A Lifestyle Business Does Not Have to Die When the Founder Does
Death and taxes really are the only certainties of life, especially when you’re running a professional boutique services firm.
But what happens to a business when the owner dies? Businesses often die when the founder does. In fact, according to Forbes, sales drop 60% within four years of a founder’s death, employment drops 17%, and the rate of bankruptcy increases significantly. In boutique professional service firms, the impact of a founder’s death is even more pronounced. Why? In many cases, the founder is the firm. When he or she passes, there is no glue to keep it going.
The exception to this rule can sometimes be found in lifestyle businesses.
A lifestyle business is a business whereby the owner will operate the business forever. Sometimes referred to as an owner-operated small business, it is set up to provide a certain lifestyle to the founder. The motivation of a founder of a lifestyle business is not to become wealthy but rather to earn a living and enjoy life. The goal is not to scale, and a lifestyle business is unsellable. So planning for an exit is unnecessary.
Lifestyle businesses with founder succession plans do much better. Many continue successfully for years after the founder’s death because they are run by a different type of entrepreneur who cares enough about their clients and employees to put a succession lifestyle business plan in place long before it is needed.
However, not all lifestyle businesses survive the passing of their founder. There are certain steps to take to make sure the firm lives on long after the founder passes away.
The Power and Purpose of Succession Planning
The passing of a founder in a boutique professional service firm can have devastating effects. Sales plummet. Jobs are lost. Usually, the performance of the firm drops because the founder played an outsized role in getting, keeping, and growing clients.
Another issue: Many small service firms are named after the founder. When the founder passes away, the brand is lost. And many of these lifestyle businesses have legal structures which make it difficult for the firm to be passed on. In some states, deadlines are such that ceasing operations is the easiest path.
The solution to this mess is succession planning. A well-thought-out succession plan dictates the next steps after a founder dies.
Members of Collective 54 are provided “succession planning in a box” with the publishing of The Founder Bottleneck and its companion course. But I will summarize the key items to keep in mind here:
- In the absence of a succession plan, power struggles are likely to break out. A well-performing lifestyle business is profitable, and the employees will fight over who gets the jobs and profits.
- Employees flee a lifestyle business after the passing of a charismatic founder. Many of these employees worked at the firm because of the founder. Lifestyle businesses that are in the services industry cannot survive mass employee defection. A succession plan, communicated correctly, can prevent a spike in turnover.
- Founders have lots of tribal knowledge that is essential to the success of the firm. If the tribal knowledge goes to the grave with the founder, the firm won’t be far behind. A succession plan institutionalizes this founder knowledge.
- Clients defect to competitors when a founder passes away. Why? Many of the key client relationships are between the client and the founder. When the founder passes, the relationship bond is broken, and the client churns. A succession plan institutionalizes the key client relationships.
How to Prepare Your Firm for Life-Sustaining Succession Planning
I cannot stress enough how important it is to proactively put succession plans in place. Are there challenges of succession planning? Sure, but those challenges pale in comparison to what can happen if your firm lacks the direction of a well-built succession plan.
For example, what happens to the firm if the founder’s death is sudden? In many firms, the founder is the only person authorized to sign contracts, authorize payroll, pay vendors, deposit and withdraw funds from the bank, etc.
If this sounds familiar, you’re not alone — but it can’t be used as an excuse to ignore succession planning. I realize you are busy. Succession planning might not be at the top of your priority list. But, again, if you care about what happens to your employees, clients, and life’s work, then put a succession plan in place, now.
Hopefully, I have lit a fire under you. So here are some basics to get the ball rolling.
1. Members of Collective 54 should read The Founder Bottleneck and have your team take the companion course.
Follow the book and course’s step-by-step process, and you can lay your head on the pillow softly each night with peace of mind knowing you did the right thing. Your family, employees, and clients have been properly protected from danger.
2. If you are not a member of Collective 54 and want your firm to live on after you, consider joining.
You can join Collective 54 by applying for membership. A representative will get in contact with you shortly afterward.
3. Set aside some money to allow the firm to buy the founder’s shares after his or her death.
Failure to do this will require the firm to take on debt to buy the founder’s shares after he or she dies. This can put a big strain on the next generation of leaders, as they will have to make debt payments.
4. Buy some life insurance and make the firm the beneficiary of the policy.
The payment will help with the inevitable cash flow dip likely to follow the founder’s death.
5. Add the necessary provisions to key documents now.
Operating agreements and partnership agreements should clarify the succession plan. These changes will make it much easier to move forward when the time comes.
6. Build a business that is not dependent on you.
Founders with firms that are very dependent on them are running “hero-style” firms, where everything hinges on the founder to succeed. To avoid or transition out of this style, create something bigger than yourself that has real value to your clients and employees. Your firm will then be able to outgrow your tutelage and continue on after you are gone with a capable successor and their own teams.
Succession planning might not be the easiest thing to talk or think about. Nevertheless, it’s important to learn as much as you can while you’re still around for the good of yourself and those around you.