When a successfully growing furniture industry SME fell into Administration just over two years into its start-up phase and soon after the death of one of its founders, it was the fifth failure apparently linked to an unexpected fatality dealt with by one insolvency practitioner in as many years. This chain of tragedies begs the question about how management teams in smaller businesses can protect themselves from losing a key executive without warning.

These situations don’t just occur so early in a company’s existence, instead they can happen at any stage. They also aren’t only the result of the sad demise of a key executive; they can be triggered by serious illness or a vital individual resigning for whatever reason. The issue isn’t usually simply their loss, it’s the lack of foresight that leaves the company exposed to a wide range of potential perils and without a Plan B to mitigate these risks.

The downsides of a management void

The problems with unexpectedly losing a key member of the management team extend beyond the loss of their contribution, skills and knowledge or the pressure it puts on the remaining senior team members, serious as those aspects obviously are.

The knock-on effect on the morale of more junior staff can’t be ignored, nor the sense of crisis and even panic such events can trigger. Dealing with these internal issues are an unwelcome distraction to senior management at a hugely difficult time. Almost inevitably, productivity will be at risk and key functions such as customer service can falter. It can lead to a loss of talent, as ambitious staff question their future career path in the new situation.

Externally, there will be impacts on relationships with a range of stakeholders. Lenders may not be so positive about continuing support, especially where the former executive was providing extra collateral by way of a personal guarantee.

Suppliers may review their credit limits and terms, especially if their trade insurers downgrade the company’s rating as a result of the management change.  The increasing use of technology and data means that insurers are now able to look beyond the numbers in a business’s accounts to wider issues including management resources and capabilities, as well as to do this highly granular risk analysis on their whole portfolio, not just the major risks.

Key customers may look to diversify some or even all of their procurement away from the company to hedge against the new, less reliable supply chain component they perceive it has become after the loss of the executive.

The influence of social media plays an ever-increasing part in the ecosystems of modern businesses. The death or departure of a key executive and its implications will need careful and sensitive communications.

The key elements of an effective management succession plan

Smaller businesses need a succession plan even more than their larger cousins. They don’t have the management resources to cover a crucial gap, nor necessarily the financial strength to weather the disruption of such events. Recruiting a replacement is more difficult for them, so being as ready as possible for this unhappy eventuality is vitally important.

Start early

Recognise the risk right at the start of setting up the business. Succession plans take time to put together, and reviewing as you grow.

Identify key positions

Determine critical roles within the business that will require successors to ensure operational stability.

Define competencies

Establish the skills, knowledge and abilities needed for each key position in the future to use for spotting and developing internal talent, or else to facilitate an external hire.

Identify and assess potential successors

Evaluate existing employees as the business grows for their potential to fill these core roles. It’s usually easier, quicker and safer to promote from within than hiring externally.

Create development plans

Develop tailored individual development plans to build the necessary skills and experience in identified candidates.

Develop a knowledge transfer process

Implement strategies for capturing critical knowledge and experience from key executives to facilitate quick and successful transition if and when necessary.

Take professional advice

There are a host of potential negative legal and financial repercussions of a surprise loss of a key executive. Examples include valuing and arranging for the realisation of their equity stake and their involvement in funding arrangements. They may hold regulatory roles, such as being the company’s MLRO (Money Laundering Reporting Officer) or be signatories in other vital operational processes. All these possibilities need to be addressed at the start, for example by putting in place a shareholder agreement with provisions dealing with the disposal of shareholdings and how voting rights will continue to apply while this is done. Taking expert professional advice is essential.

Communication

Key stakeholders, including employees, family members and partners need to be told about the headline elements of the management succession plan.

Regularly review and update

Circumstances within businesses change constantly, so the plan needs to be looked at regularly and updated as required.

The upsides of management succession planning

Effective management succession planning is crucial for SMEs to ensure business continuity and mitigate risks associated with the unexpected loss of key executives. Without proper foresight, SMEs risk operational disruption, financial loss and damage to their viability. Forewarned is forearmed, so that these events don’t have to be terminal.

If you are seeking professional advice for your business, we are here to help. We can arrange for you to speak to one of our Partners, who can discuss options with you. We have offices nationwide and by contacting us on 0203 995 6380, you will be able to get immediate assistance from our Partner-led team.