Contingency Plans for family-run companies: foresee vs. improvise
Any company, be it a family-run concern or not, is exposed to extraordinary events that affect the decision-making power within the company, which is why the capacity to react is vital in order to resolve the situation.
Failure to foresee unexpected events, such as the sudden death, prolonged or permanent absence of key members of the company due to accident, illness or any other reason will mean having to improvise how to act and how to notify the event at the time, etc.
This means that mistakes can be made that lead to a breakdown or delay in management and substantial damage to the company resulting from a lack of leadership or internal dispute, as well as an image of poor organization or disorientation that could negatively affect the trust of the employees, stakeholders (suppliers, clients, financial entities, etc.) and markets, with the associated public image costs.
To avoid this negative impact, all companies should have a Contingency Plan that allows them to act in advance and foresee the situations that may arise as a result of a change in company leadership or decision making power, in order to plan for an orderly and swift transition of power in the event of such an absence. In family-run companies, depending on the degree of professionalization, such a plan must be able to deal with the succession of ownership, governance and management.
Contingency Plans have a greater or lesser scope and complexity, according to the structure and size of the company, the degree of risk of such an event occurring and the structure to be implemented. However, it will be the result of an analysis of how the Company is owned, governed and managed that determines the extent to which it depends on certain key people and the impact of their permanent or prolonged access on the management or the decision-making power within the company.
Companies that have a Family Protocol are governed by family decisions in relation to the succession of ownership and the family’s degree of involvement in the governing bodies. However a Contingency Plan can also measure the impact of the absence of key people and establish a Procedures Manual to be observed in order to implement the change from one generation to another in sudden or extraordinary events.
The preparation of a Contingency Plan involves the following phases:
1. Evaluation of the degree of dependence of the company on key members and the definition of triggering events (death, absence, etc.) that would have a serious impact on the company.
After this initial phase, a series of needs may be detected, such as the need to prepare a Family Protocol or Strategic Family Plan designed to establish who is to succeed in the ownership and management of the company, evaluate the feasibility of continuing as a family-run company, professionalize the company, etc.
2. Analysis of each triggering event, identifying the breakdown or lack of leadership that would result, the intentions of the persons involved and designing of the required legal documents.
3. Preparation of a Route Map and Procedures Manual, including a Schedule of the steps to be taken after such an event up to the implementing of the company’s intentions.
The newsletters prepared by our specialists in different areas relating to family-run companies contain the full version of this article and other current topics in this field.
Garrigues Family Business Department
