What lenders look for in a succession plan
December 10, 2019
Business owners are urged to create succession plans for the good of their families and their employees. But there’s someone else who holds a key interest in the longevity of your company: Your lender.
If you want to maintain a clear path to acquiring 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 to address is, simply, who will lead the enterprise after you? For family-owned businesses, finding a successor can be difficult. 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.
To reassure your lender about issues such as these, take the time to identify and nurture future leaders. As early as possible, select someone who you believe holds leadership potential and educate the prospective successor in all aspects of running the business. This way, when control formally transfers, your lender will have confidence that the new leader is truly the boss and fully capable of making executive decisions.
None of this should happen overnight. You 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.
Most business owners have more than one heir to factor into succession planning. So, it’s important for lenders to know that the planning process involves the entire family, regardless of whether the individuals involved are active in the business’s day-to-day operations. This enables everyone to understand their roles — and the financial and personal consequences of an unsuccessful succession plan (which can adversely affect loan arrangements in place).
A common issue is how to equitably divide assets among heirs 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. Or you might 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.