Why to begin succession plan when business is good

When I meet with business owners and ask the question, “When do you plan on exiting your business?” the answer is always the same: “I am going to retire in five years.”

The deadline is just far enough away that committing and planning today seems unnecessary. But it’s close enough to feel obtainable and realistic.

Succession planning is vital for the continued success of a business. Sometimes, life does not happen as we hope. A divorce, death, illness, disability or split from a business partner can cause undue duress on a business and damage from which it may never recover. A succession plan allows for the orderly transition when the owners are ready to sell — or are forced to sell because of an unforeseen event.

Succession plans should be implemented when the business owners are relatively satisfied that the business is running smoothly. If the planning begins because of a problem that has surfaced, the outcome may be nowhere near what you expected.

Depending on the size of your business, planning an exit strategy may take a team of experts to coordinate and implement a successful plan. At some point during the process, you may need to meet with your business attorney, tax advisor, estate planning attorney, business valuation expert, broker, and financial advisor.

Four common exit strategies to consider are:

1. Sell the business to your business partner(s)

When a business partner dies without any planning, their share of the business will typically pass to their spouse. This may not be ideal for the surviving business partner or the decedent’s spouse.

To avoid this scenario, a buy-sell agreement is usually executed between the business partners and funded with life insurance. If structured correctly, this agreement can ensure that beneficiaries of the deceased owner’s estate do not unintentionally become business owners. The insurance policy may be purchased inside an irrevocable life insurance trust, providing tax-advantaged liquidity upon the death of the insured.

Two types of buy-sell contracts used for two or more owners are the following: a cross-purchase agreement and an entity-purchase agreement.

A cross-purchase buy-sell agreement is a contract between business owners in which all owners commit to purchasing the business interest of another owner if a specific event occurs, typically death. This type of buy-sell agreement works well for businesses with two or three owners who are all close in age. Each business owner agrees to buy a life insurance policy on the life of the other owners. The coverage amount of each policy in total should equal the total purchase price for that owner’s share of the business.

The second option, an entity-purchase buy-sell agreement, is more suitable when there are more than three business owners or if the owners’ ages are vastly different. With an entity-purchase agreement, the business entity agrees to buy a deceased owner’s interest from the deceased owner’s estate for a predetermined price. The insurance coverage amount should equal the purchase price for that owner’s share of the business.

2. Sell the business to an outside party

For most sellers, a business broker can help find a buyer and assist in creating an exit strategy. Owners should look for a broker who specializes in selling businesses that are similar to their own, in the same geographic market, and in the same price range. Ask for references and do your due diligence prior to proceeding. Inquire about the broker’s strengths and weaknesses, then consider how those qualities might align with your goals and expectations.

The International Business Brokers Association (IBBA) is the largest nonprofit association operating exclusively for people and firms engaged in business brokerage and mergers and acquisitions. Their website,, features a tool to help sellers identify IBBA brokers in their area.

3. Transfer the business to your heirs

Transferring a business to a family member takes careful planning. There will be sensitive topics to discuss based on your family’s dynamics.

Is a family member interested in running the business who is also qualified to manage the company? Will transferring your business interest to this family member intensify unresolved family issues? How will this person buy out the original owner?

Collaborating with an executive coach who specializes in preparing businesses that are transitioning to heirs may be helpful.

4. Sell the business to a key employee

If selling your business to a loyal employee is your exit strategy, discuss your plans with key employees well before your retirement date. Mentor this person and train them to learn the nuances you have discovered while in leadership.

Agree in advance about how they are going to pay for the business. Will you need to position the business to qualify for a loan? Are you willing to finance the transfer of ownership with an installment sale?

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Depending on the size of the business and your intent, it may also be a good idea to consider planned gifting or charitable strategies to minimize future income and estate tax. Addressing income and estate tax planning is just as important as implementing your exit strategy. Your team of advisors should work together so your planning will be comprehensive and cohesive.

Once your succession plan is complete, do not tuck it away on a shelf and forget about it. Use it as a working document and revisit it at least annually. As with estate planning, your succession plan may need to be amended periodically to address unforeseen changes in your life that could impact the plan.

By implementing an exit strategy, you are setting yourself up for a successful transition to retirement. Once your exit strategy is in place, position the business and yourself for the best possible outcome. After all, retirement is the period in life to enjoy the benefits of the countless hours spent growing a business.

Teri Parker is a vice president for CAPTRUST Financial Advisors. She has practiced in the field of financial planning and investment management since 2000. Reach her via email at

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