Succession Planning for Private Businesses: Often Overlooked, Always Necessary
It’s human nature to be more excited about beginnings than endings, but for business owners, it is critical to have a clear-eyed vision of how the end of their ownership will look. A business’ customers, employees and vendors all have their own fortunes linked to its well-being. A messy or unplanned succession is bad for everyone.
But what that succession plan looks like can vary. “Every situation is different,” says Luke Ferden, Vice President of Business Banking for Twin Cities-based North American Banking Company. “It takes a lot of planning and foresight.”
As a business banker, Ferden helps the parties when it comes to arranging the financial part of a succession plan. But over his time working with businesses that are undergoing ownership transitions – planned and unplanned – he has seen that there is a lot more to succession than money.
Another point Ferden stressed is that a succession plan is a necessity, no matter the owner’s age or intended career length. “You don’t always get to decide when succession will happen,” he says. “Ideally it’s on your terms, but for the good of the business and its stakeholders you should have a plan in place.” Just as an individual sets up life insurance and living wills, a business succession plan should account for the owner’s death, disability or temporary incapacitation.
Maintaining a legacy, family matters, doing right by employees
Owners first must consider what their motivation is, and what they want to see happen after they leave. In Ferden’s experience, there are a number of factors an owner must weigh. Owners may need to make tradeoffs between sale price, maintaining company culture, their legacy as an owner or other factors. For some owners the most important thing is to make sure the company will operate in the same manner or keep the same name. For other owners, selling quickly and for the maximum amount possible, is key. What happens to employees is often on a seller’s mind as well.
“Locating the right buyer is commonly the hardest part of a succession plan,” says Ferden. Some potential buyers may have the capability to manage the business but are unable to raise the necessary capital, while others may be able to finance the acquisition but do not possess the abilities or industry experience required to lead the business into the future.
Succession planning can get tricky when it comes to family businesses. When making decisions about who will run a business, emotions can influence what ideally would be unbiased evaluations. “Well thought out succession plans in family-owned businesses are essential,” says Ferden.
Patience, planning and perspective
Bruce Quitter, owner of CAP Carpet and Flooring and a client of North American Banking Company, understands the importance of alignment between seller and buyer. As an employee of CAP under its previous owner, Quitter and the owner discussed what it would look like for Quitter to take over the business years in advance.
“I started working in sales in 1996,” Quitter says. “I became a partner in 2012, and then in 2017 he decided it was time to leave the business. Because we worked together, he had confidence I could keep the business going strong.”
For the seller, it was important to maintain the CAP name and remain an independent business. Quitter’s years with the company and relationship with employees, customers and vendors was important. Still, even with an amicable succession, the process took time.
“We each brought in attorneys to draw up the contracts. We had to negotiate everything,” says Quitter. “It was a big deal for someone like me to buy the company. I needed to qualify for an SBA loan for financing.”
One lesson Quitter took from the process is that for some people, selling their company can be a very freeing experience. “There was an indication the former owner wanted to stay around from a mentoring perspective,” Quitter said, but in fact he has trusted Quitter to carry on his legacy without much input. “I think he is completely enjoying retirement.”
Succession Planning Tips and Considerations
- Plan early: Retirement may be years or decades away, but every owner should have a succession plan just like they have a will. As owners approach the point when they want to exit, allow time to find the right buyer/owner.
- Evaluate Family Successors Like Third Parties: Even if the next owner is expected to be a family member, owners need to step back and make sure the successor is capable. Ideally, put them through the same vetting as any other potential buyer.
- Play Around with Purchase Structure: Often times, buyers might not have a full down payment. Bankers can help structure the sale through a variety of tools that let the transaction happen while protecting the interests of both sides.
- Think About Seller Objectives: Do you just want to cash out? Or are you hoping to leave a legacy for the ages? Do you want to stay on as an advisor or employee, or walk away? Having a clear idea will make finding the right buyer easier.