Succession Planning: Preparing for the Expected or Unexpected

With a swelling number of baby boomers in ownership roles contemplating retirement, succession planning has become an ongoing priority. Although pandemic uncertainties led to many owners hitting pause on some planning activities, the ideas have been brought back to the table with interest rates remaining relatively low but rising and liquidity relatively still available to deploy.

Enterprise Bank & Trust estimates that 30 to 40 percent of current clients are actively engaged in succession planning to ensure continuity of business when the current ownership is no longer in charge. With these conversations so prevalent, we’re taking a look at what steps a business owner needs to take to be prepared for their business to succeed after they step away.

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. An established exit date cannot always be determined or doesn’t always happen as planned, so the sooner planning begins, the sooner an owner can react to changes or opportunities as they present themselves.  

To help business owners 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. Assisting with introductions to assemble the advisory team is also an added benefit of a solid business banker. These introductions can include tax, trust and estate experts who can provide guidance on the most financially beneficial path forward. 

Another key discussion area can also include critical loan considerations—the 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.

This type of personal wealth financial plan will help determine how investment assets should be allocated and set a path for future liquidity needs. This is a process that takes some time to think through, but those who wait to make financial plans 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 six common options:

• Sell to a strategic buyer (Another company in the same or a related industry).

• Sell to a financial buyer (A company or individual without a company in the industry).

• Sell to management. 

• Employee Stock Ownership Plan (ESOP) (Enables employees to own part or all of the company, accumulating shares over time and cashing in those shares when they retire or leave).

• Transition from singular leader to shareholder.

• Liquidate assets of the company.

A good succession plan often does not just look 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 they work with in the marketplace. Ability to preserve the culture of an organization is frequently a key factor in the planning process. 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 and transition management.

While the 18-to-24-month window can be a good guide, this process can be longer. Depending on the complexity of the organization, businesses should plan to invest months or years rather than days or weeks.

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.  

A solid financial partner in the succession planning process should be familiar with the mechanisms and provide objectivity in analysis. A sounding board that an owner can rely upon can be critical to making the transition ultimately match up to hopes and expectations.  

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 of that plan to carry forward a legacy built.