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Transition & Succession Planning: What a Lender Needs to Know

May 19, 2014, 07:00 AM

You have been lending millions of dollars to Manufacturing Company “A” for two decades. They are a model customer: they never missed a payment, they finance their equipment and divisional acquisitions with your institution, and have great vision as to where their company is headed and their position within the industry. They provide timely information and are one step ahead instead of being one step behind, if you will pardon the cliché.

At a recent social event, the owner and patriarch of this business mentioned he was having some health issues. The credit facility is up for renewal and his comment gives you pause for concern. Despite having both a son and daughter in the business, for as long as you have known him, the owner has never clearly discussed or articulated any succession plan.

You don’t want to be intrusive. Yet with most family-owned businesses, a properly thought out transition/succession plan usually means the difference between success and failure for the coming generations, as well as a success for the long term customer of your institution. How do you approach the subject? Here are some things to consider:

Is there a competent leadership/management team in place under the owners? Is the next layer of management capable of taking over and leading the organization? At ESBA we had worked with an eight store restaurant chain that faced this question. Each of the stores’ managers had been with the company in a leadership capacity for seven years; the CFO had been with the company for ten years. Although it was never stated, it was clear in this situation that the next level had the experience not only within the industry but at the company to step in, direct and lead.

If there are multiple siblings or relatives that work at the company, look to see if one has clearly emerged as a leader. Observe how the employees treat the family members. Most likely they will subtly treat them differently. Remember that respect is earned, never or rarely automatically given. Being involved for the organization for some time you’ll see the differences, as subtle as they may be. Even if you as the loan officer are relatively new to the situation, ask other members of the company’s management team whether there is a succession plan in place. Too many times, we are asking the next question before somebody is finished answering. Take the time to really listen to their answer. Listen to what they may or may not be saying and determine what they are really trying to tell you.

Is there key person life insurance in place? While it may seem a bit morbid and perhaps an uncomfortable topic to discuss, there is nothing wrong with asking this as part of normal diligence and review. And if in fact there is a policy in place, find out if it is it a token or if it is enough to ensure continuity. The answer will give you an initial indication about next steps. The follow up question to ask is whether the company had one in place voluntarily or if it was forced to put one in place. Although rarer, the company or organization that puts one in place rather than being told to have one by force, usually gives an indication that they have given planning the company’s next steps real consideration.

Is compensation proportional to contribution? Is it affecting the company's free cash flow? There are times when family members working at the company think it is their right, not a privilege, to have a job, a car, work in the family business, etc. During your diligence or update process, analyze what is truly being distributed. Make sure you consider it in a broad perspective. For example, if you ask the question how much does so and so earn, at times the corporate family members think about it (or answer only what is asked) only in terms of W-2 compensation. However, anything a family member takes out – whether it’s a car allowance, travel entertainment, country club memberships, trips – usually comprise a much more significant portion of the compensation than just their salaries. Think of compensation in the broadest sense. I have recently been involved in a situation where the chairman’s salary is more than the CFO/COO and EVP’s combined, but he doesn’t make nearly the contribution the others do. It is a tough conversation but one that needs to be had.

Succession planning is not just about the CEO, it’s also needed at most executive levels. I am reminded of two situations; one in the past and one I am currently involved with that is evolving in real time. In the first situation, we were interviewing for a chief financial officer to replace me as the interim. The controller, who was a family member, asked why he wasn’t being considered. I told him from what I had seen I wasn’t ready to place the livelihood of the company and 350 families in his hands.

In the second situation, I am working with a business that has been owned by two families for more than a century. One of the family members believes he is ready to step in as CEO in spite of the fact that he has never been responsible for supervising more than two people and has never had true overall decision-making authority. Currently, his only true qualification is that his family is one of the owners.

If there is a longstanding relationship, the owner may be a bit taken back by a question regarding the next generation of leadership for the company. That same owner may even be somewhat chagrined. One hopes the owner's ultimate concern is for the longevity of the company, its employees and the family's financial security.

Robert D. Katz CTP, CPA, MBA
Managing Director | EisnerAmper LLP
Robert D. Katz, CTP, CPA, MBA is a Managing Director at EisnerAmper Advisory Group. He serves as a CRO and is an expert in and increasing cash flow. He is a frequent contributor to the ABL Advisor. He is one of the Founders of TMA’s most successful conferences, The Distressed Investing Conference, and the MidAtlantic Regional Symposium. He is an Adjunct Professor in Strategic Management and Corporate Finance at Temple University. He can be reached at or (215) 738 – 5542.
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