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Succession Planning: Your Business Banker Can Help You Prepare
BY: Stanley D. Koopmans
With Baby Boomers approaching retirement over the next decade or so, America is about to experience the largest transfer of wealth in history. As you prepare for your next phase of life, have you also adequately prepared for the next phase of your business?
When it comes to succession planning, it’s not a question of “if” as much as “when” and “how” you will set your business up to carry on after you move on.
Your business banker should encourage you to explore various options and resources and will likely be involved in several aspects of the financing piece of the transfer down the road, from securing a business loan for the new owner to potentially helping a next generation owner use a loan to provide a lump sum payout for other siblings/relatives not interested in taking over the business.
When Should Succession Planning Start?
The short answer is “now.” If you don’t already have a plan in place, then planning should begin as soon as possible.
For instance, there could be a situation where the owner and his/her children are still young, but both the owner and spouse die unexpectedly. That could leave a thriving business in a difficult situation without a clear path forward.
Remember, your plan today doesn’t have to remain your plan forever. And, in fact, your succession plan should be revisited and reviewed regularly to make sure it is still relevant over time.
Ask yourself, “if something happened to me tomorrow, who would I want to take care of the company and how would I want that structured?”
Even if your plan is to build a business your children can eventually take over, you should have detailed directions for what should happen until they are ready for that responsibility.
Who Should Take Over Your Business?
The book “Wild Ride: The Rise and Tragic Fall of Calumet Farm Inc.” chronicles a premier Kentucky horse stable famous for breeding superstar racehorses. After generations of family leadership, the business never considered passing along the stables to anyone outside the family and eventually chose someone who had no capacity or competence for this specialized industry simply because he was the “best option” among the family. The person took over this thriving debt-free business and rode it into bankruptcy just a few years later.
How do you choose a good candidate for succession?
- First and foremost, make family an option, but not an absolute assumption.
- Don’t just pick a successor, actively prepare that person for the role.
- During the preparation phase, provide the opportunity for any potential successors to learn all aspects of your business. They don’t need to be experts in everything from marketing to finance to supply chain, but they should have a good working knowledge.
- Rather than choosing a single successor, consider grooming an entire management team and letting them know how important they are to the process.
- Encourage the incoming leader to work with an outside business coach to guide them through the initial stages of taking on this responsibility.
Most importantly, the person you choose should also want to eventually take on business ownership. Make them a part of the discussion and leave the door open if the answer is “no for now.”
How Can Your Business Banker Help?
As you work through the ins-and-outs of a solid succession plan, your business banker can explain the mechanics of how some of the financing and transfer of ownership might work in different situations. For example:
- Will the business pass on to one or some of your children, but not the others? Fair distribution of your estate – including your business – is often a concern. It may be helpful to know that the new owner(s) can take out a loan that covers a lump sum payout for siblings not interested in running the business.
- How will existing loans be handled? We can explain which types of loans can be assumed by a new owner and when they might need to take out a new loan instead.
- Will the new owner require a business loan to buy you out? Whether you pass along the company to a relative or plan to sell your business publicly, the potential owner may need to qualify for a business loan. We can walk you through the steps and timeline, so you understand the process.
Additionally, State Bank of Cross Plains has a wealth management and trust department who can help you manage and invest a large payout from the sale of your business.
A Succession Plan Is an Ongoing Process
It’s important to put a plan in place as soon as possible, but it’s equally important to revisit that plan regularly. Have a realistic plan that involves preparation and then review and update it at regular intervals because people change, conditions change, and businesses continue to change.
The following resources may help:
- UW-Madison Family Business Center
- Budget for Transition: Financial checklist for smart succession planning, a blog article by SBCP VP-Trust Officer Alyssa Chance.
- A company like Capital Valuation Group, which can help you determine the accurate value for your company.
- Wild Ride: The Rise and Tragic Fall of Calumet Farm Inc., America’s Premier Racing Dynasty by Ann Hagedorn Auerbach
If you would like to discuss succession planning or other aspects of your business, please feel free to call me at (608) 826-3519.