Succession Planning: Preparing for the Expected or Unexpected

With an aging population of baby boomers in ownership roles, succession planning has become an ongoing priority. Although some of the activities were paused due to uncertainties related to the pandemic, the ideas have been brought back to the table with interest rates remaining relatively low and liquidity relatively available to deploy.

Many businesses remain actively engaged in succession planning to ensure continuity of operations when the current ownership is no longer in charge. Business owners should consider what steps need to be taken to prepare their business to succeed after they step away.

Preparing a succession plan takes time to be done correctly. Ideally, the process starts 18 to 24 months before any potential change in leadership. This means assembling a team of trusted advisors (CPA, attorney, banker and wealth advisor) to identify the best option and put strategies in place as soon as possible because an established exit date cannot always be determined or doesn’t happen as planned.

To properly work through the intricate details of a well-designed succession plan, a business banker can explain the mechanics of how some of the financing and transfer of ownership might work in different situations. This can include tax, trust and estate matters, and guidance on the most financially beneficial path forward.

This can also include critical loan considerations — ability for new owner(s) to qualify for loans, the obligations for existing loans, etc. A solid financial partner can walk through the steps and timeline to provide a better understanding of the process involved with different options. A trusted financial advisor can also help to determine how to handle any type of lump-sum payment involved in a transition to avoid unnecessary costs or complications.

And finally, it is vital to develop a financial plan for life following the sale of the business. This will help determine how investment assets should be allocated and set a path for future liquidity needs. Those who wait until after the sale of the business could be putting themselves and their finances at some risk.

In general, any planned or unplanned change in ownership typically involves seven common options:

• Sell to a strategic buyer — another company in the same or related industry that will seek to realize synergies by combining or running the companies together.
• Sell to a financial buyer — a company or individual without a company in the industry but with interest in purchasing as a financial investment.
• Sell to management — a management team that pools resources to buy out the current owner.
• Employee Stock Ownership Plan (ESOP) — an arrangement that enables employees to own part or all of the company, accumulating shares over time and cashing in those shares when they retire or leave the company.
• Transition from singular leader to shareholder — letting the head of a business/company take a step back from day-to-day operations and install others to run operations.
• Liquidate assets of the company — selling off all the assets of a business (equipment, inventory, etc.) and closing the doors, winding down operations.

A good succession plan often does not look just at what the business owner wants and needs to maximize value and create a cash windfall, but also seeks to determine what’s best for employees at all levels and what’s best for customers, suppliers and other organizations the business works with in the marketplace. This requires a lot of time, thought and resources, potentially including an independent audit, establishing a business valuation, and working with experts on succession planning. 

While the 18- to 24-month window can be a good guide, this process can take longer, depending on the complexity of the organization, and businesses should plan to invest months or years rather than days or weeks into the work. Putting a plan in place as soon as possible should be a priority, but once determined, a financial partner should regularly revisit the details. Preparation and review work hand in hand, and updates are almost always required because people, situations and operations change.

Whether moving on to a new venture or a well-deserved retirement, or preparing for the potential of an unforeseen event, business owners should have an idea of how to exit in a way that best benefits themselves and employees while honoring the established vision that led to success. Determining top priorities and identifying the proper succession plan can allow for execution to carry forward a built legacy.  

Jeff Friesen is Southwest Region president for Enterprise Bank & Trust. In this role, he is responsible for the Arizona, New Mexico, Las Vegas and San Diego markets. He oversees current clients’ business and personal banking needs and is also responsible for commercial and industrial and commercial real estate lending.