As a business owner and father of three children, my imagination takes hold of me from time to time and I think about when my children will be old enough to work at my company. Besides welcoming the assistance of three trustworthy employees, it will provide me the opportunity to teach them what I’ve learned about achieving success. Moving along to a more distant future, I like to believe that when I die I will bequeath to them a valuable, healthy company that will provide financial stability and a sense of fulfillment as they make what I started their own. Many entrepreneurs share this dream but few realize it. Without proper planning, a successful business can go into a death spiral within weeks of a founder's passing. I recently saw this happen.
An acquaintance and business associate was the founder of a successful lighting supply company in Miami. He enjoyed a 40-year track record of success with loyal customers, stable cash flow and outstanding supplier and OEM relationships. It had all the ingredients of a successful business. Sadly, the founder, whose passion for lighting and design was palpable, passed away while attending a tradeshow at the age of 79.
As soon as I learned of his passing, I went to the company to pay my respects to his daughter who had spent her entire career at the business. Still in shock, she was unsure of what steps to take next both personally and professionally after losing her father, her boss and her mentor.
Within a matter of weeks, her brother decided that he wanted nothing to with the business. As the sole heir to the business, she had enormous shoes to fill. The pressure became overwhelming. She stopped returning customer calls and soon after stopped taking customer calls entirely. She then shut down the retail operation to avoid the pressure of dealing with walk-in customers. The staff became very concerned when orders from suppliers and to customers weren’t being approved. By April, the phone lines had been disconnected, all staff terminated, the retail operation shut down and the warehouse filled with valuable inventory locked. All business had ceased.
It didn’t have to be this way.
Preparing the next generation for ownership is a long-term process that should start in childhood. If a company founder acts as though he or she will live forever, then heirs will never be given the sense of responsibility and ownership that are critical for success. Succession planning isn't anything anyone wants to think about, but the health and success of your business depend on it. Here are four ways to do it right:
Prepare a written succession plan. The plan needs to address many issues and you should be prepared to update and adapt it on a regular basis. Its purpose is to simplify the transition from your management to new management upon your death. The format can vary but it should clearly identify the key roles that need to be replaced. If you are a founder, then you likely play several roles in the company that will be divided among several people. The plan should then name the individuals you feel are best suited for each role based on their skills and talents. Finally it should detail the process for completing the transition.
Document all important procedures. If you were to spend a single day documenting everything you do and how you do it, you could easily fill a hundred pages. It’s amazing how many steps it requires to close a sale, process an order, evaluate an employee or even make a withdrawal from a bank account. After years of doing the same thing, you take for granted that those around you do it as easily as you.
Avoid giving the next generation headaches they don’t need and make sure that major processes are documented. Include what area of the business it relates to, why it’s important, who is typically involved and what is the intended outcome. If possible, also include what should be done if things don’t work out as planned.
Gradually turn over control of key relationships and duties. Expecting someone to go from being an employee to owner overnight isn’t realistic. It’s important that your heirs develop a sense of responsibility and ownership for the company. This takes years. Don’t wait until your death bed to share with your children the recipes from your restaurant or the name of your banker. By staging the transition over time, your death won’t bring your company to a halt.
Purchase a life insurance policy. This should be done for your family as well as your business. The business policy will cover the costs of the transition to the named beneficiary. This keeps family money separate from the business while ensuring that the company has the cash to manage new hires, attorney’s fees and more during the transition.
Read more articles on succession planning.