Disaster Recovery: 10 Steps That Could Save Your Business
It's May 2009 and Correia, president and CEO of Sagacent Technologies, is recovering from surgery after a stroke has left him partially paralyzed. Doctors tell him he has a 50/50 chance of surviving the next 48 hours.
Correia worries about his family, his home, his business and what will happen to them if he doesn't pull through. He thinks about how his wife has been after him for a couple of years to get a life insurance policy, but he keeps looking for a better deal. Now he isn't going to have enough insurance to make sure the company and his family can go on.
The problem is that Correia tried to do it all. Sagacent, a four-employee firm with annual revenue of $500,000, has been built around him and, in essence, he's become too critical to the company. And now it might be too late to do anything about it. So he prays.
Now, three years later, Correia has survived -- and so has his 12-year-old company. He spoke with CRN about what he was facing while lying in that hospital bed.
"If I died, everything is tied up in the company and I'm instrumental to the company. The company would likely be difficult to get sold. It's my wife's inheritance and the company would probably evaporate or she'd only be able to sell it for a fraction of what it's worth," he said. "That was the No. 1 one thing driving me to come back. It gave me a chance to lie there and say a prayer to right my wrongs."
It's hard to run a successful business every day, but it's even harder to navigate through a crisis such as a serious health issue, fire or natural disaster. But the truth is many small businesses don't take the time to implement a strong business continuity plan, said James Rivera, associate administrator with the Office of Disaster Assistance at the U.S. Small Business Administration, Washington, D.C.
"Most individuals don't think about preparedness until after a disastrous event has occurred. All businesses should have some sort of business plan, but they should also have a disaster plan to keep the business going," Rivera said.
CRN talked with several solution providers who have been through a crisis to gain insight into their challenges: what they did right, what they did wrong and what advice they have for their peers. In all cases, those interviewed said they weren't fully prepared -- or thought they were prepared but really weren't. Most also said they didn't think something would ever happen to them.
Their answers are in line with a recent CRN research study on business continuity in which nearly half (48.3 percent) of 116 survey respondents said they do not currently have business continuity insurance for their company. Among those solution providers, 62.5 percent of them also said they haven't considered buying such a policy, with the biggest roadblocks being cost and their belief that they don't actually need it.
CRN has detailed 10 steps to help businesses build a business continuity plan as developed by the SBA in partnership with Agility Recovery Solutions, a Charlotte, N.C., organization that specializes in business continuity for small businesses and works with the SBA.
In some cases, these tips are lessons learned the hard way by solution providers such as Sagacent's Correia, who spent three and a half months in rehab after his stroke. Today, Correia's left arm has some impairment and he suffers from some hearing loss in his left ear. He struggles, yet walks without a cane. But it's a big improvement from having no movement on the left side of his body immediately after the stroke.
Correia got his second chance. And took no chances with his company or his family’s livelihood.
NEXT: Assess Your Critical Business Functions No. 1: Assess Your Critical Business Functions
Prior to his stroke, Correia had not created a formal business continuity plan for San Jose, Calif.-based Sagacent. The company could back up its data off-site, but it had no strategy to replace the business he brought in as its only salesperson.
"Hell, no. I wish to hell we did," said Correia of a formal plan. "We never thought about specific things that could happen. Luckily, we had pretty good people in good positions and they did their job. My office manager, Lisa, had been my right hand. Now the joke is she's my left hand."
Solution providers should assess each critical business function, according to the SBA, including the basic management of the business, serving clients, financial operations and IT functions. Solution providers should be able to determine how long they can withstand an interruption to those functions.
Having a strong business continuity plan, not just a technology continuity plan, is vital to any company's success, said Correia.
"It really caused me to re-evaluate my life and how I was running my company and what I was getting done," he said.
Correia currently doesn't have a life insurance policy, which would cost about $1,000 per month, or eight times the cost before his stroke, he said. For the same reason, Sagacent also doesn't have a "key man insurance" policy, which protects the business if a key executive dies or is incapacitated.
"[It's] much more than I can afford relative to the value or payout of the plan in the event of my death or incapacitation. Certainly this is an example of poor planning on my part. You want to have the insurance before you need it," he said.
What Correia can do -- and is doing -- is delegating more tasks and documenting procedures so there is not a single point of failure should an employee be out, Correia said. Creating a plan that provides backup for all business functions is something that all solution provider businesses should do, he said.
"As a small business, that's a bit of a challenge, but we can identify what everybody does and do lots of oversight on each employee's procedures and things they do and look for bottlenecks," he said.
No. 2: Review Your Insurance Coverage
Solution providers should review their insurance policies with qualified agents to make sure their coverage meets their needs. A key question solution providers need to ask, according to the SBA, is, "How much can I afford to lose?" Solution providers also should know the value of any property they own.
Of course, purchasing an insurance policy does not guarantee a safety net. Policies should be routinely adjusted and updated as the business, and employees, grow and evolve, said Dave Casey, co-founder and CEO of Westron Communications, a Frisco, Texas-based solution provider.
A few years ago, Westron's president and co-founder, Jack Higgs, died after a routine medical procedure. His death sent shockwaves through the company and Casey, then vice president of engineering, endured an 18-month legal battle with relatives of his longtime partner over insurance benefits and the valuation of the company. It cost Westron millions in revenue, Casey said.
When Westron was founded, Casey and Higgs had signed a buy-sell agreement funded with an insurance policy stating that if something happened to one partner, the other could buy out the first partner's shares with the insurance funds. The problem was that the agreement had figuratively been left in a drawer for 21 years and hadn't been updated as the business grew and times changed.
"We hadn't really reviewed it, and there were a couple of paragraphs that were not as clear as they should be," Casey said.
In particular, Westron's insurance agent wrote "buy-sell" on the document as the reason the policy was being issued. Those two words, legally vague, led the opposing attorney to challenge that the proceeds should go to the company and not to Casey to be used to buy Higgs' share in the company, Casey said.
"It could have been left blank. It probably would have been better if it was blank," Casey said. Although all parties signed the deal knowing the proceeds would go to the surviving individual, it was not clearly stated, he added.
"Be very careful how it's worded. The intention was to purchase back the stock to hire someone to replace that person's functionality," he said. "We did what a lot of folks do when they start a company that's not worth anything. We had a boilerplate buy-sell agreement. Everyone signs it, you put it in a drawer, and you're done."
NEXT: The Cost Of Analyzing Your Business One of Higgs' relatives also challenged the document regarding the valuation of the company, saying Westron was worth more than the stated valuation, Casey said.
"The relative's impression was that it was a thriving firm and Higgs was a 50 percent owner. The real story wasn't quite as clear as that," he said.
Any business agreement should be as clear and concise as possible on how the policy is funded and what its intentions are, Casey said.
"Sit down with an attorney and an accountant and go over all the permutations and what the tax results of the transaction are. It may cost more than a couple hundred bucks, but in the end it's worth a lot more," he said.
Well-defined buy-sell agreements are particularly critical for solution providers with business partners. Find an attorney who specializes in buy-sell agreements to review the documents and have separate attorneys for the business and all individuals involved, Casey said.
"The opposing party tried to question who paid the insurance premiums. The company did, but I was the beneficiary. They tried to draw the line that since the company paid the premium, the company should get the stock. We didn't do it that way for tax purposes," he said. "You end up with more attorneys in the mix than you expect. Even though the interests might be aligned, they're not exactly the same interests."
Eventually, a judge ruled in Casey's favor, but another issue was brewing: The insurance company wouldn't pay any funds until the challenge was resolved.
"That can affect banking relationships, it causes questions financially with vendors, and everybody reviews your credit line. There's a lot of dominos in that stack," Casey said.
Distributors and vendors were helpful to Westron during that time regarding credit lines, Casey said. It was the banks with no business relationship with Westron that wouldn't extend credit. "We paid our bills on time and it was business as usual [with the vendors and distributors]," he said.
Buy-sell agreements are included in many business partnerships and typically call for another partner or executive to be the insurance beneficiary, with those funds being used to buy the stock owned by the departed partner, Casey said. The reasoning is to ensure that the departed owner's family doesn't automatically become a voting member of the company. But when those agreements are not regularly reviewed, trouble can arise.
"In our case, we hadn't done an evaluation in 10 years so there was some question of what the company was really worth. Even though it's a cost of doing business, having a firm outside valuate you on a regular basis is key," Casey said.
The cost to evaluate a small company's worth can start at about $3,500 and exceed $10,000, depending on the scope of the evaluation and the reach of the company in question, Casey said.
Westron has had two in the past five years. The first one cost about $5,500 and the second about $3,500 because it used a lot of data from the first evaluation, Casey said.
"That's not a soup-to-nuts audit, but they did a lot of research on similar-type companies in our market. If you have a company with a wider footprint, they'll do comparisons with wider footprints," he said. It's best to have an evaluation done every two or three years, or when there's a change in ownership, Casey said.
"Particularly if you're in a fast-growing or fast-shrinking situation, you want to match up the underlying insurance to accurately reflect what the company is worth," he said.