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.
3. Loss of Key Skill Sets
If an owner has departed a business, the impact on the business’ ability to operate can be substantial. How substantial is directly related to the roles and responsibilities the departed owner has left vacant and whether there is a qualified, trained, and equally experienced and capable employee(s) that can fill them. For example, if the owner was the product visionary and they were a key reason why the company was successful, and they ran the product side of the business autonomously, then the company is in a serious risk position, perhaps one the company cannot recover from.
The solution is succession planning; in a sole-owner situation there should be managers and employees that are clear on the owner’s roles and responsibilities. Each key area the sole-owner currently focuses on should have at least one manager or employee trained and ready to take over for the owner if they depart.
The multi-owner scenario actually makes managing the loss of key talent due to owner departure (due to death or serious disability) a little easier as the co-owners should have cross-trained the other to ensure they know what each is doing to make the company successful.
4. Loss of Clients
With the departure of an owner / leader, clients can see a potential break in the company’s ability to meet their needs and as a result, start considering alternatives – remember they need to mitigate their risks too, especially in the instance where the departed ownership was directly involved with clients and there is no ability to smoothly transfer key client relationships and confidence. Also important in this situation is the ability to quickly and proactively demonstrate how the company will continue to meet client needs in the short, medium, and long-term.
A solution here is a written stay bonus plan funded by life insurance and previously communicated to managers including who the new leader will be and detailing who will be responsible for key client continuity.