Succession planning comes in two varieties. The plan, and the back-up plan. Even if you don't have a plan, you need the back-up plan.
I bet you won’t enjoy reading this article.
None of us likes to contemplate our own mortality. There’s a reason it’s called “life insurance” rather than “death insurance.” But tragedies do happen, to business owners just like the rest of the population. Sadly, the vast majority of those owners have no emergency plan in place.
Because I specialize in selling middle-market companies, I see this much more often than you’d think. In the most common situation, a male business owner unexpectedly dies. Then his widow - who is grieving, trying to comfort the children, and dealing with settling the estate - has the additional burden of managing a company she is unfamiliar with, or finding new management, or overseeing a sales process.
Two recent examples come immediately to mind:
1. Three brothers owned a company together. The eldest, Jacob, was the real driver in the business, with audacious goals and creative solutions. One week after they visited our offices, Jacob flew his Cessna into the side of a mountain. Without Jacob’s visionary leadership, the business floundered and was eventually sold at a loss to a competitor.
2. A father and son, Abe and Paul, owned a plastics recycling business. Abe died unexpectedly, and two weeks later Paul was killed in a motorcycle accident. Paul’s mother died within a year, officially from pneumonia but, in my opinion, mostly of grief. The company passed to Paul’s sister and Paul’s widow - a nursery school teacher and a librarian who had no understanding of the business and were appalled that they were suddenly personally responsible for a line of credit. The previous year, the company could have fetched $35 or $40 million, but without the right leadership the company floundered (a common theme here), and the women sold it as quickly as possible for a tenth of what its value had been. The buyer, who was only interested in the company’s intellectual property, closed down the plant, putting all 200 employees out of work.
Unlike traditional succession planning, which tends to involve older business owners leaving their company (whether due to retirement, or ill health, or passing it on to the next generation of management), emergency succession planning is essential for business owners of every age.
How can you protect your company in case of your sudden demise? Here are a few suggestions:
1. Don’t be the only essential manager. If you can’t step away from the office for an hour without having to deal with an emergency, then you’re too critical to the company’s operations. (This is a good idea for your relationships and personal well-being no matter what your succession plans look like!)
2. Have a competent, trusted Number Two in place. You may want to think about transferring some ownership of the company to them. You need to clearly delineate their responsibilities, give them true autonomy, and support their decisions in front of other employees.
3. Share your “vision” with the whole company. Owners of small and mid-size businesses, particularly family-owned businesses, can hold their cards pretty close to the chest. The family knows where the ship is headed, but the crew doesn’t. If all parties are clear on the big picture, a successor can keep the chaos to a minimum when they take the wheel.
Like life insurance, emergency succession planning isn’t something you do for yourself. You do it to minimize the burden on those left behind. Being prepared for the unexpected is something you owe to your employees, your business partners, and your family.
DAVID LONSDALE built and sold three venture-funded companies before becoming president and co-owner of Allegiance Capital in 2005, which provides M&A financial services to middle market business owners. @MiddleMktMandA