Entrepreneurs who head emerging growth companies generally recognize the need for planning. They see that they need to anticipate (formally or at least informally) for all kinds of risks and contingencies. What if they lose a key customer or supplier? What if commodity prices or foreign exchange rates rise or fall? Typically an entrepreneur has at least an informal plan in place to deal with such events—or can be persuaded of the need for one. As a business owner, you need to have a good contingency plan.
But surprisingly few business owners plan for the ultimate risk: their own death or disability.
What If An Owner Dies Suddenly?
When business owners think of exiting their business, their vision is of retiring, buying another business or devoting their time to a charity or other interest. But the fact is that we all know someone who died prematurely. Entrepreneurs find it easy to put off or overlook this possibility when he or she starts to think about an exit process. A good exit plan should include a contingency plan, developed by the shareholders and management, to deal with an unexpected absence of leadership.
The fact is that without continuity of leadership, most businesses will fail. If ownership transition for a business is even somewhat uncertain, business continuity is at risk. A business owner’s death can have a significant effect on the company’s ability to maintain its financing, its relationships with key customers and vendors and other parties who are important to the company’s success. Within the company, especially in a closely held business, leadership can be fragile. The loss of the founder or CEO may leave a void that results in internal power struggles, employee turnover, managerial mistakes, lost customers, and lost profits. Even a vital and profitable company can unravel quickly when its leader is unexpectedly removed from the scene.
Management Succession Is Critical
The loss of a mentor and business leader may be especially damaging to the crucial management succession grooming process. Not only are the company’s profits threatened, the plan for the long-term development of a successor may be derailed. A successor who is not ready to lead may be prematurely thrust into a leadership position, drastically reducing their chance of success. Other employees may sense trouble and begin to seek employment elsewhere. Important customers and suppliers may lose faith in the company’s ability to perform.
A large part of the value of a business is related to the prospective buyer’s confidence that the business owner will be around for 6 to 12 months to facilitate the transition of ownership with the company’s employees, vendors, and customers. Without this orderly transfer, a buyer might discount the value of the company dramatically.
Review the Plan Periodically
Responsible individuals, such as corporate officers and board members, should be made aware of the plan and be empowered to implement the plan should a trigger event occur. Further, the plan should be reviewed and updated periodically to include a current value for the business and any changes in the owner’s exit plans.
In the next part of this article I will suggest several specific components of a succession plan to deal with an owner’s death or disability.
Bill Reading is a Newport Managing Director of the Carolinas. Bill’s career has focused on the markets Newport serves: emerging growth companies that need to get past No Man’s Land and private equity firms that invest in these firms. To learn more or contact bill, click here.
