The sudden death of a CEO or owner can cause chaos and financial instability in small and medium-sized enterprises, which often lack robust succession plans. Successors with a long tenure and deep familiarity with the company are the most effective in ensuring recovery, regardless of family ties. Non-family successors cope better with short-term problems, while family successors perform better in the long term. This is according to a study from Jönköping International Business School (JIBS) at Jönköping University (JU).

The sudden death of a CEO or company owner is a devastating event that often causes a leadership crisis in small and medium-sized enterprises. The study finds financial distress worsens in the first three years before recovery begins.

“A leadership crisis can weaken even the most successful companies, but strategic succession planning and careful selection of successors can mitigate these risks,” says Massimo Baù, Senior Associate Professor of Business Administration at JIBS.

Be prepared for anything

The JIBS study analyzed a sample of 416 privately-owned Swedish SMEs that experienced the sudden death of their CEO. By examining the financial performance of the companies over five years, the researchers examined the short- and long-term effects of the successor's integration into both the entrepreneurial family and the company itself.

“Preparing for crises and selecting successors who are well integrated into the organization is essential to ensure the survival of the business. Our findings show that successors already in key positions within the company before the transition are the most effective in stabilizing financial performance. The most important advice for companies is to always plan for succession and have the mindset of ‘we have to be prepared for everything’,” says Massimo Baù.

Choosing the right successor is key

The research highlights the critical role that choosing the right successor plays in ensuring the survival of the business after the tragedy of a sudden death.

“The results show that while non-family successors mitigate short-term financial problems better, family successors perform better in the long run - especially when family successors have longer tenure in the organization,” says Massimo Baù.

The study also shows that in the first three years after the death of a CEO, the financial health of the company gradually deteriorates, and the risk of bankruptcy increases. It is only after three years that financial recovery begins.

“Around three years after the sudden death, financial distress peaks and then gradually decreases, leading to recovery in the following years,” says Massimo Bau.

Massimo emphasizes the importance of employees, family members and advisors understanding the challenges of unplanned succession and the recovery process. He also argues that, if possible, it is important for companies to choose successors with extensive knowledge of the business and long experience.

“The successor's familiarity with the business and corporate culture ensures smoother transitions,” he says.