Effective business continuity plan: Sustainability sutra for small businesses, startups amid uncertainty | The Financial Express

Effective business continuity plan: Sustainability sutra for small businesses, startups amid uncertainty

Ease of doing business for MSMEs: The fact that markets are increasingly becoming hyper-competitive and customers have become unforgiving makes it even more critical for emerging and growth-focussed small businesses and startups to have carefully designed business continuity and succession plans in place.

Effective business continuity plan: Sustainability sutra for small businesses, startups amid uncertainty
To protect the shareholders' interest, the business continuity plan should generally have an arrangement similar to that of a cross-option agreement which is prevalent in the developed markets.

By Vinayak Burman 

Ease of doing business for MSMEs: Chasing scalability and sustainability relentlessly, planning growth-hacking strategies, raising funds as well as weathering funding winters, often takes away the focus of small business and startup founders from the need to develop an effective framework to handle business emergencies and contingencies arising out of expected turns of events such as personal exigency, the sudden demise or incapacitation of the founding members. Given the growing uncertainties in life, if promoters genuinely want their ventures to outlive them, expand business continuity horizon with a long-term vision and safeguard the interest of all the stakeholders involved, they should break away from an overtly sensitive sense of security and work towards building a succession or continuity plans so that the survival and growth prospects of their ventures are not threatened by sudden unanticipated developments.  

Research carried out by Professor Sascha O Becker from the University of Warwick, UK and Professor Hans K. Hvide from the University of Bergen, Norway published in the public domain underlines the necessity of a contingency plan. The research report prepared based on a sample size of 341 privately held companies in Norway with 10 years of existence and founders deceased showed that the sales had decreased by 60 per cent after four years of the demise of the founders. According to the report, the survival rate of the companies after two years of the death of the founders was 20 per cent lower than that of similar firms with founders or promoters at the helm. Retrenchment and bankruptcy also challenged the existence of such companies battling founders’ death-related exigencies, as per the report.  

The fact that markets are increasingly becoming hyper-competitive and customers have become unforgiving makes it even more critical for emerging and growth-focussed small businesses and startups to have carefully designed business continuity and succession plans in place which can accelerate the bounce-back process from unfortunate setbacks like founder’s demise without letting that tragic event become a trigger for a full-blown existential and economic crisis for the company and all the stakeholders.  

Subscribe to Financial Express SME newsletter now: Your weekly dose of news, views, and updates from the world of micro, small, and medium enterprises 

Large business conglomerates in our country and across the globe have developed a robust business continuity plan to prevent the adverse impact of any unforeseeable event on businesses, leadership, operations and stakeholder engagement. There have been instances of how large corporates have managed to navigate contingency fuelled by promoters’ sudden death. Taking a leaf out of their books, new-age businesses which have garnered a reasonable market share should initiate measures to mitigate such unanticipated risks. After all, the show must go on.  

A few years back, a term called ‘drop dead succession plan’ gained currency in the media as well as in India Inc. as an emergency succession plan which enables a corporate to choose an interim successor in case there is a sudden demise of a key leader or decision-maker. The interim successors shoulder the responsibility to facilitate smooth functioning of the operations, and assure the investors of business continuity. They eventually bow out once the successor is ready to take charge of the business. In a family-controlled and generation-driven business environment, emergency succession planning still faces roadblocks. However, in our progressive small business and startup ecosystem, the process of formulating such plans shouldn’t be fraught with complexities and multi-layered approvals. 

As safeguarding the investors’ interest is equally critical for businesses as much as the economic interest of the founders’ kin, the founders can create a provision to invoke a ‘key man clause’ provision similar to that of private equity or venture capital firms or mutual funds. The provision prohibits a firm from making a new investment in case of the absence of its key decision maker due to death, exit or any professional reason, which in this case on a parallel analogy would be for any action by the company which could erode the value be it economic or intangible. It’s a great way to assure investors of no deviation from the pre-defined approach, which was the basis of the investment thesis. Such a clause also underlines the promoters’ sincerity in ensuring efficient leadership direction for any action that can impact the company or the brand negatively further, in light of an already severe and grim situation.  

To protect the shareholders’ interest, the business continuity plan should generally have an arrangement similar to that of a cross-option agreement which is prevalent in the developed markets, which in the local context of market documentation would be seen as an unnatural event of default. In a situation like this, the surviving founders can acquire the shares of the incapacitated or deceased shareholder or shareholders at the fair market value, to ensure economic interest protection, with modes of financing such acquisition being detailed further. This could be in tranches, single or multi. There could be a kicker construct which allows a certain portion to stay with the kin to enjoy the delta on the value some years later.  

Also read: MSME Min to converge schemes of other ministries, state govts for small businesses: Addl DC MSME Ishita Ganguli Tripathy

The other option available under the agreement could be to ensure that the employee welfare trust purchases the shares again at the fair market value and the same is utilised to bring in professional management to fill in the void and build the company there onwards, alternatively if feasible the company can buy back the shares of the incapacitated founder. The purpose of all this would be to ensure that business continues and the company’s operations do not get impacted beyond repair. This also allows the continuing leadership to control the functioning and decision-making processes and stave off the entry of any unqualified individual into the management ecosystem.  

Opting for a living trust could be a way founders try to build their contingency preparedness. All assets of the founder are transferred into the living trust once it is created. The founder remains the trustee as long as she/he is capable of discharging the duties. In case of the founder’s sudden demise or incapacitation, the successor trustee chosen by the founder can exercise her/his legal authority to keep the business operations running without any legal interventions. The successor trust usually manages the assets and runs the business as per the suggestions expressed by the original trustee or the owner. This though will need to be seen with a lens of marriage on the terms of the agreement and the rights of the investors so as to ensure the constructs there are not diluted.  

Leadership void due to exigency hurts all – customers, employees, investors, vendors, lenders, etc. Small businesses and startups need to control the preparedness narrative by setting up a robust structure which can help them ride out the unpredictable storms and assure the stakeholders. To be continued is the mantra that allows somewhat an essence of perpetuity. 

Vinayak Burman is the Founder & Managing Partner of Vertices Partners. Views expressed are the author’s own. 

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.