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• Jul 18, 2023

No one likes to think about planning for when they are no longer here. However, when it comes to running a business, succession planning is crucial for the longevity and sustainability of an organization.

Succession planning is a universal concern for all privately held businesses, regardless of size or industry. So why is it that 70% of business owners don’t have a plan in place? The process can be riddled with complexities: beyond navigating owner dynamics, there are many considerations to account for from profitability to the viability of the business model to the employees, customers and shareholders involved.

Many of these issues can be mitigated with proactive, thoughtful planning and open communication. According to Bill Fink, TD Bank’s Head of U.S. Commercial Bank Strategic Partnerships, the ideal time to start succession planning is preferably early, just after the business has launched and while the brand is still being built.

"Succession planning is table stakes for privately held family-owned and mid-sized businesses to ensure their long-term viability," Bill said. "For one, without a plan, owners risk losing their life's work, employees risk losing their jobs and customers could lose trusted vendors and valued established brands."

Owners who know their long-term plan and exit strategy can make intentional business decisions from the start to align with their goal. Waiting to plan until owners are a few years out from exiting the business can lead to unnecessary pressure, the potential to make decisions under duress, and a narrower field of options, especially in uncertain economic times.

“Businesses have a number of options when planning for the future – and finding the right financial partner can help,” Bill said. “That's why it's important to find a bank that not only offers products and services that make it easier to do business now, but also someone who understands your business and has built a lasting relationship that will endure in the future.”

Employee Ownership

One approach is Employee Stock Ownership Plans (ESOPs), an employer-funded benefit plan for employees, holding shares of the business in a trust for employees participating in the plan. Employer shares can be contributed by the owner into the trust or purchased by the trust. ESOPs can be structured as leveraged or non-leveraged, depending on whether the employer is borrowing funds to sponsor the plan.

This structure gives owners the ability to retain some control of the business while rewarding their employees and providing for their future. Engaging employees directly with the financial success of the business and the potential for voting rights can make them feel more valued. This is especially true in the food and beverage industry where employees tend to grow very loyal to the brand.

ESOPs often provide unique tax advantages for employers and employees, and particularly for shareholders. By creating a market for stocks outside of shareholders, ESOPs create liquidity. There are also tax incentives for sales of stock to an ESOP.

Next Generation

Another solution is to transfer ownership within the family. Many family-owned companies, particularly in the food and beverage industry, develop a culture of collaboration with the next generation to create interest and passion for the brand from a young age.

Many families like to build in time for training and mentorship in all areas of the business before the next generation takes control. It’s important to prepare for decisions about buy-in and exit strategies – pre-determining how family members enter and leave the business can ensure management stability and prevent financial disaster later. Another key decision for families is identifying the next generation head of the business and how that individual will be nominated, elected, and integrated into the business.

If tensions arise, consider dividing up lines of business among the family to offer different ways to work together. Establish regular family meetings to nurture an open dialogue about the progress of the succession plan – once a structure has been determined it can take years to implement, and details may change as the family evolves. Having someone from outside the family facilitate critical discussions in an advisory capacity can help smooth over challenging discussions.

Buy and Sell

Outside buyers are an option as well, and there are several paths for selling a brand. Finding and securing a buyer will likely take time, and the price is in the value the buyer sees in the company. In the food and beverage industry, many larger brands want the business to be in a strong financial position before it is sold, and that can take years to achieve. Another option is selling to a private equity firm, though this approach depends on the owner’s goals and their willingness to be involved in the future.

“Succession planning for mid-market companies comes with a unique set of opportunities and challenges,” Bill said. “Brands of this size are too large to be considered small business but not big enough to be a major industry player. This is part of the intrinsic value of mid-market businesses – they’re big enough to build infrastructure but not too big so as to have lost their brand ethos.”

Building an Advisory Board

Enlisting the professional advice of experienced advisors can be a make-or-break moment for the business. Whether owners decide to sell, create an ESOP, or keep it in the family, they need expert guidance to help navigate the many difficult decisions they will face.

This critical group of advisors can include leadership from the company, lawyers, accountants, M&A specialists, and colleagues or friends with specialized experience in the industry.

“In my experience, a third-party group of advisors can be essential for owners preparing for the future, especially during the transition period,” Bill said.

Business Valuation

When the business is transitioned, and when it is sold, it’s important for owners to have a realistic sense of what the business is worth, regardless of its size. When owners know at an early stage, they want to sell the business later, they can plan for decisions that will add value to the business and maximize profit, such as paying off debt or selling off less profitable lines of business. “Partnering with the right bank that knows your business inside and out, and that has a vested interest in your success is critical for this important planning step,” Bill added.

Communication is Key

Another consideration is when and how to communicate the succession plan to the company, customers, and the media. All of the stakeholders involved and what is best for each must be taken into account, whether it’s the owners, family, shareholders, or employees. The type of communication and timing for such announcements depends on the succession plan, but candor, clarity and respect will help ensure a successful transition.

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