Do you have a succession plan for your business? Having a clear succession plan is in the best interest of business owners’ families and their employees. However, there’s someone else who holds a key interest in the longevity of your company—your lender.
In order to ensure that you are able to procure the working capital your business may need after you’ve stepped down, it’s important to keep your lender apprised of your progress in putting a carefully considered succession plan in place.
A viable successor
One key operational issue that lenders look for in a succession plan is who will lead the enterprise after you have stepped down. For family-owned businesses, finding a successor can be complicated. Children or other relatives may be qualified but have no interest in taking the reins. Or they may want to be involved but have insufficient experience.
Taking the time to identify and nurture future leaders can reassure your lender. As early as possible, select someone who you believe has leadership potential, and educate them in all aspects of running the business. This way, when the time comes to transfer ownership, your lender will have confidence in the new leader and their capacity to make executive decisions.
None of this should happen overnight. You will need to lay out a well-defined path for the successor under the assurance that his or her hard work during the transition period will eventually be rewarded with the leadership role, as well as ownership interests. Ideally, you’ll want to set a specific timeframe for the transfer of control and ownership to officially occur — all while keeping your lender in the loop.
Many business owners have more than one heir to factor into succession planning. It’s important for lenders to know that the planning process involves the entire family, regardless of whether all family members are active in the business’s day-to-day operations. When everyone understands their roles — and the financial and personal consequences of an unsuccessful succession plan – loan arrangements are less likely to be adversely affected.
A common issue faced by business owners is how to equitably divide assets among heirs, especially when only some of them will have control of or receive ownership interests in the business. If there are sufficient liquid assets, you can buy life insurance to provide for any children who won’t be involved in the business and give ownership interests only to those who will be involved. Another good option is to establish a family trust to own and operate the business, so that the entire family shares the risks and benefits.
Your lender may not be top of mind as you ponder the many details of a succession plan, but it’s important to cover all the bases, including keeping your company in good standing for future loans. We can help you with all the tax, accounting and financial aspects of a good succession plan — including effective communication with your lender.
If you have any questions about succession planning, please leave a comment below, or feel free to reach out to me directly, I’m happy to help!