Over the past 20 years, I have heard dozens of SME owners discuss various risks that they, and their firms, face — legal, financial, geopolitical, technological, competitive, theft and so on. However, what is shocking is that an owner fails to recognise the biggest risk to the firm — and that is himself.

Rarely does one hear discussions of the impact from the absence — permanent or temporary — of the owner on the firm and its stakeholders, including his family. The key issue is how dependent the firm is on him/her. The majority of SMES depend on one person, and quite often the sole shareholder.

A multiple shareholder (even if dependence on one individual is very high) company will still manage, somehow, but a sole shareholder SME can be severely affected if the owner is not around. Mitigation of “key man” risk is a complex subject, and I will highlight the major issues I have seen being faced by businesses, particularly on the demise of the owner.

First come the stakeholders to whom money is owed. If an owner dies, the ones who panic the most and fastest, are the lenders (banks, etc), creditors (market lenders) and suppliers. Banks will react immediately, first by freezing the company and personal accounts.

If the owner was a sole signatory, this itself will ensure the business comes to a standstill. Creditors come second, and if the owner has borrowed from the market, there will be no way to tell how much and from whom, as these are often unsecured and not documented. Any one can demand repayment of debts that may or may not exist.

Lastly, there are the suppliers, who even if they can and want to continue doing business with the firm may not have a deep relationship with anyone else. Key suppliers may be scared off, especially if “special arrangements” were in place.

Addressing these and avoiding problems is not difficult. Bank accounts with more than one signatory, separate accounts in personal names for business emergencies and properly documented borrowings (with terms) from the market are possible. Supplier relationships should be documented and/or key employees/family members aware of relationship details.

The impact on the SME’s customers can be complex. They will need to be reassured of orders being fulfilled, contracts being completed, etc. In a market where payments are almost never made on time, customers may take advantage of the situation by delaying or ceasing payments, if they feel there is no one to chase them.

Competitors will also move in for the kill — to poach business, agencies/supplier relationships and employees. A competent and meaningful eye will be required to manage this.

Employees and other shareholders (if any) are critical. Employees (may be owed or could owe the company money as well) will tend to panic and worry about their jobs, especially if there is no one in charge. They may also be approached by the competition to switch jobs. The bad ones will take advantage of the situation in other ways.

Other shareholders, if any, will react, depending on their relationships. They could be pure investors, friends, extended family, employees and so on. They have to be managed and this task will be easier if arrangements with each are well documented.

The family will be the worst affected. Not only will they be dealing with emotional trauma, but various stakeholders, vying to protect their interests, will also hit them from all sides.

If the owner has kept some money aside, then at least the immediate cash flow will be available giving the family the time to work out other issues. Then there is the visa problem, especially if the family was on the owner’s personal sponsorship. The other serious issue is that of wills — a shocking number of owners have no wills. For non-Muslim families, the absence of a will can complicate matters.

Simple steps can mitigate most of these risks. Internal controls, proper documentation, insurance, delegation and authority matrices and so on will greatly help. We have helped several companies in setting up systems to address each risk — this is time consuming but well worth it.

The most difficult issue to mitigate is the continuity risk — ensuring there is a competent and empowered person to run the firm in the absence of the owner. Succession planning is critical and so is the creation of a second tier of management. Employee share ownership schemes, etc, can be worked out and can ensure this — some firms have done this well.

This is a seriously neglected area and owners rarely think of a scenario described above. But it is time they did and sought help to work through these issues to establish systems to address any such eventualities.

 

CREDIT: The writer is the Managing Director of Vianta, which works with SMEs in raising bank finance.