Insufficient response to health contingency of entrepreneur -A common mistake among SMEs in India

ontingent events like terminal illness of entrepreneur are dealt with ad-hoc approach among SMEs in India leading to the spectre of struggle and messy financial crisis for families to bear.

I came across a story of entrepreneur recently in Bangalore who died after prolonged illness. Two years back he was detected with a brain tumour and was operated upon.

However, he could not recover fully from the problem. He had been suffering from various related ailments for which he was under treatment. Hs business was well established and flourishing when he was detected with the problem. The revenue was stable and the industry in which he was operating having fairly stable outlook.

After his death, his wife joined the business. She did not have any inkling of business, except during last few days she was introduced to financial aspects of the business by her late husband.

However managing the business is more than that. She had to take quick decisions on production, procurement, revenue, recovery of dues etc. There are many issues to deal with which she was not trained to. She counted on one of their relatives who was working in the factory; however not much of help.

Despite best efforts & sincerity, stable market outlook and fairly well-established reputation, she could not withstand the pressure and the business started declining. She failed to get the grip on the business and frustration was rising.

Good employees started feeling insecure and begin to leaving the company. The end result is -the company which was built from scratch became a burden on her and she had to close down the business.

In our previous blog- Planning for growth: How prepared you are?– we had emphasised how important it is to have a contingency plan for SMEs in India. Contingent events are seen at lower probability but a threat to business and in turn to the family if seen. In such circumstances, unprepared spouse and family members are often left in a  precarious situation of intense business responsibility after the sudden death of owner and rarely know how to handle it

What went wrong in this case?

When he was detected with illness, he should have acted prudently with regard to business. His wife joined to assist in meeting the contingent needs than assigned with any responsible role. She remained a mute spectator most of the time.

He has not altered the business practice by an inch- he remained to play a key role. No standardisation of processes was taken up so as to help others to take up the role in his absence. No thought on restructuring, identifying key roles and people for carrying out in his absence.  The business had been continued as in the past.

When he died, wife had to step in without much preparation. Fear and lack of confidence in the employees started catching her and the momentum was lost during the precious period of transition.

How could the situation have been managed better?

He died after a long time since operated upon as much as two years. He could have prepared the family and the business for the eventuality by creating a business continuity plan. We feel these are the possible ways the situation could have been handled:

1. Grooming successor: In the contingent event, it is not enough to identify the successor. You also need to be sure that person can successfully take over your position in the business. Identifying her/his strengths and weaknesses will help you develop a successor grooming plan. The plan may include education or training, obtaining outside work experience, rotating through the business to learn also the aspects of its operations and engaging in a mentoring relationship. You will also find it useful to have an outsider coach to hone the skills. Do introspection and identify & share the key skills and competencies which are necessary to remain competitive in the business. Share the tricks of the trade, which you have perfected over the years, to your successor.
2. Bookkeeping and accounting: Many SMEs have legacy issues with regard to bookkeeping and complying with certain statutory guidelines. In the emergent situations, these non-compliances may hurt the future successor. It is better to settle all the dues and creditors and keep the books clean and transparent for a new comer to begin.
3. Standardisation of processes: Most or crucial processes are known rot entrepreneur himself and there is an element of criticality of his role. It might be a necessity in the past. However, in view of changed circumstances, it is desirable that same is standardised so that anybody can handle the job without any discontinuity or reinventing the learning curve.
4. Hiring Advisors: Hire good advisors or introduce your existing advisors who play role in business of the company. Technical and financial advisors definitely of help to facilitate transition pain-free.
5. Sale of the company: If the business is too big or complex and the family is not willing to shoulder, consider the proposal for sale of business. This will help to protect the value and unburden the family.
6. Inducting for a partner: Another way is to locate and take on board a partner who can carry the legacy forward. The legal agreement or shareholding structure may be designed such that the family will get its due share without any hassles.
7. Stitch a Financial safety net for the family: It is not uncommon to find among SMEs that they hardly share the financial details of business and self with family. In contingent situations, it is not only desirable to disclose fully but also bring discipline in the financial aspects and create a safety net for the family to take care of themselves.

Please see: Transition Planning

Conclusion:

Ideally, every SME should have a contingency plan to deal with risks as doing business inherently risky. However once such an unfortunate event is visible, the entrepreneur should act quickly to mitigate the hardship to family and ensure sustenance of business. In the instant case, the best way was to step aside, trained his wife in all the aspects of business and encouraged her to take responsibility.