Business Owners Fall Short In Planning Leadership Transition

Planning Leadership Transition

When a business owner dies the leader and business team left in charge are often overwhelmed. Most business owners do an adequate job on estate planning and tax issues. But when it comes to planning leadership transition, business owners often fail to ensure a smooth transition from one leader to the next.
Writing in Family Business, Bob Deprez cites several reasons why business owners fall short when they think about the transfer of ownership that will happen at their death. Like all of us, business owners avoid thinking about their own mortality. Who wants to consider their own death? They are also overly optimistic about the ability of the new leader and team to take over the business.  But, according to Deprez, the biggest factor that jeopardizes a smooth transition is not understanding the emotional impact the owner’s death will have.

Emotion Impact Is Large But Often Unanticipated

Business is all about numbers, right? Business is not about emotions. Well, that’s not true when the owner dies. Part of the problem is that business owners tend to be independent risk-takers and many of the people around them in their business are not. The second and third in command—and most members of business leadership teams—are often people who are dependent and who seek certainty. Losing their leader can bring grief, doubt, inaction and even chaos.

Grief Costs Billions

According to The Grief Recovery Institute’s 2006 survey called “The Grief Index: The Hidden Annual Costs of Grief in America’s Workplace,” hidden grief costs U.S. companies more than $75 billion annually in lost productivity, lost business and poor performance. Illnesses or deaths in the family are the second most common problems affecting workplace performance. The study of more than 25,000 people found that a reduced ability to concentrate was by far the most prevalent workplace issue. In fact, The Grief Index found that business executives who had suffered the loss of a loved one acknowledged that they had made decisions during their period of grieving that they would never have made under different circumstances.

And in family businesses it isn’t true that only family members are substantially affected by the loss of the owner. According to Deprez, the business owner is an important life leader for the employees who depend on that business owner for their livelihood.

Steps To A Solution

Of course business owners can never remove the impact of the grief that surrounds death. But business owners can remove most of the potential for doubt, inaction and chaos within their business. Here are some options:

  • Grant a key manager a limited power of attorney so he or she will have the authority to make decisions and continue business operations in the event of your incapacity.
  • Cultivate a fully functional, self-accountable senior leadership team that has a shared vision of the business. They must be able to run all aspects of the business if you, the business owner, are away for a month.
  • Execute a document that would trigger the transfer of your business interests to a trust in the event of your incapacity. The trust company could continue business operations on your behalf in the event of your death or incapacity.
  • Establish an employee stock ownership plan to insure that a buyer is available at the business owner’s death.
  • Implement a buy-sell agreement if there are co-owners, key managers or other employees that might be interested in purchasing the company. A buy-sell agreement can be between shareholders of a corporation, partners of a partnership or a key employee and a sole proprietor. The agreement obligates the surviving business owners, key employee or the business itself to purchase the interest of the deceased owner.

If you’re a business owner never underestimate what your permanent absence might do to your company and your employees. Accept that a business owner’s death can trigger powerful emotions with far-reaching consequences. Reread the potential options listed above and seriously consider taking action on one or more of them.

If you are interested on more information on leadership transition contact me, Gene Offredi at 203 453-1017