5 Ds that can trigger a succession
In the 1980s there was a TV series named tales of the unexpected.
https://youtu.be/js7T-VTL91k?si=6QeMc6yldGwIyip1
The stories were written by Roald Dahl and always has a bizarre twist with black humour at its end. I always found myself asking , “could that actually happen?”
When I discuss succession with business founders, I refer to the 5 Ds. Not because they are anyone’s favourite topic but because not planning for them, introduces significant risks for their business. I ask do they know of any business owners who have been impacted by any of the 5 Ds. Typically they do know someone who been affected or have had to react themselves to one of the 5 Ds.
5 Ds
- Disagreement – between founders or shareholders , or being sued by a customer or supplier
- Divorce – Family disputes, requiring an asset valuation of the business or triggering a sale
- Disaster – e.g. floods, fires or outbreak of war, pandemic or trade tariffs disrupting their business
- Disability – a sudden illness or injury that incapacitates a founder
- Death – loss of founder’s impact on business & family and who can make decisions for the business?
The point is “none of us has a crystal ball” but there are steps every business can take to make their business more resilient to the 5Ds.
30-Minute Business Continuity Reflection Exercise:
The 5 Ds
This exercise is designed to help you, as a business founder, reflect on potential unexpected events that could trigger a need for succession or exit planning. Please allocate approximately 6 minutes to consider each of the “5 Ds”.
For each “D”, consider its importance to your business continuity and provide a score from 0 to 10 indicating the likelihood of it happening to you or your business (0 = highly unexpected, 10 = likely to happen). Then, spend a few minutes reflecting on the questions provided.
1.Disagreement
Disagreements can significantly disrupt operations, damage relationships with key stakeholders (customers, suppliers), and even lead to legal battles that drain resources and time. Internal disagreements between founders or shareholders can paralyse decision-making, while external disputes can damage reputation and profitability.
– Likelihood Score (0-10): ____
Reflection Questions
– What are the current potential areas of disagreement within the business (e.g, between founders, shareholders, family members involved)?
– How robust are our current agreements and processes for resolving disagreements (e.g., shareholder agreements, partnership agreements, conflict resolution protocols)?
– Are there any significant customer or supplier relationships that could potentially lead to a major dispute? What safeguards are in place?
– How would a significant disagreement impact our day-to-day operations and long-term strategy?
2.Divorce
– Importance to Business Continuity: For many SME founders, their business is a significant personal asset. A divorce can lead to complex legal and financial implications, potentially requiring a business valuation, asset division, or even a forced sale to liquidate assets. This can destabilise the business and impact its future direction.
– Likelihood Score (0-10): ____
Reflection Questions
– If you are married or in a civil partnership, how would a potential divorce impact your shareholding and control of the business?
– Are there any agreements in place (e.g., pre-nuptial or post-nuptial agreements) that address the ownership and control of the business in the event of a divorce?
– How would the business potentially fund a settlement that involves your business assets?
– What impact could a personal legal battle have on your focus and ability to lead the business?
3.Disaster
Disasters, whether natural or man-made, can severely disrupt or even halt business operations. This could include physical damage to premises, loss of key personnel, supply chain disruptions, or economic downturns triggered by larger events. Resilience to disasters is crucial for survival.
– Likelihood Score (0-10): ____
Reflection Questions
– What are the most likely disaster scenarios that could impact our specific business operations and location (e.g., flooding in York, cyberattacks, significant trade policy changes post-Brexit)?
– Do we have adequate insurance coverage for various disaster scenarios?
– What business continuity plans do we currently have in place (e.g., data backup, remote working capabilities, alternative suppliers)? How often are these tested?
– How resilient is our supply chain to external shocks and disruptions?
4.Disability
The unexpected disability of a key person, especially the founder, can significantly impact the business’s leadership, expertise, and decision-making capabilities. Depending on the severity and duration, it can necessitate a change in management and potentially a longer-term succession plan.
– Likelihood Score (0-10): ____
Reflection Questions
– How reliant is the business on your specific skills, knowledge, and relationships?
– Do we have any key person insurance in place to protect the business financially in the event of your or another key employee’s long-term disability?
– Are there individuals within the business who could potentially step up and take on your responsibilities in the short or medium term? Have they been trained and developed accordingly?
– What provisions are in place for decision-making if you were suddenly unable to make them?
5.Death
The death of the founder is the ultimate trigger for succession. It raises critical questions about the future ownership, leadership, and direction of the business. Without proper planning, it can lead to uncertainty, family disputes, and potentially the forced sale or closure of the business.
– Likelihood Score (0-10): ____
Reflection Questions
– What would happen to your ownership stake in the business upon your death? Do you have a will that clearly outlines your wishes?
– Have you discussed your wishes for the future of the business with your family and any potential successors?
– Do you have a robust succession plan in place that identifies and prepares future leaders?
– How would your family manage the business in the immediate aftermath of your passing? Are there trusted advisors or processes in place to support them?
Next Steps:
After completing this exercise, consider which of the “5 Ds” you have scored highest and which areas have raised the most concerns during your reflection. These are likely the areas where you should focus your attention in developing and implementing your business continuity and succession plans. It is recommended to discuss these reflections with trusted advisors, such as financial planners, legal professionals, and your accountant.