Contingency Plan

"What Happens If..."

Managing succession in family-owned businesses includes contingency planning.

A family business contingency plan addresses the "downside" risks encountered when dealing with the succession process. Even if you are following a good planning process - disaster can strike suddenly.

Katrina was a natural disaster that impacted hundreds of thousands of people. For many family business owners along the Gulf Coasts, hurricanes are part of the risk of doing business in that part of the country. How many of the family businesses that fell victim to Katrina had a contingency plan? A plan plan that worked? We know of one, The Oreck Company . Oreck, a family business, had a sophisticated contingency plan, one that worked. Amazingly, Oreck moved their headquarters from New Orleans to Dallas TX and had their damaged manufacturing facility, located on the Gulf Coast, up and running within 9 days after Katrina!

Other catastrophic events can also impact the succession plan. One family business client aged 57 and seemingly in good health, had the timeline for his succession plan radically altered following a visit to an oncology clinic. Pancreatic cancer was the diagnosis and the man died less than 3 months later. The contingency plan we helped to develop saved the family business. His succession plan called for his withdrawal from day to day involvement in the family’s businesses over a period of 5-7 years – plenty of time to groom his daughter to take over as CEO. In this case, when the business owner became incapacitated and died, there was an advisory support team in place that could help mentor the daughter and to help coach the family in making better informed decisions about the business.

One client we were not able to help was 45. The son of successful generational business, he was an exciting entrepreneur with many interests outside of the primary business. Several of the businesses he had purchased were businesses on the verge of bankruptcy. But with the infusion of cash and his business acumen, the businesses looked like they might be resuscitated – even though he had left the management team in place. When we last talked about developing a contingency plan, he felt his brothers would be able to run the core business of the family. But his brothers were never involved in the other businesses he was running. One day, for reasons no one can figure out, he drove 100 miles from home and committed suicide in a hotel. His brothers were able to cover the leadership loss in the primary business, but his other businesses tanked.

As part of our Family Business Assessment we start probing the client’s "what if" plan – questions that help us gain a better understanding of the owners goals and objectives.

Strikingly, when asked about their "what happens if" plans, many family business owners say that they have purchased life insurance that comes into play when they die. Only rarely do we find a contingency plan that addresses the operational needs of the business should the owner die or become disabled.

Moreover, thanks to medical advances, strokes and heart attacks don't kill nearly as many victims as in the past. However, they can still incapacitate a key family member for long periods of time - sometimes even permanently. When this happens, the life insurance does not come into play.

As a rule of thumb, when a family business owner dies or becomes disabled, we consider most family businesses have the momentum to run, business as usual, for about 4-6 months before the business starts to decline. Vendors get worried, key employees start seeking other jobs, customers start seeking alternative sources for product and services – not a pretty picture.

And it is not always the parents that die first. One or our family business clients was 67. His succession plan provided the financial security for him to retire in five years. At that time, his oldest son would be age 41 and would succeed dad as president of the business. At age 39, the son and his wife were killed by a drunk driver in a head-on collision. In this case, the succession plan called for the family to hire a CEO, with a 5 year contract, to run the business and to mentor the son. The new CEO was hired to run this 50M business and slated to start the Monday – as it turned out, the Monday following the weekend crash.

Good contingency plans do not prevent tragedies from happening but they absolutely improve the odds that the family and the business can survive a catastrophic event.

FRACTIONAL EXECUTIVES is one of the services we offer to our family business clients. Our multi-disciplined team can deal with the operational issues of running the business and meeting the emotional needs of the family. We quarterback the process for dealing with the accountants, the lawyers, the bankers, key customers and suppliers, the management team – and most importantly, being the interim manager of the business.

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