Planning is key to getting business succession right
Over the next 10 years, almost half of all privately held firms in the U.S. will be looking to transfer ownership of their business. Planning is the key for addressing business succession.
According to Josh Moore, Senior Vice President and Manager of Commercial Real Estate, and Dave Stoltenberg, First Vice President and Commercial & Industrial Manager, business succession needs to plan for:
- A well-defined exit strategy for owners to ensure their business is sustainable.
- Maximizing the value of their business enterprise that they have worked years to build.
- The business employees and the business legacy within the community.
- Family member(s) or key employees to transition the business to.
- Impact on customers.
Some of the most successful transitions are those where the owner has planned for the succession and partnered with a good team of advisors including their banker, accounting firm, insurance company, and attorney. Five to ten years from exit is not too early to begin succession planning.
Failure to plan can be costly and could create far-reaching ramifications. For example, if a business needs to sell quickly due to an owner’s unexpected death or other reasons, the family may not realize the full value of the business at the sale. A buyer from outside the area could also have an impact on the employees and the community.
To facilitate planning, CRBT’s commercial bankers advise business owners to ask themselves several questions:
- If something happens to the owner, what happens to the business? Is there a management team so the business can continue to run?
- Are the spouse or heirs able to run that business?
- If there are no family members to take over the business, are there key employees to whom the owners would like to transition the business?
- Is selling the business for the highest price possible, imperative or are there other considerations?
- Is it important your employees still have a place to work?
- Is it important for the business to continue to serve customers in the community they are a part of?
Dave Stoltenberg advises that every business owner needs to decide what is important for them. Focus on what is most crucial and establish a succession plan to address the most essential things.
When it comes to maximizing the value of the enterprise, transparency and continuity are vital. If a seller can identify barriers to entry and show the business is in a protected position, that helps maximize the price. If the seller is willing to stay on as an employer or advisor, that adds value and protects the business.
Josh Moore adds that good financial reporting helps establish realistic expectations for the value of the business - avoiding situations where ‘one party thinks X and another thinks Y.’ We advise to not run personal expenses through the profit and loss statement. The clearer the picture of the cash flow, the better the chance of maximizing the value of business.
With proper planning, there are several viable options to help facilitate a beneficial exit.
Whether financing solutions involve bank loans, life insurance, seller financing, private equity or any combination thereof, a strong banking relationship is essential.
To sum up, successful business succession planning requires an early start and coordinated effort that includes your banker, accountant, attorney, and insurance representative. Of those three words — business succession planning, the most important is ‘planning.’