is partially disabled and cannot come into the office, but can take phone calls and still assist in decision-making, perhaps only a part-time operator needs to step in to assist.
2. Create a written succession plan and share it with key people. This succession plan will probably live as an addendum to the agreement you’ve worked on in Step 1. The importance of clarity as to who the temporary operator of your business will be cannot be understated.
3. Update your estate plan. You will need to update (or draft) a will, revocable living trust, durable power of attorney, and healthcare documents. This will also likely be an addendum to the agreement in Step 1.

Death and disability are issues that we have the least control over. What about dispute and divorce?

Dispute

People disagree over strategy and compensation all the time in business. That’s normal, and in fact, healthy in some ways. What we want to do is prepare for a deadlock. Going back to the operating agreement we discussed above, add sections to cover:

• Dispute resolution (will there be mediation/arbitration?)
• Buy-out clauses (one owner can force a sale and sometimes this can even feature a discount if the other owner(s) can be proven to be a “bad actor.”
• Most importantly, have documented clear voting and decision-making rules.

Funnily enough, you’ll want everyone to buy in on these clauses, meaning you’ll need to agree on how you’ll disagree.

Divorce

Perhaps the least exciting discussion of the ones we’ve listed is with a spouse about what would happen to a business in the case of a divorce. In the case of single people, you can write this out without consultation now and get sign-off before your marriage.

• You may consider requiring the company or other owners to have the right of first refusal or a mandatory buy-out upon the filing of a divorce or a decree of divorce.
• You may consider holding shares in a trust with protective language.
• You may update (or create) a prenuptial or postnuptial agreement to classify the business as separate property and set valuation and buyout terms.

In the case a spouse is a co-owner, their interests should be dealt with just the same way as other owners in the operating agreement we mentioned above.

It is also true that marital assets can be divided, which might force an ex-spouse into ownership. That possibility should be foreseen and provided for in your agreement as well.

All the documents you draw up for these difficult scenarios should be reviewed every year with your key advisors to which we would also add your insurance professional(s). If you want to go above and beyond, you could do a test run, specifically in your written succession plan. You could go on a vacation where you will be unreachable and see how your team does. They can call you if things really go sideways and if not, you’ll have some well-deserved time away.

Dealing with the 4 Ds now, while you still can, might be the single most important thing you do to preserve the value of your business, because it will mean your family and those you care about will be taken care of, even when you’re not able to ensure that entirely on your own.

Need help getting started on dealing with the 4 Ds? We can help.