No business owner wants to think about what would happen to the business if circumstances prevented him or her from running the company. Confident, hard-driving owners have a vision for the future, and accidental death, terminal illness or disability are generally not in the picture, says Howard N. Greenberg, a managing member at Semanoff Ormsby Greenberg & Torchia, LLC.
“To succeed in business, principals often have a belief of their own invincibility. But if there is no emergency plan in place and the principal dies or is disabled, the results can be catastrophic. If suddenly the ship is rudderless, like any ship without a captain, it will crash,” he says.
If your company doesn’t have an emergency plan in place, now is the time to develop one.
“It’s always the right time to develop such a plan,” says Greenberg. “In doing so, you will gain useful insights into your business as you examine your management team and put together a group of outside advisers.”
Smart Business spoke with Greenberg about how to develop an emergency plan for when the principal can no longer lead the organization.
What key components should an emergency plan include to ensure a smooth transition of leadership?
An emergency plan involves identifying a group of successor managers, determining what role each key manager should play in the business and then putting in place incentives to ensure that they stay on board. Additionally, the principal must assemble a team of outside advisers, which would include an attorney, accountant, close experienced business associates, a spouse or other family member, and possibly a trusted and experienced friend. The outside board will ensure that the emergency plan is properly executed by the successor managers.
What considerations should a principal evaluate during this process?
The principal must determine how vulnerable the business would be if he or she were not in the picture. Who would step up and take over as head of sales, manufacturing, finance, or the other key functions? Who on the leadership team would drive the business forward toward predetermined set goals? And, critically important, what are the ultimate goals for the business? Is it to be sold? To be liquidated? To be sold to the inside management team? Will the business need to attract outside investors so the organization can function as it was before the principal was gone?
These what-if scenarios need to be worked out by the principal, then discussed and strategized with a team of outside advisers.
How does the principal begin assembling a next-generation management team?
The first step is to identify a team of leaders that will replace the principal, slotting managers in key positions such as sales, operations and finance. It’s critical to groom this team before an emergency occurs so the principal can determine who will fill his or her shoes. Outside advisers can provide insight on future leaders and offer perspective on what roles will be critical to carrying the business forward according to its strategic plan.
When you are ready to present the plan to your managers, be sure to consider who the No. 1 leader will be and consider reviewing the emergency plan with that person before unveiling it to the team.
What if the sales director you plan to push into the role of president says he cannot possibly work with the operations leader you want to choose? You need to be aware of internal politics so you can tweak your plan as necessary.
How does a principal motivate and reward leaders so they stay on board?
How valuable is a team of leaders if they jump overboard once the principal is gone? They’re not. You need them to stay. An owner can choose and groom his or her successors, but if they leave the company, then that effort has been a waste.
Principals must put in place incentives to motivate both inside leaders and outside advisers to stay on task. A priority is determining how to compensate the internal managers.
Incentives can include salary hikes or performance-based bonuses, generally tied to a commitment to stay during a transition in leadership. Or, a company can be recapitalized so the new leaders can be rewarded with certain stock or stock rights and thereby obtain equity in the company. Inventive stock options, phantom stock plans and stock appreciation rights are useful tools.
Also important is a commitment to the key managers of continued employment so they are assured that they can stay on board during a transition and participate in the good they have done for the company. All of these tools incentivize managers who are being groomed for leadership roles.
What important role do outside directors play in executing the plan?
The plan should be coordinated among the principal and the outside advisers, including an accountant and attorney, who can provide direction from a business and estate planning perspective. Outside directors should meet at least quarterly to review what is going on in the business, and to ensure that the goals that have been set are appropriate, realistic and are being achieved. Outside directors are critical because, in the event of a principal’s unexpected exit from the business, they must provide direction to the internal managers and ensure that the principal’s emergency plan is executed.
None of us can control sickness, accident or death. And unfortunately, many of us do not plan for these life events. Our businesses can suffer as a result.
Creating an emergency plan is not a task to leave until tomorrow. The process should be initiated now. You never know what can happen in life.
Howard N. Greenberg is a managing member at Semanoff Ormsby Greenberg & Torchia, LLC. Reach him at (215) 887-0200 or [email protected]