As an entrepreneur, it can be difficult to analyze your business through an objective lens. Upon first glance, it might seem like you have everything in order, but a critical event can quickly leave you unprepared. Whether you’re a small business owner who’s just getting started or are thinking about retiring, a contingency plan is a vital component in helping to ensure the longevity of your business.
Understanding contingency plans
A contingency plan is a developed course of action that’s put in place ahead of an unexpected event. While you can’t know when or even if certain events will happen, you can prepare for the possibility of them so that 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 that any negative impact on your business is minimized.
We’ve all taken part in a fire drill at some point, and there’s a reason for that. When you take the time to think about what could happen and then prepare for it, you’ll know exactly what to do if that event transpires. When a plan is already in place, you don’t have to scramble to create one when the unexpected becomes a reality. In effect, time spent on contingency planning means time saved when a critical event takes place.
Fortunately, many women entrepreneurs already have a good start on their contingency plans. As Sheri Griffiths, Head of Ontario, BMO Canadian Commercial Bank, explains, “Our research reflects that women tend to approach risk differently – they make educated and well-informed decisions and often plan for the worst-case scenario. I have not met many women entrepreneurs who do not have some form of a documented business plan. They may not have called it a contingency plan, but they have generally thought through many scenarios.”
What to prepare for
A natural disaster is just one example of an unexpected occurrence that you can prepare for. When developing a contingency plan around a critical event, it’s important to assess the level of risk it poses to your business. While not all businesses will be susceptible to every type of natural disaster, John Paniccia, VP and Head of BMO Business Advisory and Succession Planning, says that “Every business should have strategies in place for the four Ds: Death, Disability, Divorce, and Disenchantment.”
Paniccia says that given the nature of private and family run businesses, business owners are usually a key component to them. Should they be impacted by one of the four Ds, a contingency plan ensures that they have the systems and procedures in place to maintain the continuity of their business. As Griffiths explains, “People often assume family members will take over, and then they find out at the last minute that they’re not interested or qualified. Sudden illnesses or the death of a business owner can be devastating as they can be left with no one to run the business, impacting both clients and employees.”
According to PwC, statistics show that 70 per cent of private and family business owners plan to either sell or pass on their business, 47 per cent don’t actually have a succession plan in place, and 70 per cent of business transfers fail between generations. When strategies are already developed well in advance of an exit, the responsibilities of the business owner can successfully be passed on.
Like many, Joanna Track, VP & Executive Publisher, 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 that 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, it’s important to consider all types of possibilities. However, Griffiths agrees that we can’t always prepare for everything. Rather, she says that, “Contingency planning involves considering reasonable and possible circumstances. For example, COVID was not foreseeable, however pivoting quickly and having a back-up plan with a second potential revenue stream, or being flexible and able to shift variables and fixed costs quickly can be extremely helpful.”
Aleks Myszk, Founder & Creator, AM Coffee Studio, has created contingency plans for her own business in Toronto following this guidance. “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, all business owners should develop a contingency plan that includes a detailed SWOT analysis; outlining Strengths, Weaknesses, Opportunities, and Threats. This should highlight both internal and external factors, and include weaknesses and threats as they relate to unforeseen events. You should be exhaustive when coming up with a contingency plan so that as many risks as possible can be mitigated.
He says that businesses often succumb to the concept of overreliance, which means placing too much of their plan 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, helping to ensure a successful change in ownership that will see the longevity of your company.
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.
When getting started, Paniccia recommends connecting with BMO’s planning professionals, who work with clients 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 provide clients with guidance and strategies so that they can mitigate them.”
With planning that’s informed by insight and experience, BMO is committed to helping business owners realize their objectives in all stages of their personal and professional lives.
For more information, please speak with your BMO financial professional.
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