- A company founder’s death is an emotional and financial blow. Sales often plummet and jobs are cut.
- A founder’s death can impact workers’ overall performance because the founder likely played an outsized role in holding the company together.
- Creating a succession plan can help a business continue operations and eventually thrive following a founder’s death.
- This article is for business owners interested in exploring the effects of a business founder’s death – and taking steps to mitigate the damage.
The untimely death of a business owner or founder can leave a company in shambles. Organizations of any size and stage may struggle without their owner’s leadership. Without a succession plan, inner turmoil among associates could complicate operations. Additionally, the business could suffer brand image and customer response issues, especially if the brand was closely associated with its founder.
We’ll examine what happens when a founder dies and explore ways entrepreneurs and small business owners can ensure business continuity if the unthinkable happens.
What happens when a company founder dies?
Businesses suffer long-lasting and significant negative impacts following a founder’s death. Sales figures often flounder, and there may be layoffs as the organization struggles to stay afloat.
Additionally, depending on the business’s legal structure, state regulations determine how quickly crucial decisions must be made, such as selling the business or ceasing operations. Amid this turmoil, the business must continue to pay employees and vendors and fulfill other contractual obligations.
Continuing operations can be challenging even for successful businesses. An often-cited study published in 2013 found that the death of a founder in the first decade of a company’s existence has a profoundly negative effect on even well-run businesses. (While this research isn’t new, its findings likely remain relevant today since founders remain central to any organization’s early years.)
According to the study, a founding entrepreneur’s death wipes out, on average, 60% of a firm’s sales and cuts jobs by roughly 17%. Also, these companies have a 20% lower survival rate two years after the founder’s death compared to similar firms where the entrepreneur is still alive.
Did you know?: When a sole proprietor passes away, the sole proprietorship ceases to operate, and all holdings become part of the owner’s estate. In contrast, LLCs must have stipulations about what happens if an owner dies.
What happens if there’s no succession plan?
Ideally, a succession plan will dictate the next steps after a founder dies. However, creating a succession plan is not typically a high-priority issue for startups. Even longer-term businesses may put off succession planning because a founder’s death seems unlikely and other pressing issues seem more crucial.
However, not having a succession plan can throw a business into chaos with challenges like the following:
- Power struggles: Without a succession plan, companies will likely see power struggles for senior roles – especially if the business is doing well or shows promise. Additionally, if the business fills an urgent role with a hasty bad hire, the chaos is compounded.
- Loss of direction: Succession fights and related challenges can distract from a company’s direction, halting growth and putting business goals on hold.
- Employee loss: The chaos of a business thrust into succession challenges can cause valued employees to jump ship and put off talented potential new hires.
- Loss of the founder’s knowledge: A founder likely has intimate knowledge of the business, its operations and its customers. When they’re unexpectedly taken away without documentation, that knowledge is lost and those relationships may never recover.
- Customer turmoil: If employees leave or must take on additional duties, customer service could suffer, leaving the business vulnerable to clients jumping ship.
Tip: A founder’s death is just one of the eventualities – including physical and virtual disasters – that can be included in a company’s disaster recovery plan.
How to keep a business strong after a founder dies
A succession plan and business continuity planning are essential for keeping a business strong after a founder dies. Also called exit planning, this process involves plotting how an organization will continue after an owner’s retirement or death. Exit planning aims to help a business thrive without the founder’s direct involvement.
With exit planning, founders gain the peace of mind of knowing they’ve done everything possible to keep their company strong and their families protected. They know their values and vision will survive.
While exit planning may sound morbid, companies could end up in disarray without a strategy in place. For instance, if you’re the only person authorized to sign contracts and agreements, what would happen if you died unexpectedly without appointing anyone to handle these tasks legally?
Here are four things founders and their companies may want to consider to prepare for the worst.
1. Founders should consider life insurance to protect their businesses.
Various types of business insurance provide a safety net for companies. For example, founders can make their companies the beneficiaries of life insurance policies. Among other things, the payment can help with the cash flow dip likely to follow a founder’s death.
Additionally, key person insurance can help replace lost revenue if a founder or critical executive passes away. The business would pay the premium during the key person’s life and then be eligible to collect a benefit after they die. This payment may be essential to continuing business operations.
2. Build something of intrinsic value to help a business survive.
If a business is to survive a founder’s death, it must have intrinsic value beyond what they brought. The business’s mission statement and vision statement will guide its value, and its purpose will further shape its legacy.
If a founder wants their business to outlast them, they must create something worthy that others are motivated to own and continue. Businesses where founders deliver value through very specific expertise are often challenging to sell.
3. Include relevant provisions in key documents.
Businesses may have foundational documents like articles of incorporation and operating agreements or business partnership agreements that clarify a succession plan. These documents make it much easier to move forward in an orderly manner. Some nonfamily businesses may include a provision that a founder’s death will trigger a sale of their stake.
Apple is an example of a company that set a clear succession path that eliminated uncertainty and confusion. When Steve Jobs was dying, he named Tim Cook head of the company he founded. This decision made clear to the company and the world how Jobs saw Apple in the future. Jobs’ decision to choose his successor almost certainly helped the company move forward beyond its iconic founder.
While a massive corporation like Apple is very different from a small business, clearly documenting succession plan provisions can eliminate the chaos and uncertainty of an owner unexpectedly dying.
4. Founders should take steps to ensure their families are cared for.
When founders die unexpectedly, it almost inevitably plunges their business into crisis. It does the same thing to their families. When founders take steps to ensure their family is taken care of, it helps give the people around them the time and ability to support the business. This rule is especially true when the founder’s family is involved in running the business.
Tip: Exit planning is also crucial for a founder’s retirement. Small business owners can prepare for retirement by saving for retirement, developing a succession plan and building a support team with expert knowledge of investments and tax law.
The aftershocks of a founder’s death can be mitigated
Starting a business takes a leap of faith and an undauntable personality that can withstand the inevitable challenges and pitfalls of entrepreneurship. While it’s uncomfortable to think about their own demise, founders must be pragmatic and address the ultimate protection of their business and family.
A founder’s unexpected death will almost certainly have negative consequences for a company. However, if the business establishes a succession plan and takes other prudent steps, it can cushion the impact. Without a clear plan, recovery will likely take years, if it’s possible at all.
Alex Halperin contributed to the reporting and writing in this article.