Death is not an exit strategy. Protect your livelihood and your legacy.
“One stat that doesn’t need research to prove: 100% of business owners will exit their business someday—either by design or by default. That’s why business owners must begin their succession planning, and successor development, as early as possible.” (MassMutual’s 2018 Business Owner Perspectives Study)
All business owners, in one way or another, will exit from their businesses either during their lifetime or when they pass away.
The question is: Will your business exit be on your terms or someone else’s?
According to the Exit Planning Institute’s (EPI) State of Owner Readiness Survey, roughly 50% of owner exits are not voluntary due to one of the 5 Ds: Death, Disability, Divorce, Distress, or Disagreement. And these stats were pre-COVID. The number may actually be higher now due to the forced liquidations and deaths that have resulted from the pandemic.
The EPI survey also revealed that 40% of surveyed owners have no contingency plans for illness, death, or forced exit. These numbers are a bit frightening. A forced exit can be detrimental for an owner, but it can affect so many others as well, including your family, employees, and community.
If we’ve learned anything from the past year, it’s that we can’t predict the future, but we can prepare for it to the best of our ability.
The Risks of Not Planning for Your Eventual Exit
Business owners who don’t have an exit plan in place are setting the business and their family up for disaster. We have seen many cases where owners pass away or become seriously ill while they are still running the business, which can put their family, business, and employees at risk. In this talk from Inc.com, Jessica Johnson-Cope, CEO and President of Johnson Security Bureau, discussed unexpectedly finding herself at the head of her family’s third-generation, 50-plus-year-old business following her father’s sudden death. Her story illustrates the significant challenges of not having a sound business exit plan in place.
“I think I spent three years dealing with lawyers,” she explained. Why? Her father did not have a will or plan in place for the future of the business. So, what was an already emotionally difficult time for the family as they were dealing with his illness and death was compounded by the fact that they now had to run the family business without any real guidance.
The day following his funeral, they had to do payroll and keep the business moving forward. As Ms. Johnson-Cope said, they had a handful of large customers and 16 employees (and their families) who were depending on the continuity of the business.
Planning to Ensure Continuity
As Ms. Johnson-Cope highlights, one of the problems that arises in family businesses is that potential successors are often kept in the dark when it comes to the business, including the day-to-day operations and business finances. Johnson-Cope offers some sage advice for business owners, especially owners of family businesses: Find and groom your successor.
Spend time to find and engage a young person – whether it is a son, daughter, key employee, or someone else. Find someone who you can groom to run your business so they can take your business forward once you’re gone. She and her brother weren’t exposed to the business growing up. This often happens because the owner/parent wants to shield his or her family from the perceived burden of running the business. However, this lack of education, communication, and planning can be detrimental when it comes time to hand over the reins to the business.
Against the Odds
Fortunately, against the odds, the Johnson family business has survived, and Johnson-Cope has grown the company significantly under her leadership (and with some significant outside guidance) to 160 employees. (She was recently featured in a story about a small business program from Goldman Sachs.) Generally, in a scenario like this, a business would likely be sold for far less than its value or be forced to liquidate.
The success of the business, despite the huge obstacles they faced, is not typical. Most business owners just assume their business will simply pass from one generation to the next and continue without any planning or forethought. The reality is that less than 30% of family businesses experience a successful transfer from the first generation to the second and it gets worse with each generational transfer. Countless family businesses have fallen apart or had to be sold due to lack of planning. This can result in strained family relationships between those who are and those who are not involved in the day-to-day operations of the business.
Even though Johnson-Cope and her brother were not prepared to take over and run the family business at the time of her father’s death, they realized it was a necessity. She realized that all that her grandparents and her father had achieved wouldn’t matter if the business failed. It would all be “for naught” if she and her brother didn’t keep it moving forward. With proper ownership transition and succession planning, the process would have been much less painful and difficult for the family.
“Nobody wants you to die. Nobody is ready to die. But you want to make the most of what you have. You can’t take your business into the afterlife, so plan for this phase of your business just as you would retirement,” Johnson-Cope says.
Even if you don’t plan on transitioning or selling your business for years, having a comprehensive exit plan in place gives you peace of mind, knowing that your business, your future, and your family’s future are secure. Your family harmony, legacy, and financial future depend on making sound business decisions and planning for the future.