It’s important for small businesses to have a succession plan to enable the company to continue into the next generation once the owner leaves — whether it be voluntarily or as the result of an unforeseen circumstance.
Think about succession from day one — identifying the right banker to assist, one who understands your business model, can help ensure the continuation of the business after your departure, says Michael Badzik, AVP, Commercial Banker at Premier Bank.
“Succession planning should be at the top of a business owner’s list,” says Badzik. “People often think this means giving the business away, or just passing it down and it will all work out, but that’s not necessarily the case. You need to have an exit strategy — and your banker can be a key player in creating that and keeping it current.”
Smart Business spoke with Badzik about how the right banker can help you create a succession plan that helps ensure your business survives into the next generation, even when you are no longer there to steer it.
How and when should a business owner start planning for succession?
Start early. Too often, owners think they are young and healthy and don’t need a plan, but you don’t know what the future will bring.
The first step is to identify who will be involved in that succession, whether it is a child who is passionate about the business, an employee ready for ownership or an outside investor. It is critical to involve the appropriate individuals early because those are the ones who will be dealing with the banker once the plan is implemented.
Banking is very much about relationships, and if an owner passes the business to a child, that person will likely see that banker as mom or dad’s banker if there is no relationship. Employees may also have their own preference. Allowing the successor to get to know your banker and form a connection helps that intergenerational relationship succeed. Creating relationships early is crucial so there is someone the successor identifies and connects with when transitioning that relationship.
What should a business owner look for in a banking relationship?
Build relationships with people you know, people you like and people you can trust. Find a banker who will answer your calls when things aren’t going well. If you build that trust from an early stage, you’ll feel comfortable sharing the negatives, as well as the positives, to work through those things.
Bankers are the intermediary between you and the bank, and you need them on your side. If your business goes through cycles, you need them to present that to the bank, that this down cycle is normal, this is why, and it’s going to change. They send a message to the bank; we knew this was coming, and we’re comfortable with it.
The succession transition can be a very long process, and the sooner you start it, the better positioned your business will be when it comes time for you to exit. Meet with your banker at least once a year, if not every six months or quarterly, and an exit strategy should be part of that conversation. Things change. You might have had children, changed your mind about something, decided not to pass the business down but instead sell. Bankers can help you adapt your strategy, protect your balance sheet and make the business appealing to a potential buyer.
How can having a successor ease the transition?
It’s critical to know what the plan is and who will be involved. Introduce the appropriate individuals to the process, get them involved in the finances and understand what impact that person will have on the business.
Most business owners are salespeople. How does the business function without you selling? Who fills that gap? Identify who can push the company in that direction.
Business owners often see their company as their child, and it’s hard to imagine it functioning without you. Having a plan helps you clarify that. A lack of planning generally comes from resistance to the idea that you are not going to be here. Hopefully the next generation is passionate, but if that passion isn’t there, if you wait to create a plan, you may end up selling for pennies on the dollar.
Owners might be able to tackle succession planning alone, but a banker with the right expertise can guide you through the process. Partnering with an experienced banker is a great start to ensuring that when you exit your business, it not only survives but thrives into the next generation.
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