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Lead Your Team Strategy

When Founders Die, Businesses Suffer

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  • The death of a company's founder is an emotional and financial blow. Sales often plummet and jobs are cut.
  • The overall performance of workers can be impacted after a founder dies due to the leadership effect.
  • Create an exit planning strategy early on to confirm your business continues to operate in event of your death.

The untimely death of a business owner can leave a business in shambles. Companies at any stage may struggle without the leadership of their owners. Inner turmoil among associates could cause complications as the company moves ahead if there isn’t a succession plan in place. Furthermore, there could be issues with the brand image. If a brand has been long associated with the founder, his or her death can affect customer response to the company.

In fact, research finds that many businesses suffer long-lasting and significant negative impacts following the death of their founders. Sales figures often flounder and there may be layoffs as the organization struggles to stay afloat.

The study revealed that the death of a founding entrepreneur 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.

Sascha Becker, a co-author of the study, said the research shows that founders are the glue that helps hold businesses together.

"We expected businesses that experienced the death of a founder-entrepreneur to have some kind of a dip in performance immediately after the death owing to the upheaval, but we anticipated there would be a bounce-back," said Becker, a professor at the University of Warwick in the U.K. "Even four years after the death, most firms show no sign of recovering and the negative effect on performance appears to continue even further beyond that."

The difference between the great drop in sales compared to a smaller decline in employment was puzzling to Becker. While he isn't sure exactly what accounts for it, he believes the difference shows what a vital role these people play in maintaining productivity levels within a firm.

"It could simply be that the founder was a fantastic salesperson who generated a disproportionately high level of sales," Becker said. "On the other hand, it could be down to a leadership effect, where the founder-entrepreneur inspires the employees to perform as best they can, and without this presence, that drive slips away."

As part of the study, researchers analyzed data on privately owned firms in Norway that had not been opened for longer than 10 years. Specifically, they followed 341 firms where the majority-owning founder had died and compared them to the same number of companies that shared similar characteristics but where the entrepreneur remained alive.

The results held true regardless of the business type, such as family or nonfamily firms and urban or rural businesses.

The study did discover that the level of education of the founder impacted how badly the firms were affected. Businesses with the most highly educated founders experienced a bigger drop in performance after the death.

 

Business continuity is also called exit planning. This process involves plotting how an organization will go on after your retirement or death. The goal of exit planning is to allow a business to thrive without the founder's direct involvement. For the founder, the benefit is that he or she can know that the business will remain consistent even after death. The founder's values and vision for the company can be withheld as long as a solid exit strategy has been implemented. Exit planning may sound morbid, but your company could end up in disarray without a strategy in place. For instance, if you’re the sole one responsible for signing contracts and agreements, what would happen if you suddenly died and had not appointed anyone in your place to legally handle these tasks?

A living trust can be created as a way to ensure business continuity. The successor is selected by the business owner and given legal authority to handle all tasks related to running the organization without the courts' involvement. Although the successor doesn't necessarily have a financial stake in the business, he or she provides time to family members on whether they plan to keep or sell the business. Your successor will allow for services and products to be delivered without any type of interruption.

Business News Daily Editor

Business News Daily was founded in 2010 as a resource for small business owners at all stages of their entrepreneurial journey. Our site is focused exclusively on giving small business advice, tutorials and insider insights. Business News Daily is owned by Business.com.