By Steve Williams CExP™, CMMA
Major Risks Comprehensive Succession Planning Should Address:
1. Leadership Vacuum
The sole owner typically is very invested in their company and, as a result, plays a key role in its future success. If an owner is removed from the company through death or serious disability, there is risk the company will not survive without a Succession Plan.
If the company is suddenly left without the owner, there is potential it is without a recognized and appointed leader. If this is the case, it will have a significant negative impact on the company as managers and employees will start to wonder about the sustained future of the business. As a result, they may seek employment with an alternative company. As key staff are lost, this minimizes the opportunity to maintain company value and fill leadership voids. Another result, managers may seek to fill the vacuum on their own, potentially creating conflict and lack of focus on core business activity.
A solution in this scenario is a fully funded stay bonus for key employees / leader(s).
In a multi-owner environment, the impact can be much different if there is a loss of one owner as another owner is still in place to maintain continuity of ownership. The issue in this case is more often ownership transfer and how shares, control, and finances will be transferred to the remaining owner(s). Rather than having a clear path, the remaining owner is forced to wade through what can be a lengthy distraction while the business suffers as a result, and, by extension, the departed owner’s estate and beneficiaries suffer too.
A solution in this scenario is an up-to-date, adequately funded buy-sell agreement, to allow the remaining owner(s) to acquire the departed owner’s interest in the business.
2. Loss of Financial Resources
This is an area that can impact both the sole-owner and multi-owner company in a similar way, depending on how much the finances of the company were directly tied to the departed owner.
If the company has external, financially interested stakeholders in place, the terms and conditions may be directly linked to the departing owner, in the form of approvals or guarantees. In this case, if the 3rd party stakeholders see the company as being more risky with the departed owner no longer part of the business, then the company may find it difficult to get or keep these stakeholders involved in supporting the company; examples include bonding capability, obligations under leases, and capitalization shortfalls.
A solution here is using life insurance to fund what the company needs if the owner departs.