A Founder’s death: What to do next? Part 2

By Prof. Enrique Soriano

 

When you die or become permanently disabled, your business may die or be permanently disabled on the same day – not because something wrong was done– but because nothing was done! Founders and key business leaders should never think they are Superman. The truth is, they will soon die. No ifs or buts. It is just a matter of time.

The past few weeks have been extremely challenging and downright depressing. We have seen and experienced too many deaths due to COVID-19. I have been witnessed to several business owners-friends and clients that died without a succession plan and throwing the business into turmoil. Any untimely death of a founder or a business owner can leave a business in shambles and family enterprises at any stage may struggle in the absence of their key business leader. The first 100 days is critical as estate or intestate proceedings take centerstage. But there are other dimensions that are critical as well. These are death tax liabilities, business continuity, legal ownership documentation and more complicated internal concerns among siblings, in-laws, offspring and employees. These multi-dimensions can cause complications as the business is barely struggling to move from a suspended state.

In fact, many research studies have concluded that many businesses suffer long-lasting and significant negative impacts following the death of their founders. Brands associated with the founder get compromised, bank loans restructured, sales figures dip and executives are gasping for answers. There may also be layoffs as the organization struggles to stay afloat.  The combination of the founder’s death and the raging pandemic can be likened to a ship without sail being tossed mercilessly by a double tsunami.

In my role as a family business advisor, family businesses represent more than 60% to 70% of any founder’s total net worth. However, when it comes to making sure that the business continues to be successful after their death, business owners are frequently unprepared.  No person would willingly put more than 60% of their net worth at risk, yet this is in fact what happens with a family business due to no planning or poor planning.

If you are a business owner with a “do nothing” mentality, ask yourself this: If you died of the dreaded COVID infection tomorrow what would happen to your business?  Would it be business as usual, would it continue to operate and provide a long term source of financial support for your family? Will your employees continue to manage the business? Who will make those critical decisions in your absence? Who will manage a barrage of calls from your creditors and suppliers demanding for a disclosure and sit down meeting? Are your children ready to step in and assume the leadership role that you left vacant? Or would it gradually disintegrate amidst squabbling between family members and lawsuits and poor management until the remaining assets were sold for a fraction of their original value?

As a founder you are aware that you were able to manage the business fairly well and you continue to be reasonably profitable.  But you also recognize that your business will be compromised after your death and yet despite the grim warning and possible worst case scenarios, most business owners continue to ignore this reality and fail to develop effective transition and the “what if” plans. It is difficult to imagine, especially after working so hard and then all of these questions are raised because you never planned your death or disability. In unfortunate events like this, businesses are liable to fall apart if proper planning and agreements are not in place.