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NOVEMBER 02, 2021

Creating a contingency plan to protect your business

As an entrepreneur, you must look at your business through an objective lens. Even if at first glance it appears you have everything in order, a critical event can quickly leave you feeling unprepared and in a lurch. Whether you’re a small business owner, one who’s just getting started, or you’re thinking about retirement and succession, a contingency plan is a vital component in helping to ensure the long-term success of your business. 

Understanding contingency plans

A contingency plan is a developed course of action that’s established prior to the occurrence of an unexpected event. While you can’t know when or even if certain events will occur, you can prepare for the possibility of them, so you can respond effectively if they do. Different scenarios will of course require different plans; however, the overall purpose of a contingency plan is to mitigate risk so negative impact on your business is minimized.

Similar to participating in a fire drill, when you take the time to think through what could happen in the event of an emergency and then prepare for it, you’ll know what to do if it transpires. With a well-developed plan in place, you have a thoughtful course of action if or when the unexpected becomes a reality. Time spent on contingency planning means time saved if a critical event occurs.

Fortunately, many women entrepreneurs already have a good start on their contingency plans. As Carol Schleif, deputy investment officer at BMO Family Office, points out, “Almost every woman I encounter has some kind of contingency plan in place even those who aren’t entrepreneurs. I think for many women, it’s natural to plan ahead, so they feel prepared. It’s in their DNA.” Considering different scenarios and developing plans can go a long way toward mitigating risk. While not everyone labels this kind of planning specifically as contingency planning, having this type of documentation in place brings peace of mind as you know that you’ll be more prepared.

What to prepare for

A natural disaster is just one example of an unexpected occurrence that you can prepare for in advance. When developing a contingency plan around a critical event, you should start by assessing the level of risk it poses to your business. While not all businesses are susceptible to every type of natural disaster, John Paniccia,  vice president  and head of business advisory and succession planning, for BMO Wealth Management, Canada, says, “Every business should have strategies in place for the 4 Ds: Death, Disability, Divorce, and Disenchantment.” 

Paniccia says that given the nature of private and family run businesses, business owners are critical to the planning process. Should a business owner be impacted by one of the 4 Ds, a contingency plan helps ensure there are systems and procedures in place to maintain the continuity of their business. Although many business owners assume that family members will take over, it’s common to find out at the last minute that they’re either not interested or qualified to do so. As a result, when a sudden illness or death occurs, a business can be left with no one to run it negatively impacting both clients and employees.

According to PwC, just one-third of family businesses in the US have documented succession plans in place that have been communicated, and just over half say that there’s family alignment on the direction of the company. Without a well-documented plan, it can be difficult to pass on the responsibilities of the business owner and maintain the direction of the company, introducing considerable risk that could impact its future.

Like many, Joanna Track, vice president and executive publisher at Venturepark Voice, experienced a tumultuous 2020, and knows the importance of planning for the unexpected. “It’s impossible to plan for every possibility, so I think what’s most important is to manage your cash flow so you can ride out a storm,” she says. “In addition, it’s important to make sure there are strong but flexible processes in place. You should never be reliant on one team member for all of the information you need because you never know what could happen to them.” 

What to include

When developing a contingency plan, you should consider all types of possibilities. However, Schleif agrees that we can’t always prepare for everything. As she explains in reference to the pandemic, “Certain situations are almost impossible to plan for, but having the ability to switch gears and refocus is incredibly important. No one could have planned to go from a 2% unemployment rate and a healthy economy to 14% unemployment and the worst recession since the Great Depression, all in eight weeks. However, there were many exciting stories surrounding businesses that were able to pivot during this time. Amassing cash, cutting expenses, coming up with alternative revenue streams, and projecting what the ‘new normal’ will look like enabled many owners to maintain their businesses.”

Aleks Myszk, founder and creator of AM Coffee Studio in Canada, has created contingency plans for her business. “In the event that I would no longer be able to continue with my business, I have created areas of opportunity in the present that will make my business more profitable to sell in the future. This has included adding new and unique aspects, such as: flowers, plants, a retail space, e-commerce, an outdoor rental space, and liquor licensing. I’ve also been investing in high-quality food servicing equipment for more efficient and consistent service, and adding additional storefront signage.” 

According to Paniccia, your contingency plan should include a detailed SWOT analysis, outlining Strengths, Weaknesses, Opportunities, and Threats. This should highlight both internal and external factors, and also include items related to unforeseen events. Be thorough when developing a contingency plan, so you can mitigate as many risks as possible. 

Paniccia says that businesses often succumb to the concept of overreliance, which means placing too much of their future on the business owner themselves. Because of the nature of entrepreneurship, private businesses often tie much of their identity, resources, and cash flow directly to their owner. However, if an unforeseen event occurs and they are no longer able to run the business, the company is left unprepared. Developing a SWOT analysis with this in mind prepares you for a variety of scenarios and a successful change in status or ownership to protect the longevity of your company. 

Seek advice

Contingency plans are sometimes difficult to create, especially because they require you to analyze your business through the lens of multiple worst-case scenarios. When you’re as close to your business as most entrepreneurs are, this can be a challenge. 

To get started, Paniccia recommends connecting with BMO Wealth Management’s planning professionals to guide you through a holistic wealth planning process. “This includes both integrated business and personal planning,” he says. “As a part of these professional advisory services, our Business Owner Advisory and Transition professionals assist in identifying business and family risks, and can provide clients with guidance and strategies to mitigate them.”

With expertise in contingency and succession planning that is informed by both insight and experience, BMO is committed to helping business owners realize their objectives in all stages of their personal and professional lives.

By taking the time to reflect upon your needs and goals, as well as the risks that could potentially pose a threat to your business in both the short- and long-term, you’ll be better prepared to face the unexpected. Through well-developed contingency plans, you can protect your business in the future and help ensure that your employees and clients are taken care of.

For more information, speak with your BMO financial professional.

 

 

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