In a previous blog, I pointed out how Succession Plans are insurance for when the unexpected results in the business owner’s absence. The most common response to this I hear from business owners is: “Yes, but that’s not likely to happen to me.” While that may or may not be true, owners also need to ask themselves: “Can my business and my family afford the consequences if the unexpected happens?” Others’ experiences and the research provide a clear answer.

In interviews with owners of family businesses, the Small Business Council of America and National Life of Vermont looked at factors that cause businesses to falter when transitioning to the next generation. One alarming finding was “77 percent of failed family businesses that entered bankruptcy went bankrupt after the unexpected death of the founder”. Another finding points to a likely cause for these bankruptcies: Of businesses which failed after the departure of their founder (often due to unexpected death or disability), 97% had no written succession plan.

Herman_Aaron.CroppedDrops in profitability and revenue due to an unexpected absence of the CEO were found in three other studies. The first reveals that the death of a CEO results in an 18% drop in the company’s profitability and declining sales growth. These declines are seen in companies of all sizes as well as in private and public companies. The value of Succession Planning is found in those cases where the company and family had time to plan for the transition and, thus, experienced minimal declines.

The same authors showed similar negative consequences resulting from a CEO’s illness or a death within the CEO’s family. Hospitalizations of the CEO for five or more days results in profitability declines of 13% to 15%. Similar downturns occur when the CEO is faced with the death of a close family member. The significance of Succession Planning especially for the CEO/business owner is highlighted by the fact that similar “shocks” to other senior executives and board members do not have the same negative impact on profitability.

Clearly a well thought out Succession Plan protects the economic viability of your business. But it also protects the economic and emotional health of your family. An American Bar Association report notes that among businesses that failed after the founder’s death “[a]lmost 81% of the failed businesses were negatively impacted by family conflicts among the survivors.”

While there are no guarantees in life, a documented, well thought out Succession Plan protects your business and family for when the unexpected happens. Consider this: Would you go without business interruption insurance which protects your business in the short term? Also protect the long term viability of your business with a Succession Plan.