What have you done to ensure your entity functions after departure/death/incapacitation of a principal?

For my business, I have done two things. First, I have a "key employees" insurance policy for my top employee. He's not an official partner, but he is instrumental in the success of the company. If he were to pass away, the policy provides enough cash to help me recruit and hire a replacement, and it also helps cover the reduced revenue/profit that we would suffer while the position was unfilled.

Second, I have an insurance policy on myself, paid by the company, with my wife as the beneficiary. This is a multi-million dollar policy that helps ensure that my wife does not have to sell the company at "fire sale" prices in order to pay bills, etc. The policy is worth less than the company is worth (so my wife will still want to sell the company to monetize its value), but it's large enough so that there should be no time pressure to find a buyer. Ideally, a group of my employees (the other executives and managers, probably) would put together an offer to purchase the company from my wife, either by getting a loan to finance it or by paying her off with the profits from the company over time. My key employees and my wife know that this is my wish, but of course what they do when the time comes is up to them. Worst case is that she has to sell to a private equity firm or similar.

I have thought about that question quite a lot as I have two very young children, and I wanted to have their future secure in case something happens to me (doesn't have to be death, it could be complete incapacity to work).

Two angles:

1. Personal: I have various insurances in place, so my wife is protected. If I die, she gets £1 million, which she can use some to pay off the house (for example), and find her feet again. It won't keep her financially secured for the rest of her life, but at least she doesn't have to make any quick decision about the house, the school for the children, etc... If I am not able to work at all, I have critical illness insurance, which again, will provide us with a monthly income equivalent to what I would earn if I was working. Without going into too much details, all of those policies are setup in a trust, which is more tax efficient (here in the uk). It can be passed to my children quite effectively.

2. Business: Nothing written here, however: my goal is to build a business that works without me. So I would in time "just" be the business owner. Which means if I die or is critically ill, it doesn't impact the day-to-day running of the business. Which means my wife could be the business owner and it wouldn't change anything.

So for the next 3 years, the goal is to remove myself from the company until the day where I can recruit a Managing Director to run the company for me. I just collect dividends.

How do I do this? Well, I prepared an organigram of the company structure with all the various positions (HR, admin, sales, marketing, operations, manager, etc.. etc...). And then I put a name in each box for who is filling in that role at the moment. When you start your company, your name is in EVERY BOX. Starting from the bottom, you remove yourself from each box, until the last box which is "THE BOSS". Too many people make the mistake of recruiting a boss first, it's the wrong way around: you need to start from the bottom up. So for example: First box I removed myself from: cleaning. I got a cleaner coming twice a week to clean the office. Second box: programming (I run a web development agency). I recruited an extra programmer to cover the hours I was doing. Etc.. Etc.. This gives me more time to focus ON the business, instead of keeping my head buried IN the business.

As you can see, once I am out of every box, it doesn't really matter if I am here or not. This protects my wife as well as giving me more free time to spend with my family whilst I am NOT dead!

Here's what I've done:

1. Legally separate yourself from the center of your business entity as early as reasonable. This means a corporation of some form or at least a limited partnership rather than a sole proprietorship.

2. Access. I regularly update a secure, encrypted file with every important password and account number vital to my life and business. A couple of key people would have access to the file if I were to be incapacitated.

3. Surround yourself with really smart, loyal people. Hiring early helps take the sole burden of the company's success off your shoulders. I viewed these early hires as invaluable investments in the longevity of the company.

4. Insurance. Buy a healthy term life insurance policy. Removing the cash flow issue is a great help when a principal needs to be replaced.

Here is how I proceed :

About the structures

You are running company A and you have a large percentage of the shares. This can be dangerous if you die, so one solution is to have a holding company (I am speaking here of an holding under French law). Any representative of the holding can speak for it at the level of company A. So Company A, which is one of the cash cows of the holding, won't have any decision problem. Of course, problems are just transferred to the holding, but hey, this is not of any concern for the company A. In fact my principle is to have 2 managers for the holding, even if they don't have the same amount of shares to avoid problems if one disappears.

Documents and projects

All documents are managed electronically with a dedicated tool so that anyone that have access can know everything that must be known in order to make the company running.

For any action our policy is to share it with at least one collaborator.

All passwords and "secret" information is in a (very big) notebook which is in a safe at the bank.

All bills (electricity, phone, etc.) are paid automatically each month.

All bank accounts are authorized for 3 persons at least : the boss, me and the accounting person.

The scheme for shares transfer is known : who will inherit, or who will buy it to the inheritors.

Proof of concept ?

What sort of testing/examination would be good to see that everything is in place for the incapacitation of a key person? Again, I am looking for specific details, not just high level concepts.

The idea is to organize a fake-but-real crisis. The scenario can be quite simple : imagine you send Alice, Bob and John to a meeting with potential clients far away and that the plane crashes. Basically it means that you send Alice, Bob and John to a few days break, and you see what happens. Each time one task cannot be completed (or simulated since you will not actually transfer shares for instance), you organize a meeting with the folks involved. In this meeting you will design a process that handle the case and you stop the roleplay here. A few days or weeks later, you do that again, and again, until everything works fine.

At the end of the whole process, you should have an emergency book, with the task that must be completed to survive some events.

Here is what I have done so far and what I have to do for the two entities I am part of:

Entity 1

(just me - sole proprietorship - desktop app for very small niche) This product is sold through my site via paypal. No interaction with me is needed. I have configured it so that another entity can set up licenses for users, but the people who pay via paypal can get a license via my web site.

I have one more step I guess which is to direct any of my successors to make a configuration change to a script so that the software is just free with no licensing necessary.

I will also release the code to the public in the case that I am unable to continue. It makes very little money, but the people who need it really really are appreciative.

Entity 2

S Corp with another person 50/50 split I just finished a pretty thorough document that lays out all the providers we have for things like Voip phone service, SVN, web hosting, bank accounts, etc. I put this doc in svn and told the person about it.

This should be sufficient for now.

We will eventually get insurance for each of the principals as well.