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Emergency Operating Plan: What, Why, How


Joan M. Ridley, CEPA, CBI, CFP™

What Is It and Why the Need

The emergency operating plan (EOP) is sometimes confused with the buy-sell agreement (BS). The purpose of the BS is to address ownership change while the purpose of the emergency operating plan is to address operational issues, that is, who will run the business if the owner cannot. Both include “triggers” which are chiefly unforeseen circumstances such as death and disability. However, the BS can also address change of ownership in the event of divorce, bankruptcy, and retirement of a principal. The EOP triggers are often more broad to include any event that results in the business owner /operator not being willing or able to work for any reason. So the BS is an agreement between two parties wherein they agree that one will buy out the other’s interest if he cannot, or decides, to no longer work in the business. The EOP is a plan, not an agreement, wherein the owner expresses to employees, professional advisors, and family members who will operate the business if the owner cannot, or decides not to run the business. While the BS is an agreement between two or more parties, the EOP is an expression, directive, or guide for the remaining interested parties with the expectation that his directive will be honored.

Should a business owner have both documents? If the signers of the BS are both owner-operators, and if one could fulfill the duties of both, perhaps a BS is sufficient. However, if there is any question about value or funding of the purchase after the BS is exercised, then an EOP might still be advisable. A well-drafted EOP might help to preserve the value of the business after the owner-operator departs for any reason. Employees, professional advisors, and the family of the owner-operator need clear directions about how the business will be run after he departs. Absent such a plan, employees, vendors, and customers could take flight if chaos and disorganization ensues. This is especially true if there is any lag time between the exercise of the BS and the take-over of operations by the succeeding owner. Now that we know what an EOP is and why it is useful or necessary, let’s take a look at “the how” which are the key elements of such a document.

Key Elements of an Emergency Operating Plan

A more personal approach. Usually, the business owner(s) expresses his dreams and goals in establishing or acquiring the business and comments on his experience with the employees in achieving the company’s goals. This can be done in the document itself, or in a personal cover letter.

Triggers. The document names the events that would trigger the implementation of the plan. These include death and disability, or, if the owner does not show up to run the business for any reason. There should be some provision as to how the named key person would know when to engage the plan, such as a call from a specific relative or designated friend of the business owner.

Duties and responsibilities. The document should state who would assume the duties of the business owner. The new duties should be listed. Be clear about new duties and responsibilities of anyone whose work day would change due to the owner’s absence.

What to do if the owner does, or, does not return. The documents should state how much time should lapse before it is clear that the owner will or will not return and what would happen in that event. The directive should state how much time should lapse before action should be taken to find a buyer or engage an intermediary.

Coordination with a BS Agreement and other estate planning documents. If there is a BS Agreement, anticipated new ownership should be mentioned and the language of the two documents should be free of conflicting provisions. The same is true for any other documents that could contain language regarding the operations of the business such as employment agreements and family limited partnerships.

A plan to sell to a third party. If the ultimate plan is to sell to an outside third party, include language about the owner’s wishes about the profile of the ideal buyer, anyone who would not fit that profile, and priorities of a sale. State if the priority is to sell to the highest bidder regardless of other terms, sell to the buyer with the best cultural fit, what intermediary to retain, and other desires of the owner. Insure that priorities do not conflict.

Role of other advisors. State who will prepare the business for sale and who will be responsible for negotiating the terms of any transaction. Also state who will select the intermediary if one is not specifically named. State how the advisors will work together, how decisions will be made, and how they will be compensated.

Incentives and increases in compensation. State how employees will be compensated if they are tasked with duties to increase value in preparation for a sale. Provide for funding of any incentives and when and how the designated employees will be paid. Include provisions for non-compete and non-solicitation agreements. Make certain that any funding provision would not have a negative effect on the value of the business. Check with an intermediary for his/her opinion if you are not certain.

Coordinate with owner’s family regarding a third party sale. State who will interface with the business owner’s family members and what family member is authorized to be a spokesperson for the family. For instance, will the intermediary negotiate with the designated key person in the business, or, with the designated family member. Decide if the key negotiator for the owner should have a specific power of attorney to negotiate on the ownership’s behalf.

Create a visual to display how it will all work. Many people are visual and will appreciate flow charts that detail what happens and when. Be sure to include all the “what-ifs”.

Include a table of funding vehicles. Typical funding vehicles are life and disability buy-out insurance, or funding could be paid for from the sales proceeds. Check with the intermediary to see how the latter might affect deal negotiations and company value from a buyer’s standpoint.

What employees to designate. You might be surprised to learn who the employees would view as the person to take charge if the business owner could not perform his duties. It’s better to find out now who they see as the likely new leader before a trigger event actually occurs. This can be revealed by having short interviews with key employees. These interviews are best left to a retained business consultant who conducts the interviews on a confidential basis so the employees are comfortable airing their views.

Employers might be surprised. Employers are sometimes not willing to create such a document for fear of how employees might react. It has been our experience that employees are delighted that the business owner has cared enough to make an effort to insure that the business would continue and thrive in his or her temporary or permanent absence. Some employees are so touched that they become emotional when they learn how much the owner cares about providing for an orderly transition of responsibilities and duties in his absence. They easily recognize that the result is providing job security for them, and a continued income stream for their families because the business will remain stable even in a crisis. The benefit for the business owner of course is that the business, and the business value, will be protected because employees less likely to leave. One of the immediate benefits for the business owner is that during the discussions with employees, facts and opinions of the employees come to light, resulting in employee loyalty and new and improved strategies for the business.

Still not Convinced?

If you are still not convinced that your company might benefit from having an EOP and a BS, in place, please read A Legacy of Peace or Turmoil-It’s Your Call for a true story about what happened to one family and longtime employees when these documents were not in place.


Joan M. Ridley is a Certified Exit Planning Advisor, a Certified Business Intermediary, and a Certified Financial Planner™. She is President of Business Wealth Solutions, a business consultancy that helps business owners improve their top line, bottom line and present their financials to best showcase company performance. When you are ready, we have the conversation about what comes next and what you have to do to get there. Call 214-692-9192 and visit www.bwsllc.net

Copyright 2013 Joan M. Ridley

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