Passing the Torch
The scary truth about succession planning—and how banks can help
Business owners and corporate executives often—pardon the pun—are scared to death to tackle the subject of succession planning because, among other reasons, it forces them to confront their own mortality.
Beyond that unpleasant consideration, there are myriad issues involved with succession planning, ranging from family dynamics to employee retention. While the apparent complexity makes the task seem daunting, it is not insurmountable.
Why do business owners struggle to create good succession plans? It can be overwhelming for owners to know where to start when making decisions about complex subjects such as wealth, power, change of control and responsibility, especially when there are multiple invested parties that must be considered, including family, employees, clients, vendors, customers, the owner(s) or executive(s) and banks.
Due to the seemingly convoluted task of developing an effective succession plan, many business owners postpone dealing with the subject or simply give up on the idea. Banks may be reluctant to make loans to some potential borrowers when the issue of succession has not been addressed. Even when a bank has not directly requested a succession plan, it behooves a borrower to provide one, unsolicited, addressing not only ownership succession but also management succession.
Banks can help. In fact, this is an area where banks can show their commitment and sincerity to serving the customer. The challenge facing banks, however, is how to walk business owners through the maze of issues that will make a potential borrower—as well as an existing borrower—a more appreciative customer. In order to do this, banks must find a way to remove the mystery of business succession plans by explaining how all parts work together. In addition, banks are wise to provide guidance through their commercial lending and private banking arms.
Why are banks focusing more on succession planning?
Banks and other financial services providers always have been concerned with their borrowers' succession plans, but are paying closer attention these days. A good succession plan benefits bank clients directly as well as expands and secures the banking relationship. At the same time, almost all banks now boast divisions dedicated to private wealth management defined by concierge banking services. One of the fastest growing, value-added services they can provide is educating and guiding clients regarding succession plans.
Addressing succession planning is critical to C-suite executives at private and public companies, including corporate counsel and outside lawyers advising them. Every day, stories appear in national media about companies that have not effectively dealt with succession planning, to their chagrin and dismay, as family members hurl lawsuits at each other and customers and key employees await the uncertain outcome. Not long ago, there was a story in The Wall Street Journal about a spate of unpleasantness among the family members who own Tootsie Roll.
In the most simplistic example, if a bank lends money to a small or mid-sized company and that company loses its top executive, repayment may be jeopardized. If a succession plan is not in place to ensure continuity and financial stability, absent calling the loan if there's a default, there is little a bank can do except sit by the sidelines and hope for repayment.
Banks may be negatively impacted once a business changes executives or owners. Likewise, when ownership of a business changes hands, there are several factors that could affect the value of the business and, therefore, affect the company's ability to obtain new credit lines.