Navigating the Future: The Vital Role of Succession Planning for Business Owners

For companies looking to preserve their legacy well beyond the present generation, careful succession planning is the name of the game.

Though often seen as a secondary element within most companies’ overall business strategy, the importance of succession planning cannot be overstated. Companies that fail to develop clear succession paths risk facing potential disruptions, value loss, and a weakened competitive edge. With data indicating that only 30% of family businesses survive into the second generation, largely due to the fact that only 34% of family businesses have a documented succession plan, the urgency to address this gap has never been more pressing.

Although the business owner may wish for the business to remain in the family, it’s important to consider whether there are family members capable of handling the responsibilities of ownership and management. What steps can be taken to retain key employees to assist with this transition and continued viability of the business? Is the second generation interested in being involved, or is this solely the parents’ expectation?

Failing to plan for potential conflicts among the next generation of business owners, other family members, key employees, partners, vendors, and customers can be detrimental. An estate plan without a corresponding business succession plan may ultimately govern the disposition of an asset at a significantly reduced value.

Jamie M. Walrack, Executive VP and ESOP Specialist at First American Bank, summarizes the essence of succession planning: “It’s more than a safeguard – it’s a strategic necessity. Succession planning allows businesses to ensure continuity and foster long-term growth. If you’re not planning for the future, you’re planning to fail."

What is Succession Planning?

Succession planning is a crucial process that prepares for the transition of ownership or leadership in a business. It involves careful financial, fiscal, legal, and operational planning to ensure the company continues to thrive after key leaders leave. Beyond simply selecting successors, effective succession planning includes talent development, knowledge transfer, and strategies for long-term sustainability. This comprehensive approach helps maintain stability and foster growth, ensuring that the organization remains resilient in the face of change. Much more than just an “exit plan”, succession planning is designed to support the continued operation of your business through a seamless transition.

Why is Succession Planning Important?

1. Continuity and Stability: A well-crafted succession plan safeguards relationships with clients and stakeholders who are concerned about the company’s continued growth. It ensures a smooth transfer of leadership and maintains operations without interruption, fostering confidence in the organization’s stability and future.
2. Value Preservation: A company lacking a robust succession strategy is likely to experience a decreased valuation during the sales process, as potential buyers may perceive uncertainties surrounding the leadership transition.
3. Talent Development: Succession planning strengthens a company’s internal talent by grooming future leaders and promoting a culture of growth and engagement.
4. Mitigating Risks: Business owners who proactively plan toward future transitions can mitigate risks involving leadership voids.

Preparing for Succession: Steps to Take

For business owners, the journey toward effective succession planning typically spans a 3 to 5-year process. Ahmet Markicic, Senior VP of Commercial Banking at First American Bank, emphasizes the need for meticulous preparation: “You want to ensure you have a strong accounting system  to track your company’s performance allowing you to make decisions on when and how to start the succession regardless if it is a sale to employees, financial investors or a transition to family members. If you haven’t prepared your company for transfer it becomes significantly more difficult to finance or achieve any of the strategies mentioned above with the appropriate sale price.”

Here are essential steps for preparing a successful succession plan:

1. Assess Current Business Operations: Analyze financial health and operational efficiency to identify areas that require improvement.
2. Define Goals: Understand your timeline and aspirations for exiting the business. Are you looking to retire, pass the business to a family member, or sell to a third party?
3. Engage Advisors: Collaborate with legal, financial, and business advisors to structure a comprehensive plan. Having the right professionals guiding the process is essential to avoid costly mistakes, and your Banker is a great place to start.
4. Communicate with Key Stakeholders: Keep open lines of communication with employees, clients, and family members to ensure everyone is aligned with the succession vision.
5. Implement Training and Development: Invest in developing internal talent to prepare them for future leadership roles.
6. Consider Your Tax Domicile: Are you residing in a high tax state exposing yourself to unnecessary capital gains taxes?

First American Bank’s Hands-On Approach to Succession Planning

First American Bank stands out in its commitment to supporting business owners through customized succession planning services. Their tailored approach guides owners through the transition process while minimizing tax impacts associated with the potential sale or transformation of their business. The bank’s services include:

• Business Succession Planning: Helping business owners future-proof their company by creating detailed transition programs within their companies.
• Trust Services: Offering various trust options, such as revocable and irrevocable living trusts, can help manage assets effectively and provide for beneficiaries; including creditor protection planning.
• Wealth Planning: Thorough wealth management services that encompass financial planning, retirement strategies, and estate planning.

Ahmet explains the bank’s philosophy: “We take a holistic view of succession planning, ensuring our clients not only understand their financial position but also have the right tools and strategies in place to secure their legacy.”

Future-Proofing Your Company

For businesses looking to thrive beyond the current generation, succession planning is top of mind. As shown by the insights from First American Bank’s experts and the wealth of data available on this issue, the benefits of a thorough succession plan are undeniable. Business owners must start their planning process early, engage the right advisors, and foster internal talent to overcome future changes of leadership. By prioritizing succession planning, owners can safeguard their legacy, boost their business’s value, and prepare for a sustainable future.

“Effective succession planning is about control, foresight, and ensuring that your business exists long after you’ve stepped away,” said Jamie.