Family Business Lifeboat Drill

Back in the olden days when I was a Chartered Financial Planner, one of the exercises that the family businesses I worked with was the lifeboat drills we used to do.

This blog and podcast covers a little more about what lifeboat drills are and why they are a useful exercise for you and your family to complete.

What is a Lifeboat Drill?

An actual lifeboat drill is essentially a practice evacuation of a ship using the lifeboats on board. I am not advocating everyone rushing out and practising evacuations, however it is the purpose of a lifeboat drill that is important here.

The reason that lifeboat drills are important for sailors is that if and when they need to use the lifeboats they want the reassurance of knowing that:

1. The lifeboat does the job it is there to do; and
2. If anything does go wrong that it is not at a time of emergency and you can do something about it.

It is this principle that I am advocating.

A lifeboat drill for your family business is essentially looking at a number of ‘what if’ scenarios that allow you to test that the legal, financial and business procedures you have in place are fit for purpose.

What Scenario’s to include

Each family business will be different with differing levels of complexity including the size of the business and the family. However, these drills are useful irrespective of the size of your business. I read an article recently that stated that Amazon are amongst the businesses that undertake these types of exercise. 

So what sort of things should you look at? Perhaps the easiest starting point is to look at the disaster scenarios such as death or divorce, but you can also extend those scenarios to look at other potential future events such as births or marriages, or if there is already a next generation you could look at what mechanisms, rules or governance you have around them joining or owning the business. 

The idea being that if you have discussions now, when things are OK and the issue hasn’t presented itself you can plan for it. This goes for the disaster scenarios as well as the other scenarios. 

Death – A useful exercise to look at is to look at the impact of the current key stakeholders in your business passing away. Whilst this may sound morbid and might feel uncomfortable, is it not better to review what would happen now than to find out that in the event of the main shareholder dying that your shareholders agreement contradicts the will, that there are no other signatories for the accounts or that there are no insurances in place for either the business or the family. 

Divorce – There is a dedicated episode looking at divorce coming up where I cover this in more detail but you may want to look at the consequences of a divorce or a marriage and subsequent divorce in your family. Again, this can seem a bit doom and gloom but you may discover that in the event of a divorce that the family business is also negatively impacted. For example, of no pre-nuptial agreements are in place any shares owned in the family business could become subject to a claim, knowing this beforehand allows you to mitigate that. 

Loss of Capacity – Losing mental capacity can have a devastating affect on the individual and their family, but it also has an impact on the business. If decision makers suffer a loss of mental capacity and are unable to perform their roles, what contingencies do you have in place? What safe-guards have you got within the business and your family to cope with this. 

Speaking to your lawyer about this and putting in place lasting powers of attorney might be a way of avoiding this scenario. 

In essence the lifeboat drill is designed to stress test various elements of the business and family governance to ensure that everything operates as you would expect during disaster scenarios. 

The benefit of having a drill is that you are not waiting until that scenario happens to find out that something isn’t as everyone expected and you have the time to do something about it. 

The link to Continuity  

Many businesses will have a continuity plan in place to deal with certain threats to their business, be that an IT outage right through to a global pandemic. The continuity plan set outs what to do in these events to keep the business going. 

An extension of this, when it comes to family owned and operated businesses is the impact of events that I have highlighted above. 

What would happen if the main shareholder, the MD, the head of the family were to die? What if this is all the same person? What does that mean for your succession planning? We all know that we will one day live our last day, and yet there is still a lack of succession planning in businesses. That’s because it can be really hard to talk about this stuff and you’ve got a business to run. 

If your lifeboat drill highlights that in the event of untimely death that shareholdings become muddled, that decision making becomes difficult and that there is no leadership in the business, that is also a red flag to start looking at your succession or continuity planning.

If you need help with this, please get in touch.

A Review of your Governance

As we emerge from this global pandemic, now may also be a time to reflect on the lessons that we have learned over the past 12 months. How has our governance performed, both at a business level and at the family level? What has gone well and what hasn’t? 

If you have informal governance and decision making processes in place, is now a good time to formalise them? There is no right or wrong answer to this as it needs to be what works for your family and your business, but I would suggest that now is a good time to look at this. 

Again, if you need help, please get in touch.