Just In Case Something Happens to Me…
by Edwin A. Hoover, Ph.D. CMC
and Colette Lombard Hoover, M.S
LSi Resource for Family Business Management
Editor’s Note:The company described in this article is not an actual company but is a composite based on many family businesses we have worked with.The names are fictitious.
The last thing Judy Richardson expected was that her husband Gary would not make it out of the recovery room, dying from complications related to hip replacement surgery. Gary was only 61.The doctors assured him that the risks were few given his good health.No one imagined that a blood clot would tragically end his vibrant life.It was impossible to imagine the impact of the hole left in his family and in the business which he founded and ran for twenty-two years.”Thank God,” said Judy, “Gary left us those instructions about the business!”
Judy referred to the Emergency Management Transition (EMT) letter that Gary had written barely a year before his death.Like most successful entrepreneurs Gary was enthusiastic, optimistic and hard driving.The very same characteristics that make business owners successful also make it difficult for them to think about their mortality and planning beyond it.
Good stewardship is the hallmark of responsible family business ownership. It requires us to protect and care for what has been entrusted to us in our businesses.Stewardship creates a certain form ofdependency.Others come to relyupon us for many things, not the least of which is our leadership during times of crisis.This creates immense responsibility to anticipate the needs of our businesses and families in the future; especially in the event of the ultimate crisis of our unexpected death.The recent tragic airplane crash inCroatia brought to awareness that all companies have to take emergency management transition planning very seriously.Public companies are typically required to have such plans in place in the event of the death of the CEO.Most family businesses do not have such a plan.
The EMT letter is not the usual written succession plan that spells out a process that occurs over time in normal process of transition of ownership and management at retirement. While such normal succession planning in family businesses is vitally important many owners who are in their 30’s, 40’s and 50’s haven’t even begun to develop one, they’re much too young.Yet, the death of a business owner is no respecter of age. The EMT letter, written to your spouse and family, and shared with trusted advisors, gives instructions on what to do immediately in the event of your death.It quite possibly could make the difference between survival and demise.
Lawrence D. Ornitz, CEO of Ocean Pacific Sunwear Ltd. died suddenlyfrom complications of coronary bypass surgeryin 1988 at the age of 53.There was no emergency management plan for the company.In 1992 Ocean Pacific filed for bankruptcy protection because of management confusion and fragmentation following Ornitz’ death. Your business has to go on for the sake of all those who depend on it, yet, both business and family,reeling from grief and confusion, may be hard pressed to know what to do next.
University of Chicago Business School lecturer and former CEO of Sealy, Inc., Howard Haas, was quoted in a recent Chicago Tribune article”A company goes into mourning just like you would if you lost a parent…Recovery can take at least 18 months, and I’m not talking about the financial statement, but about the culture getting knitted back together” (Nancy Williams, “Crash forces firms to handle huge loss,” April 5, 1996, p. 3-3).
How to Begin
Youmight begin your EMT letter like this.
To My Dear Wife (or Husband), Family and Trusted Advisors:
Just in case something happens to me, I have attempted to lay out for you my ideas, suggestions and wishes regarding the future of our business.Please use this to guide and advise you but do not feel obligated to follow every suggestion if it seems unwise to do so.My greatest desire and hope is that what we have built together in Richardson Enterprises will continue to thrive.
Some or all of the following components can be included in your EMT letter.
In a brief paragraph identify your wishes as to the philosophy you want to continue guiding your business.
I hope Richardson Enterprises continues as a family business for my children and grandchildren, guided by the same principles of honesty, care for customers and employees, leadership in our field and community involvement, for which we have been known.Family involvement based on the Family Participation Plan we wrote in 1992 should be followed and encouraged.Cultivating strong leadership and loyalty of non-family managers is essential as well.Treating customers and employees as we want to be treated, along with responsible financial management is critical to our business success.
Spell our your suggestions as to how the company should be managed, the family organized behind it and ownership handled in the interim, say twelve to eighteen months after your death.Also indicate your recommendations regarding key management personnel.
John Middlelson should immediately be given the title, duties and authority of President.We have worked together closely for several years as President and COO, and he knows the ropes better than anyone else.He’s also level headed and committed to our family.John’s duties as COO should go to my daughter Janine.Janine and John will appoint Janine’s replacement as V.P. Internal Operations.John should form his management team with Janine and the other V.P.s.
I think Janine shows excellent promise as the next family member President but needs another ten years or so of experience.John is an excellent mentor and along with Janine should work out a plan to prepare her for the position of President when he retires, which should be in about 10 years.My estate is well taken care of.My 50% of company ownership is in the Gary Richardson Trust with Judy as sole trustee and primary beneficiary.Her 50% is in the Judy Richardson Trust.There is sufficient life insurance to pay estate taxes on my 50% which will eventually be owned by our four children.
Our attorney, Frank Volker, should be contacted since he drafted all the estate planning documents.I think Judy should convene a family meeting with Frank, A.S.A.P., to review our estate plans with the children so everyone is informed.It spells out very well how Judy and the children will be taken care of and how we’ve decided to handle future ownership of the business within the family.
Direction and Outside Support
Indicate how direction will be set for the company and what outside support and input should be sought.
Judy and John will become co-chairs of the Board of Directors replacing me as chair.We should maintain a board of five members with our two outside directors.This means that John will need to be replaced by Janine on the Board.After twelve to eighteen months the Board should decide whether John or Judy will continue as permanent chair.This decision should be based first and foremost on the needs of the company.
I also recommend a temporary interim Advisory Council consisting of John Volker; our CPA Bill Remsky; and our Family Business Consultant Joanne Spaulding.The Advisory Council members have helped other companies through times like this. As a group and individually they should be relied upon byJohn, Judy and the Board to make sure the important issues are being identified and handled.
Indicate the most important key success factors that should be watched and monitored.These are the things that have been primarily in your bailiwick, that you watch by second nature, that could be overlooked in the shuffle yet must be paid attention to on a continuing basis.
Although John knows what the key indicators of our business status are I have taken responsibility for keeping an eye on them in the past.John’s going to have to pick this up and work closely with Bill Remsky in this regard.Specifically I watch that payroll stays close to 27% of total revenue, scrap does not exceed 1% of the cost of raw materials, pre-tax profits stay in the 6% to 9% range, receivables average no more than sixty days and monitor (monthly) variances from budgeted forecasts for each cost and profit center.It’s also very important to review the monthly Customer Order Report which lets us know if our best customers are ordering more or less than expected.If a good customer’s orders vary by more than 10% contact them.
Location of Documents
Indicate where important documents are located and who has access to them. This should include an annually updated personal financial statement, estate documents such as wills and trusts, life-insurance policies, official company records, stock certificates and any personal documents you wish to include.
Here is a list of documents and papers you will need to know about (provide the list).The ones marked with the “*” are in the company’s safe deposit box at Security National Bank, 1234 Main Street.My secretary Florence has a key as does Judy.The others are located in Florence’s office in the fire-proof file cabinet.Our corporate record book is kept at John Volker’s office.
“In the short term, a company usually has enough momentum to carry on,” says Clawson Smith, a partner with the New York executive search firm of Johnson, Smith and Knisely.”But after 30 days or so, if they are rudderless, then it gets crucial,” Smith continued, referring to the death of Lawrence Ornitz and the resulting problems at Ocean Pacific Ltd. (Chicago Tribune,Jan. 3, 1994).
In the Final Analysis
Thirty days is a very short period of time, especially in the aftershock of a CEO’s sudden death.Your EMT letter serves to guide your family and business through the turbulent waters of this period.It is a companion piece to family business succession planning. Both are necessary.The aboveis intended to give you suggestions and an outline to follow.
Unlike legal documents drafted by your attorney, your EMT letter should be personal, reflecting you and your style of thinking and writing. It needs to be updated and reviewed annually with your family and key advisors. If you believe, as we do, that our lives will be eventually be measured largely on the basis of how we exercised stewardship of our family relationships, personal talents, material possessions and businesses, then writing your EMT letter is a central requirement.
Edwin A. Hoover, Ph.D. CMC and Colette Lombard Hoover, M.S.are family business consultants withLSi Resource for Family Business Management, Oakbrook Terrace, Illinois. They can be reached at 708-495-7600.