Succession Planning Part 1: Ideal Timing Tips for Small- and Medium-Sized Businesses

By Plumas Bank February 27, 2023 Business planning

Apple. Gucci. Disney. Starbucks. All big brands with enviable business models, right? 

Wrong — or at least as it pertains to succession planning. 

All four of these business behemoths experienced serious operational hiccups due to flawed succession planning. And considering corporate giants have been known to undertake succession planning poorly, it’s easy to assume that small- to medium-sized businesses (SMBs) also struggle with this concept.

In this two-part series on succession planning, we’re sharing common missteps in the long-term planning process. We'll also share a banker's perspective about the ideal timing of succession planning conversations, as well as insight into common scenarios related to the transition of power in a business. In our second post in this series, we’ll look at the recommended cadence for revisiting your long-term goals, as well as the key roles that will need to be filled on the succession planning team. 

First, let’s address the elephant in the (conference) room: Why is succession planning often an overlooked — or undervalued — step in the business of doing business? 

Why Business Owners Fail to Succession Plan 

According to Matt Baca, Vice President of Commercial Lending at Plumas Bank, a lack of adequate succession planning often arises due to the basic realities of owning a business. Essentially, you’re mired in the day-to-day operation, unintentionally allowing the idea of succession planning to take a backseat to the very real, very immediate challenges facing you. 

Matt Baca, Plumas Bank Vice President Commercial Lending

“A lot of biz owners are so focused on running their business — time goes by so quickly, and they lose sight of that timeframe before they’re wanting to exit,” Baca describes. “They’re so busy managing the company and making sure they’re taking care of employees, that some will lose sight of their succession plan and their retirement.”

Luckily, Baca adds: “But that doesn’t mean we can’t work through these challenges.” 

While succession planning may look simple on the surface, Baca says it can be a complicated process. If a business owner finds him- or herself late to the planning game, sometimes they’re looking for easy answers to questions that involve many nuances. 

“A client will say something like, ‘Hey what do you think my company is worth?’ or ‘How do I go about selling my business?’ And it kind of opens up an onion. There are so many layers to selling a business. It depends on if there are service contracts involved, or what type of assets make up the company. It depends on if there’s real estate involved, and what kind of liens are on some of these assets. With a transfer of ownership, is there an assumption of debt? There are so many items that roll into this.” 

Succession Planning Timing: Early is Better

Business Succession Planning, Earlier is Better

In fact, that’s why early conversations with your business banker about succession planning are so essential. Baca says he’s facilitated many business acquisitions on the purchasing side with clients and estimates he’s assisted or had significant conversations about succession planning with more than 15 different clients during his 4.5 years at Plumas Bank. 

With all of his clients, Baca says he initiates the succession planning discussion in their earliest conversations — no matter where the business is in its lifecycle — to help remind the business owner about the importance of thinking about the future.  

Ideally, he says that laying the foundation for a succession plan as early as possible will bring business owners peace of mind, planning for the ominous “what-ifs” that can permeate an entrepreneur’s mind. And he adds that the succession plan should be baked into your business as a component of its very deepest roots, which often take shape in your initial business plan. 

“When you start your business, whether you purchased it from someone or started it from the ground up, you should have a business plan in hand,” Baca says. “You should have a full understanding about the scope of what the company is going to do, some short-term and long-term goals.”

The goals become the blueprint for the future, including plans prescribing what will happen to your business when you no longer want to be involved. “You need to try to anticipate the course of your business over its entire lifecycle — what’s going to happen for expansion, what’s going to happen once you’ve hit a plateau, and what’s anticipated for when you’re winding down and decide to sell the business, want to pass it along to your kids or completely dissolve it — that should be built into your business plan when you’re first starting.”  

The benefits of taking on the succession planning process early cannot be overemphasized, Baca notes. Most significantly, it creates a pathway for what’s to come, and it creates specific ideas about how to hand over the reins (or otherwise part with your business) in a strategic manner. 

Early Planning Leads to Smoother Transitions of Power

Baca reflects on a common scenario with SMB owners: The owner has identified a strong internal candidate for taking over the company, whether that’s a family member or an employee.

“As part of the succession plan, maybe there’s a blending that can occur, where this candidate starts working into a minor ownership plan. It's an easier handoff when there’s an internal transition,” he says.

“No one wants to see their company, what they’ve worked so hard for, change drastically once they sell it or transition out of ownership. That’s what they’ve spent their lives building."

Business Planning Succession

Baca says planning for that clean transition of roles, with opportunities for additional training for management and the identified shifting of responsibilities, lessens the burden of a change in ownership. 

Ultimately, Baca suggests that business owners remain flexible but proactive in these planning efforts, doing the best they can with the information they have to create a solid plan. A change of employees, a change of clients — everything can impact your business plan and succession plan.

“There are so many outside factors that you have no control over, and those can impact your plan drastically. So as long as you are in front of it and understand your time frame, you can realign. Business owners need to be able to adjust given the different curve balls we get in the market," Baca advises.  

Check out our second post on business succession planning, where we address exactly how often that realignment should be taking place in your small- to medium-sized business. 

Read Part 2: Revisiting the Plan + Team Dynamics

In the meantime, is it time to discuss your succession plan? Contact your business banking advisor to learn more.