What is your business succession planning strategy?

Read Time: 6 Min
After working hard to build up a business, preparing for the next chapter should start as soon as possible. When passing down or selling your business, begin with a solid succession plan that includes business valuation, liquidity, and more.

Wherever you are in your career, the time to start your business succession planning is now, because your business will transition, you just have to decide if you are going to be prepared for that process. Given the labor, sacrifice, and risk-taking involved in building a successful business, owners have high expectations for the rewards that will come when the business is passed down or sold. The value they take away can finance a life of travel or the next entrepreneurial venture.

A successful transition can result in productive careers for the next generation, a charitable legacy in the community, or all of the above. The reputation of the business, the goodwill you've grown, your passion projects, your workers and their families who depend on the company—all could suffer if the transition is not handled correctly.

According to a recent PwC study, only 34% of surveyed family businesses have a robust, documented and communicated succession plan in place. Limited or no business succession planning can impact everyone involved, and if you sell to an outside buyer, the payoff could be far less than you anticipated because of poor planning.

A hasty or ill-considered transition could leave a business with less liquidity than it needs to operate, or with outsized debts that give creditors too much say in the company’s future. The child you had hoped would take over may have different plans in mind, or the business might end up being run by family members unprepared for the role.

Below are some succession planning best practices:

Reasons to start now

We don’t know what will happen tomorrow, so it’s likely better that you start your succession planning as soon as possible to avoid delays, or worse, due to sudden health issues, the inability to make decisions yourself.

And demographics show that for many, there’s little time to waste. Baby boomers (born between 1946 and 1964) still own about 40% of small businesses or franchises, and 60% of owners surveyed expect to sell their businesses within the next decade§.

For many owners, there just never seems to be enough time amid daily pressures to focus on planning for this personal and professional evolution. Add to that another stress factor–transition and succession touch on sensitive topics that even tough-minded businesspeople may find difficult to broach. Given the stakes, the succession planning process should begin several years in advance of an owner’s departure. Though your succession goals may evolve as your business and family change and grow, laying a foundation can make that ultimate transition smoother.

All the more reason to get going now and find experienced professionals to help along the way.

Business valuation: what's your company really worth?

Having a clear understanding of the value of your business is vital, and not just when selling to a third party. And getting an objective business valuation can challenge an owner’s own beliefs about their business. You’ll also need to know the value in order to plan your estate, consider a merger with another company, or in case of divorce or other major life event.

Long before you exit the company, proper valuation can be a vital business-planning tool, yet studies suggest too many owners rely on guesswork.

Owners may think they have a good idea of what their company is worth, but its value is only what someone else is willing to pay. Without accurate valuation, owners may develop outsized expectations. Conversely, they might underestimate what their company is worth, potentially costing them a sizeable amount in a sale, or even generating rancor in the family.

One owner I worked with gave his hard-working grandson what he thought was a modest, 5% stake in the company, only to learn through a subsequent evaluation—the first in decades—that 5% was worth millions.

Not only did it greatly complicate the owner’s gift taxes, but it also backfired from an emotional standpoint. When other family members objected, the grandson came to resent the well-meaning gift and even considered leaving the company.

Specialists such as accountants, tax experts, and other advisors can bring a more objective lens to the process, and they can regularly update you as market conditions change. The more accurate your valuation is, the more intentional you can be about whatever your next step is.

"The reputation of the business, the goodwill you've grown, your passion projects, your workers and their families who depend on the company—all could suffer if the transition is not handled correctly."

Dan Griffith, CEPA®
Director of Wealth Strategy, Huntington Private Bank®

Asset-rich and cash-poor: liquidity considerations

Even for companies with considerable assets and loyal customers, lack of liquidity can prevent a seamless transition, and handing the business down within the family presents other issues. If the business is worth $60 million, coming up with the cash to buy you out may be a lot harder for your kids in their 30s than it would be for a third-party buyer.

A cash-flow crisis could threaten the business. Depending on your situation, transferring interest in the business over time, through trusts, or through outright gifts of voting and non-voting shares, could help lower the burden on the next generation to buy the company.

Liquidity concerns could also threaten the next generation’s ability to keep the business going. If you’ve been relying on, say, a $2 million line of credit, you can’t assume that your heirs will automatically have access to that same level of funding.

With some businesses, that line of credit is essential to keeping the doors open. If you haven’t thought through these issues, you could be handing down a ticking time bomb. Now may be the time for a careful review of your company’s overall approach to liquidity management, including your operating accounts, your working capital, and your strategic cash.

Extracting value: what will you walk away with?

When the time comes to ensure your own financial future, how much money can or should you take from the business? The answer requires careful consideration of a host of interlocking and, potentially, competing priorities.

Think of your own future—you have new avenues to explore that may include retirement, starting a new business, or supporting a new lifestyle. And then there’s the need to protect and grow wealth for your family’s future.

Affluent families often lose wealth by the second generation, and even more by the third, so estate planning strategies, as part of your succession plan, could help your family avoid becoming one of those statistics.

And, finally, there’s the question of whether the company will survive once the owner’s liquidity needs are met. Because business conditions often fluctuate from year to year, extracting a bountiful payment during a strong year could leave the company too lean to function when the next downturn hits.

While this is hardly a matter for guesswork, 60% of business owners surveyed in 2019 said they used informal or nebulous valuation methods to determine the value of their businesses.

Repercussions of a failed business

If a business is shuttered because the owner neglects to prepare for its succession, more than just the immediate family may suffer the consequences. The impact could be felt by employees and the community at large. This is because small, local businesses support community sports teams, school programs, local non-profits and employ many.

The closing of a business may contribute to a reduction in:

  • Local businesses supporting each other and helping create a thriving community
  • Environmental awareness
  • City revenue to increase community improvements
  • Creating local jobs
  • Entrepreneurship and independence
  • The role of small businesses in shaping the character of the community

Starting the conversation

As daunting as questions about your exit from the company may seem now, the path to having a clear succession plan can start with the considerations we’ve outlined here. When you’re ready to learn more about key decisions and strategies such as keeping the business in the family or selling to an outside buyer, talk with your Huntington Private Bank advisor about other available resources.

While it’s true that there’s a lot to consider, the process doesn’t have to be onerous. A Huntington Private Bank advisor can walk you through each step, introduce you to experienced associates and resources, and help you consider the available options.

I recall working with married business owners in their 50s who began the succession planning process early. Knowing that the kids were interested in other careers helped the couple plan an orderly and profitable sale.

When the husband died unexpectedly, those years of careful succession planning helped prevent a financial crisis from potentially compounding the tragedy. The sale proceeded smoothly and family members were left with a more secure financial future.

Getting the advice you may need

Huntington Private Bank advisors understand the many roles and the responsibilities that your position requires—as a visionary business owner, employer, and as a family member. Connect with your Huntington Private Bank advisor to outline a plan that can help alleviate your concerns and protect your business succession. To learn more, please contact your Huntington Private Bank team to see how we can help, or find a Huntington Private Bank Office near you.

Looking for more business insights?

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Related Content

Flack, Jonathan. (2021.) 2021 Family Business Survey: US Findings. PricewaterhouseCoopers. Accessed Jan. 22, 2023.  

‡ Guidant Financial. (2020). Boomers in Business - 2020 Trends. Retrieved January 2023.  

§ project Equity. (2021.) The small business CLOSURE CRISIS. Retrieved Feb. 22, 2023.

Business Enterprise Institute. (2019.) Business owner survey report. Retrieved Feb. 19, 2023.

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