Business Succession Planning:

How It Works, Why It’s Important

Handing over the reins of a company is one of the most significant decisions a business owner will face.

A well-executed business succession plan can help ensure your company continues to thrive, regardless of what lies ahead.

Despite the importance of succession planning in business, statistics reveal that one-third of business owners don’t have a plan in place, potentially jeopardizing their legacies. For many owners, the day-to-day demands of running a business make it easy to postpone succession planning. However, waiting too long can limit your options and create unnecessary risks for your company’s future.

Planning for Business Succession

A business succession plan maps out how you’ll transfer leadership and ownership when you’re ready to step away from your business. While many owners create these plans for retirement, unexpected events or new opportunities might require an earlier transition. Health issues, family needs or attractive business ventures could all prompt a change in leadership sooner than planned. Having a clear succession plan ready helps protect your company’s stability and value, regardless of when the transition occurs.

Common Business Succession Planning Strategies

Business owners have several options when planning for succession. Your company’s financial position, leadership goals and plans for future growth will help determine the best path forward. Here are some of the most popular approaches.

Passing the Business to Family

Many business owners dream of keeping the company in the family. However, this strategy requires careful planning to avoid potential conflicts. This includes open communication about leadership roles, compensation and potential family dynamics.

Selling to a Key Employee

If you’ve built a team you trust, you may consider handing the reins to a key employee. Since the new owner will already know the business inside and out, this approach may help ensure business continuity and stability. Seller financing or a buy-sell agreement may help smooth the transition.

Selling to an Outside Buyer

Selling to an entrepreneur or a competitor may be a smart move, especially if maximizing the business’s market value is a top priority. This typically requires preparing the business to make it attractive to potential buyers. Conducting financial audits, field exams and professional appraisals can help provide a clear and comprehensive picture of your company’s financial health. These steps enhance transparency and build buyer confidence. Operational updates and a professional business valuation can also make your business more appealing to buyers.

Transferring to a Co-owner

In partnerships, a buy-sell agreement ensures the remaining partners can purchase your share if you step away. This approach provides clarity on ownership transitions and helps maintain leadership stability. It also helps ensure the business remains in experienced hands.

Financing Business Successions

Creating a solid business succession plan is a start, but many businesses also require financial support to implement their plan. From funding a buyout to keeping cash flow steady during the transition, having the right financing options can make all the difference. Here are a few of the most common financing tools used for business successions.

Delayed draw term loans: Provide access to funds over time, rather than all at once. Often used for phased buyouts or transitions where capital needs are spread out.
Revolving credit lines: A flexible credit option that allows you to borrow and repay as needed. This may be useful for managing cash flow during the succession process.
Term loans: Fixed-term loans that deliver a lump sum up front. Commonly used to fund major expenses such as purchasing ownership shares or preparing the business for sale.
Asset-based lending (ABL): Financing that uses your business’s assets, such as accounts receivable, inventory or equipment, as collateral. May be especially helpful for businesses that need liquidity but have much of their value tied up in assets rather than cash.

Credit enhancements may also play an important role in securing financing. For example, a personal guarantee involves the borrower pledging to cover loan payments personally if the business cannot, which helps improve lender confidence. Borrowers may also benefit from setting up a debt service reserve account — a dedicated fund specifically set aside to cover loan payments, ensuring there are resources available to meet financial obligations during the transition.

Why You Need a Succession Plan

It takes hard work to build a successful business, and most business owners want to protect what they’ve created. A clear and strategic succession plan helps safeguard a company’s future by creating a framework for long-term growth and stability. Key benefits include:

Stakeholder confidence: Reassure clients, employees and partners that the business has a strong foundation and clear direction.
Clear leadership continuity: Ensure that critical roles are filled by individuals who understand your business, its goals and its culture.
Skill development and preparation: Give successors time to gain the training and experience to confidently take on new responsibilities.
Talent retention: Keep key employees engaged by offering pathways for advancement and leadership opportunities.

Key Elements of a Strong Succession Plan for Business

A successful business transition doesn’t happen by chance. It requires careful planning across several key areas to ensure your company remains strong during and after the change in leadership. Missing even one of the following key elements could create weak points that may surface at critical moments, potentially disrupting the transition or creating unnecessary challenges.

1. Leadership Assessment and Development

Succession planning for business owners often begins with identifying potential successors and evaluating their readiness to lead. You can do this by creating opportunities for these individuals to develop their skills through mentoring, training and gradual increases in responsibility. Taking this approach may help ensure they’re prepared to step into leadership roles when the time comes.

2. Clear Timelines and Milestones

A structured timeline helps avoid unnecessary delays and keeps the transition moving forward. This requires mapping out when key transitions should occur and what needs to happen at each stage. It’s also helpful to include specific goals and checkpoints to track progress.

3. Detailed Documentation

Clear documentation helps improve communication, preserve critical business information and keep operations running smoothly during the transition. Keep thorough records of business processes, key relationships and operational details, including:

Important client relationships and contracts
Vendor agreements and partnerships
Operational procedures and systems
Business strategies and growth plans

4. Financial Planning

Business success planning often requires working with financial advisors to structure the transition in a way that makes sense for both current and future owners. A professional can help with business valuation and pricing strategies, tax planning, and impact analysis.

You may also consider working with a commercial b anker well versed in your industry for insights regarding terms of payment or financing arrangements. These professionals may help you maintain the liquidity needed for smooth transitions or access to financing to help cover immediate needs, stabilize operations, and keep the business on track.

5. Communication Strategy

Open communication helps prevent misunderstandings and keeps everyone aligned during a leadership transition. It’s important to create a plan for sharing information with key stakeholders, including family members, potential successors, employees and business partners.

Transparent communication with lenders is especially critical, as it helps maintain their confidence in the business during this period of change. Keeping lenders informed about the transition timeline, leadership plans and financial strategies can build trust and help ensure continued support. Clear messaging reassures everyone involved that the business remains stable and focused on long-term success.

6. Risk Management

Successful companies prepare for the unexpected. Think through potential challenges and create contingency plans. Consider factors such as unexpected health issues, early retirement, key employee departures, family dynamics or conflicts, and market changes or economic shifts.

7. Regular Review and Updates

Business conditions and personal circumstances change, so your succession plan may also need to evolve. Regularly reviewing and updating your plan can ensure it remains aligned with your goals and keeps it relevant and effective.

Succession Plan vs. Exit Strategy: What’s the Difference?

While the terms are often used interchangeably, business succession planning and exit planning serve different purposes. Succession planning in business includes developing future leaders and maintaining stable operations as management changes. An exit strategy, on the other hand, specifically outlines how an owner will leave the business and realize their equity. This may occur through a sale, merger or other transfer of ownership. In other words, succession planning is the process of preparing your business for its next chapter, while an exit strategy focuses on your personal transition away from the business. While they often work together, you may need a succession plan long before you’re ready to exit. For example, many business owners choose to retain ownership while taking a step back from day-to-day operations. In this case, a succession plan could help smooth the transition.

Protect Your Legacy with a Business Succession Plan

Creating a strong succession plan takes time, but it’s one of the most important steps you can take to protect your company’s future. The sooner you start planning, the more options you’ll have to structure a transition that works for you, your successors and your business.

At Banc of California, our business banking team works closely with business owners to provide insights and solutions that help protect what you’ve built. Connect with us today to learn how we can help you create a strategy that aligns with your long-term goals.

This is not a commitment to lend. All offers of credit are subject to credit approval.

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