Most business owners would agree that the worst possible scenario for their company is the dreaded fire sale: a forced liquidation of their business, with assets usually sold at a price far below market value. For family-business owners, the hurt can go beyond merely the financial loss: there is often a painful sense of failure and loss of identity when the family business goes under.

Despite this, many family-business owners trust in good luck and hard work to keep a fire sale from happening to them. The problem is, neither of these things will necessarily stave off the factors that could force them to liquidate their business. These include:

  • Loss of uninsured key personnel
  • Lack of a buy-sell and/or shareholder agreement, including financing arrangements
  • Failed succession, including an unprepared successor
  • Insufficient planning for the sale of the company
  • Family feuding

In reality, plenty of planning is the best way to protect against the chances of having to sell at rock-bottom prices if an unforeseen event takes place. At a minimum, a business needs to take the following steps:

1. Get key-person life insurance. When a person vital to the company dies, becomes critically ill, or is seriously disabled, the business can go into a tailspin that ends in a fire sale. Beyond the sudden loss of leadership and a potentially steep drop in profit, this loss can also give lenders the jitters, prompting them to call in their loans. On top of that, capital-gains taxes and other costs associated with this kind of loss can cripple a family business financially.

Key-person life insurance gives the company the cash infusion it needs to continue the business, buys it time to recruit and train a replacement, and bolsters lender confidence. The insurance policy is purchased and maintained by the company, which then receives the tax-free insurance benefit upon the death, critical illness, or disability of the insured person.

2. Create a buy-sell agreement. A buy-sell agreement is a legal document that sets out details about the company’s shares, such as whether they can be sold outside the family, what the triggers are for selling them, and who is legally obligated to buy them. It also spells out how the purchase of the shares will be financed, which is most commonly through life-insurance policies.

Having a legal way to control the sale and purchase of shares, and having insurance policies or other financing mechanisms in place, will help keep events such as the unexpected death of a major shareholder or a serious family dispute from forcing the family to sell the business on short notice.

3. Create an emergency succession plan (also called a contingency or business-continuation plan). Even more than a regular succession plan, an emergency plan is a must-have for any business wanting to prepare for the unexpected. The plan ensures that mechanisms are in place for the business to continue in the event of the sudden loss of its leader.

The first and most important step in creating the emergency succession plan is to take out key-person life insurance for any personnel whose loss would significantly affect the company. The insurance benefit will give the business the financial liquidity and flexibility it needs for actions such as purchasing shares and training new leaders.

Beyond that, the plan names an interim successor, gives the new leader(s) access to important information such as passwords and the details of major contracts, and contains organizational charts showing how roles will be filled.

We only need to look at the scenario of McDonald’s in the early 2000s to see how crucial a contingency plan is. First its chairman died of a heart attack in 2004. Using its well-constructed emergency plan, the corporation appointed a competent successor.[1] Then, only a few months later, that successor was diagnosed with cancer, dying just two months after he stepped down.  Again, following the emergency succession plan, McDonald’s was able to appoint yet another CEO, who led the company to a $20-billion increase in annual sales within 4 years.[2]

4. Start working on a family-governance system, including a Family Constitution. Although it’s easy to assume that financial factors are the key to avoiding a forced liquidation, in fact the state of family relationships is a vital component of family-business survival. In failed successions—a frequent point of forced sale—the culprit in 60% of cases was a breakdown of communication or trust within the family[3]. Family discord can threaten even the most successful family business.

5. Choose and prepare the successor well. Unprepared successors cause up to 25% of succession failures[4]—and a failed succession can lead to a forced dissolution of the family business. The first step in choosing the right one and preparing the successor well is for the current owner to communicate honestly with family members and any other potential successors. A plan that is kept in one person’s head is not a plan: it’s a fantasy.

6. Plan for the sale of the company several years out. Planning to sell the company to a third party should mean planning to sell it, not just intending to sell it. This means, to start with, the owner or partners communicating their intentions clearly to all family members, as well as their estate and retirement planners. They then need to draw up a clear transition plan and timeline, for the benefit of owners and employees alike. “Golden handcuff” agreements might be signed with key managers to increase the likelihood that they will stick around after the sale, providing a major asset to the purchaser.  And an independent business valuation must be done, to establish how much the company is worth. These steps will increase the business’s chances of being among the 20% of those put on the market that end up selling[5], rather than having to be dismantled and liquidated.

Of course, there is no way to guarantee that a business won’t fail and fall into a fire sale. But doing some essential planning will make it far less likely. The first step is for the owner or partners to assemble a team of experts to advise them and draw up the needed documents. The team should include wealth managers, tax specialists, legal advisors, family-business coaches or therapists, and advanced life-insurance advisors. With this support and guidance, the family-business owner will not only minimize the chances of a forced sale but maximize the chances that the company will grow and thrive.


[1] “Former McDonald’s CEO Charlie Bell Dies of Cancer.” NBC News.

[2] “How McDonald’s Got CEO Succession Planning Right.” SIGMA Assessment Systems.

[3] Garton, Nicole. Continuity Planning for Family-Owned Businesses. Canadian Bar Association, BC Branch Wills and Trust Section, Vancouver.

[4] Garton, Continuity Planning.

[5] Ibid.