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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. Even owners who do not plan to move on from their business in the next 2 to 3 years could benefit from walking through potential succession plans with your banker and advisory team.

Enterprise Bank & Trust estimates that 30 to 40% 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.

One thing is for sure — preparing a succession plan takes time in order 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. This is because despite the plan in mind, 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 providing 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 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 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 — The management team pools resources to buy out the current existing owner.
  • 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 the company.
  • Transition from singular leader to shareholder — The head of a business/company takes a step back from being involved in the day-to-day operations and installs others to run operations.
  • Liquidate assets of the company — Sell off all the assets of a business (equipment, inventory, etc.) and close the doors, winding down operations.

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. 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. This ensures expectations align with reality and with the vision of others involved in the business.

While the 18- to 24-month window can be a good guide, this process can be 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. Any successful transition needs to be well-thought-out and done over a period of time commensurate with the level of decision and thought from all different angles.

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 change, situations change, and operations change.

Because of this, a financial partner in the succession planning process should be familiar with the mechanisms and provide objectivity in analysis.

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.