A recent survey commissioned by BKD found that nearly nine out of 10 respondents viewed ownership and management succession planning as an important issue. However, an alarming 64 percent indicated they had no formal succession plan in place. With the baby-boom generation aging, it’s no surprise that a majority of these participants anticipate an ownership and/or leadership change within the next 10 years.
This trend applies to all commercial businesses, but it may occur more frequently in the banking industry due to competition and growing regulatory costs.
We believe an intentional business succession process designed to satisfy all of the owner’s objectives will result in the best outcome. Unlike an audit or tax return, the outcome of a succession plan is not well-defined. Instead, it’s tailored to an individual owner’s specifications—it’s unusual to have a third-party enforced deadline. It also involves coordination of multiple advisors, including the CPA, attorney and investment and insurance advisors. Given all of these factors, the owner may not even know where to start.
Below are six questions every business owner must ultimately answer about business succession and its effect on the owner’s personal wealth and legacy.
1. Who will run the bank when I’m gone?
If the bank’s success relies too much on the owner’s skill, vision and passion, it may be difficult to continue the bank legacy or maximize value in a sale without that owner. Successors must be identified for the various owner roles, and the right people must be directing operations, lending, compliance, finance and other key areas. Appropriate incentives should be in place to retain key employees. Assessment of the management team also will include identifying the roles, if any, for family members working in the bank.
2. Who will own the bank when I’m gone?
Ownership can be transferred in several ways, including the transfer to family, a sale to management or a third party or an employee stock ownership plan (ESOP). Transfer to family could involve gifts during lifetime, bequests at death, sales or some combination. An ESOP could have tax advantages to the owner—but it has financing issues and ongoing compliance costs to consider. A third-party sale must involve thoughtful consideration to meet the owner’s objectives, which may not be limited to maximizing the sale price.
3. Is the bank ready for a transition?
A realistic assessment of where the bank stands today includes a detailed review of its key areas, including lending, sales and marketing, accounting systems, management information and technology. Changes in operations or the ownership structure may be needed to facilitate the transfer in the desired manner and at the appropriate value.
4. What are the income, estate and gift tax consequences of making a transition?
The bank is often the most significant asset within the owner’s estate; therefore, tax planning must address not only current income tax issues, but also estate and gift tax issues and related income tax basis considerations for heirs. The owner’s personal charitable objectives also may help reduce the transition tax cost.
5. What are my cash flow and lifestyle consequences after the transition?
Personal wealth planning is essential for a successful ownership transition. It influences how a transition will be accomplished and at what price. The after-tax results of any proposed transition should be projected to confirm that sufficient resources will be available to meet the owner’s living needs, charitable intentions and family legacy objectives.
6. What will I do when I’m no longer immersed in running the bank?
The owner should determine nonmonetary retirement objectives and develop a plan to achieve them. This may include travel, more time with family, charitable or civic pursuits or starting a new business.
This brief article won’t solve the business owner’s succession dilemma, but it may provide a framework to help identify the areas of greatest concern and a place to start the process. Recognize that the answer to one of the questions will often affect, or depend on, the answer to another. The process takes significant thought, coordination and time. There’s no better time to start than now!
(This article was adapted from an article originally published in the March 2015 issue of Ingram’s Magazine.)