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Founder’s death can have lasting damage on a business

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The death of a founder in the first decade of a company's existence will wreak lasting and profound damage on even the best-run organisations, research by two economics professors has found.

On average, 60 per cent of a company's sales are lost and 17 per cent of jobs cut in the four years after a majority owning entrepreneur dies, according to data analysed by Sascha Becker of Warwick University and Hans Hvide of the University of Bergen .

These companies also have a 20 per cent lower survival rate in the two years after the fatality compared with companies whose founders have not died, the study revealed.

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The findings show the importance of founders even 10 years into a company's existence.

The academics analyzed data on 341 privately owned companies in Norway, the country whose government agencies gather the highest level of detail about its companies and their creators.

They compared these companies with an identical number of "twin" organizations, which shared similar characteristics but where the founder had remained alive.

The degree of ownership the founder had retained matters. The study found that the death of a founder with a 50 per cent stake had about half the impact of losing a founder who had retained a majority shareholding.

The level of formal education of the founder also showed a strong correlation with the damage that person's death could have. Those with the most highly educated founders experienced the largest drops in sales performance after the founder's death.

Mr. Becker, who is deputy director of the Centre for Competitive Advantage in the Department of Economics at Warwick University, said the results showed the importance of founders as the "glue" that keeps a growing business together.

"It could simply be that the founder was a fantastic sales person who generated a disproportionately high level of sales," he added.

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"On the other hand, it could be down to a leadership effect, where the founder-entrepreneur inspires the employees to perform as best they can – and without the presence that drive slips away."

All the companies included in the study were found to have been negatively affected by their founder's death, but there was no difference between the results for family and non-family companies; between rural and urban businesses or when comparisons were made between different sectors.

The very youngest companies suffered most after the founder's death but significant effects were still felt by companies that were up to six years old, the study found.

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