Business owners and corporate executives often—pardon the pun—are scared to death to tackle the subject of succession planning because, among other reasons, it forces them to confront their own mortality.

Beyond that unpleasant consideration, there are myriad issues involved with succession planning, ranging from family dynamics to employee retention. While the apparent complexity makes the task seem daunting, it is not insurmountable.

Why do business owners struggle to create good succession plans? It can be overwhelming for owners to know where to start when making decisions about complex subjects such as wealth, power, change of control and responsibility, especially when there are multiple invested parties that must be considered, including family, employees, clients, vendors, customers, the owner(s) or executive(s) and banks.

Due to the seemingly convoluted task of developing an effective succession plan, many business owners postpone dealing with the subject or simply give up on the idea. Banks may be reluctant to make loans to some potential borrowers when the issue of succession has not been addressed. Even when a bank has not directly requested a succession plan, it behooves a borrower to provide one, unsolicited, addressing not only ownership succession but also management succession.

Banks can help. In fact, this is an area where banks can show their commitment and sincerity to serving the customer. The challenge facing banks, however, is how to walk business owners through the maze of issues that will make a potential borrower—as well as an existing borrower—a more appreciative customer. In order to do this, banks must find a way to remove the mystery of business succession plans by explaining how all parts work together. In addition, banks are wise to provide guidance through their commercial lending and private banking arms.

Why are banks focusing more on succession planning?

Banks and other financial services providers always have been concerned with their borrowers’ succession plans, but are paying closer attention these days. A good succession plan benefits bank clients directly as well as expands and secures the banking relationship. At the same time, almost all banks now boast divisions dedicated to private wealth management defined by concierge banking services. One of the fastest growing, value-added services they can provide is educating and guiding clients regarding succession plans.

Addressing succession planning is critical to C-suite executives at private and public companies, including corporate counsel and outside lawyers advising them. Every day, stories appear in national media about companies that have not effectively dealt with succession planning, to their chagrin and dismay, as family members hurl lawsuits at each other and customers and key employees await the uncertain outcome. Not long ago, there was a story in The Wall Street Journal about a spate of unpleasantness among the family members who own Tootsie Roll.

In the most simplistic example, if a bank lends money to a small or mid-sized company and that company loses its top executive, repayment may be jeopardized. If a succession plan is not in place to ensure continuity and financial stability, absent calling the loan if there’s a default, there is little a bank can do except sit by the sidelines and hope for repayment.

Banks may be negatively impacted once a business changes executives or owners. Likewise, when ownership of a business changes hands, there are several factors that could affect the value of the business and, therefore, affect the company’s ability to obtain new credit lines.

In an effort to minimize these risks related to commercial and specialized high-net-worth lending, banks have tightened their post-recession underwriting criteria to mandate a succession plan.

What do banks look for?

In the past, companies held life insurance policies for key leaders. However, these insurance funds rarely cover business loans. Instead, they typically are crafted to cover the lost expenses and transition costs during the search for a successor.

Post-recession scrutiny has helped synthesize and identify the most valuable pieces of information that clients can provide to banks. Naturally a business seeking a loan should outline assets, a strong sales record and a stable environment. But a clear succession plan—whether requested or not—can make that business more attractive to a potential lender. Lenders may be assured by a strong succession plan; it can speak volumes about the business’s stability.

When analyzing volatility with a succession plan in hand, banks look at the management depth and the management strength of the company. This ensures that prior to approving a loan the bank can reasonably assume that the company’s value does not depend entirely on the owner or executive.

To ensure that all of the bases are covered when developing a succession plan, banks can make sure that the owner(s) or executive(s) have gone through several steps, including:

1. The owner or executive should definitely know what he or she wants to do with the company now and in the future.

2. Rather than developing a plan alone in a vacuum, the owner should seek advice from many different constituents, including peers at other companies, family, attorneys and trusted advisers.

3. Once embarking on the process, the executive must commit to development of the plan and follow through on any steps necessary.

4. It is also important that the owner or executive feels that the plan was well prepared and believes in its outcomes. He or she should not come away feeling as if it were recklessly thrown together.

5. All parties involved with the implementation of the succession plan must understand that it is a dynamic and evolving plan that should be reviewed and altered as key factors (e.g., management, family, business size, etc.) change.

It is important to note that this article does not discuss bank regulatory and compliance matters, nor whether including succession plans in underwriting satisfies those requirements. Common sense, however, reasons that detailed succession and management change planning is a win-win for banks and their customers.

How can banks, and lawyers, help develop a viable succession plan?

The mistake some advisers make when helping potential borrowers develop a succession plan is they employ too narrow a focus. Some needs, such as estate planning, are obvious for business owners, but they are rarely the only areas that merit consideration. Rather than sending clients to specialized personnel, banks and the attorneys advising them should aim to provide quality consultation via holistic and comprehensive perspectives. When lawyers are involved, broad succession planning is the perfect example of the new type of legal counsel that focuses on business results and not just a single legal question at hand.

Creating a standardized procedure for succession plan development does not work because each situation is unique. Instead, bank advisers and others ought to discover the owner’s ideas, goals and dreams, and then convert those into a structured plan that makes sense.

One tool that can be instrumental in identifying the important factors in a business owner’s ideal succession plan is a well-developed questionnaire. The questionnaire should identify important details related to the owner goals and the current management depth and strength, as well as the company’s financial standing.

While many banks implement general questionnaires on financial standing and needs, they do not have proper measures in place to properly cull information and advise the business owner. Rather than immediately directing the owner to an accountant or business coach, for example, banks could establish an in-house professional for business succession consultations. This consultant would not need to be an expert at any single area, but should know enough about all potentially relevant areas to assemble the right panel of advisers to analyze each owner’s or executive’s situation in a comprehensive manner. This measure could ensure that all of the moving pieces in a succession plan are accounted for and that the process is a bit less complex for the business owner.


Solid succession plans are extremely critical for business owners, and banks have a stake in ensuring that business owners are well-advised on the issue. Rather than offering narrow advice on specific aspects of succession, financial institutions can lessen volatility and provide value-added service to their customers by delivering customized consultation services employing advisers from specific disciplines. In this way, banks are empowered to turn ill-prepared companies into highly valued customers.

Banks and other financial services providers always have been concerned with their borrowers’ succession plans, but are paying closer attention these days. A good succession plan benefits bank clients directly as well as expands and secures the banking relationship.