Succession planning for businesses is usually associated with retirement. But what happens if a co-founder passes away unexpectedly? All too often, remaining owners are left without the capital, skills and ideas they need to sustain and progress the business, which is why having high life cover in place is essential, even for businesses in their early years.
When a co-founder passes away unexpectedly, the impacts on the business can be devastating. Often their vision, skills and knowledge make up the fabric of the company, leaving the business without the stable foundations it needs to progress.
But it is possible for a business to have a bright future after the loss of a founder. Indeed, they have dedicated time, money and effort into their business to ensure it will have a long and successful future even if the worst should happen. Likewise, other founders and successors often want to continue pursuing their venture, especially when their own and other employees’ livelihoods are at stake.
The solution is succession planning. With high life cover in place, businesses and families can access capital to respond to the situation and protect the business, jobs and heirs. But for arrangements to work over the long-term, the plan must be flexible to respond and adapt as the business grows.
Businesses are estimated to lose 36% of profitability1 when an owner passes away. And the outlook is worse for start-ups, which see sales fall by an average of 60%.
There are lots of reasons why a company can struggle after losing a co-founder. Firstly, self-made entrepreneurs2 often have a unique view, capability and character, which are integral to the business. They cannot easily be replaced, meaning businesses are left without the drive and forward thinking that previously made them successful.
Secondly, stakeholder confidence can dwindle. Investors may have bought into the co-founder’s personality and vision. Without this cornerstone of the business, they could stop their investment or question decisions, making it difficult for the remaining owners to progress. Similarly, employees may feel worried about their own future and leave the business at a time when it needs a stable workforce the most.
Succession planning has a considerable task to mitigate against these risks. That is why high life cover is so crucial for businesses. Successors need liquidity if they are to have the freedom of choice they need to navigate hurdles effectively.
Succession planning to protect the business
Liquidity from high life cover can solve a number of challenges a business faces when a co-founder passes away unexpectedly. It can help cover the shortfall should investors retract capital. And in many cases, it provides investors with reassurance that the business has the means to continue through a difficult time. The cash can also pay liabilities like business loans, which may be vital to staying afloat if sales drop.
Additional liquidity can solve a longer-term challenge: replacing the co-founder. Studies reveal that it costs six to nine months3 of an employee’s salary to replace them. But the figure can be much higher for executive level staff, where finding a replacement is said to cost 213% of their salary3. With additional liquidity, the company can cover the costs of a head-hunter, sign-on bonus and training for the new employee, and it can also be used to hire short-term executives to help take care of day-to-day work.
For many businesses, liquidity is vital for ensuring the remaining co-founder retains control. It can be used to buy out the late founder’s heirs, giving the family security while ensuring current owners have the freedom to decide how they run the business.
Balancing business needs with family needs
Not only does the liquidity help to protect the business, but it also provides financial security for the family. When named as beneficiaries, the family can access cash to repay any liabilities and to make decisions about their own future. It means they are not forced to break up the business or sell assets, ensuring the business can stay in the existing owner’s hand. This route also provides a potential gateway for heirs to take over or join the company’s leadership team when they are qualified to do so. Alternatively, if the business is named as the beneficiary, the remaining owners can buy out the late co-founder's heirs to maintain full control of the business while ensuring the family benefits financially.
Providing clarity and flexibility
During what is undoubtedly a difficult time, the business and the family each need direction and flexibility. It is a balancing act that succession planning can provide.
A clear succession plan can help founders and heirs to avoid disputes. It sets out the roles that any beneficiaries will play in the business, aiding good communication. It can also clarify the steps that will be taken in the event of an untimely loss, helping all involved to progress.
But for young businesses, flexibility is just as important as clarity. The business will change a great deal over the years, and the plan needs to adapt to changing co-founder and heirs needs.
High life cover built with businesses in mind
Our high life cover solution provides liquidity for both businesses and families, along with complete freedom of choice over beneficiaries and investments. It also provides the ability to access capital from the plan, giving the business a source of additional liquidity if it faces challenges or needs a cash injection for growth.
You can find out more about our Swiss Life Generations high life cover here.
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