In the Shakespeare play, an aging King Lear decides to split his kingdom equally among his three daughters. However, the succession plan leads to bitter warfare among the daughters in which all three die, and King Lear dies of grief. Despite having the best intentions and desiring everyone in line to get a fair share, things don’t turn out as King Lear hopes. His lineage and his legacy that had once been promising are eventually lost.As a community financial institution (CFI), many of your customers are small local businesses. Those business owners might be thinking about their legacy when they retire, much like King Lear did. Although your customers’ succession plans aren’t likely to turn out like a Shakespearean tragedy, making the wrong decision about who to pass the reins to could send some blocks tumbling. The sense of urgency in succession planning has increased since the pandemic, when so many small and medium-sized businesses (SMBs) struggled or folded. The pressures of that period left many SMB owners worn out, and they may now be interested in retirement, which means passing the business to a successor or selling the business. Without a thought-out plan, this can be a problematic time for these businesses — and for the CFIs that have banking relationships with them.For CFIs, succession planning by client SMBs is an important strategy to ensure that bank interests are protected along with those of the current company owner. Succession planning can help businesses deal with several important long-term considerations, including business continuity and talent retention, as well as forestalling future leadership problems.Four Options for SMB OwnersThere are several options for SMB owners as they embark on succession planning. Here are some of the main ones:
- Leave the business to heirs. For closely-held family businesses, this can be a desirable solution, since it keeps the business in the family. However, there needs to be a clear and thoughtful planning process behind it. Family members need to be interested, and there needs to be a roadmap of responsibilities. The entire process needs to be transparent and agreed upon. Simply designating an heir as the successor can lead to trouble, particularly if one or more family members are passed over.
- Have employees take over. This is a solution that can work well for family businesses where there is no heir to step up. A well-run business should have one or more capable and ambitious employees who would be interested in one day owning the business. The owner can begin the process by granting ownership shares gradually as a perk, with a plan for full ownership transfer in the future. For companies with 15 or more employees, an Employee Stock Ownership Plan (ESOP) is a vehicle to accomplish the transfer goal. However, there are costs and duties associated with an ESOP, including setup and maintenance fees, that may be too much for a very small business.
- Sell the business. As an owner evaluates the options for passing on the business, sometimes it is apparent that there are no potential successors waiting in the wings. The best option for these viable businesses may be a sale. Selling a business has its own challenges, and owners will need to strengthen the business as much as possible to make it attractive to buyers. In this case, a succession plan would involve evaluating the business and its customers to shore up any shortcomings. This can be a long and involved process, but it can avoid the surprise of low-ball or no offers.
- Close the business. A final option for some owners is to simply shut down and sell any remaining assets. Perhaps the business is so tied to the owner and their unique skills that it really can’t function well without him or her. Maybe industry changes have made the business less viable and unattractive to heirs or potential buyers. Closing a business comes with its own challenges, including tax issues and how to deal with laid-off employees. If closure is the best option, it is important to begin the evaluation and planning process early so all the variables are understood and planned for.
The Need for Expert Advice Carrying out any of these strategies can be complicated. The decision needs to include input from and agreement among all those impacted and then be documented in detail. First of all, because succession plans involve legal documentation, no matter what you choose, the SMB needs to consult a lawyer to make sure nothing is overlooked. In any case, the SMB will also need accountants and financial advisors to evaluate the business’ value and ensure a fair deal for everyone. There’s also the option of utilizing a succession planning consultant who specializes in SMBs.The Role of CFIsSuccession planning isn’t just important for SMBs — it’s also critical for the CFIs that serve them. When a business changes hands, the ripple effects can be felt in everything from loan repayment to cash flow and deposit behavior. Without a clear plan, transitions can become messy, leading to business disruptions, payment defaults, or account closures. For CFIs, these scenarios represent a tangible risk to portfolio health.Yet, this transition also presents an opportunity for CFIs to become key partners in the SMB’s long-term success. Being involved and supporting the SMB during the succession planning phase can help your CFI build critical relationships with incoming owners. To help SMBs create a succession plan, a CFI can:
- Identify possible risks. Relationship managers who ask about succession timelines can flag potential leadership gaps or liquidity concerns and help business owners with a plan to address these issues before they impact the business.
- Tailor financial solutions. Lending teams can structure financing for buyouts, ESOPs, or business sales — ensuring continuity while growing fee-based services.
- Strengthen client loyalty. Helping a business owner plan for retirement shows a long-term commitment, building trust that can translate to personal banking, generational wealth management, or new commercial relationships with successors.
- Grow through the transition. When ownership changes hands, CFIs have an opportunity to serve the next generation — whether it’s a family member, employee group, or external buyer — keeping the relationship alive and well into the future.
CFIs can also go beyond one-on-one conversations. Hosting workshops, sharing planning guides, or publishing checklists on succession readiness can position the institution as a resource for business longevity. This kind of strategic engagement can deepen loyalty, create cross-sell opportunities, and ensure that CFIs retain the SMB’s banking relationship after the transition. Being an active partner in succession planning is one more way to protect a client’s stability while building long-term, high-value connections.
