Succession Planning – The Why’s and How’s

The business ownership lifecycle may often be broken down into three distinct phases: formation, operation, and succession. Formation includes the original product or service ideas, choice of entity, and legal setup of the business. Operation may include, among many other things, income generation, growth, and the labor involvement and/or management of the entity by the owners. The last phase, succession, usually includes some elements of estate planning, exit planning, and/or some form of dissolution as the owners finally begin to reduce or eliminate their involvement in the business.

Why think about Succession now?

This last, but very important, succession phase often receives the least amount of attention by the owners; however, it should be strongly considered and given significant attention early on in a business’ lifecycle because some day, the need to dissolve or exit will occur, whether voluntarily (sale, retirement) or involuntarily (death, disability). There are many beneficial reasons to engage in succession planning now. When planning for the transition of your estate or your business, you will likely seek to maximize the value and enjoyment of the property for your successors, and minimize the tax burden, conflict, and stress that may accompany the transition. Planning now is the best way to do that. Planning now will also help alleviate the potential frustrations, disappointment, and strained relationships that may occur at a later time, when the owners and potential successors are facing the pressures of transition. Additionally, an often-overlooked but somewhat obvious benefit of planning now is that you are free to change your plan if your life or business situation changes significantly.

How to prepare for Succession?

Ideally, the transition of a business will, when necessary, be almost mechanical pursuant to a buy-sell agreement entered into in advance of the need to transition. Remember that at the time the business is formed, no individual owner knows whether they, or their successors, will be a potential buyer or seller when the time comes to transition the ownership of the business. Accordingly, this is an opportune time to draft an agreement that fairly protects everyone’s interests. For example, the partners could decide on a method for valuing the business and a mechanism for how to buy out the exiting owner.  A retiring owner may wish to receive payments over a number of years post-exit, whereas at death, a former owner may just prefer a one-time payment to his estate. Likewise, there should be a strategy in place to finance an ownership transition. For example, a company may use life insurance to buy out an owner’s estate (Owner A dies, Owner B had a life insurance policy on A – purchased by the company – such that B now has the liquidity to buy out A’s interests). Alternatively, a company may look to a third party lender such as a bank to finance an ownership transition. Another option is for a selling owner to finance a transition by accepting the sales proceeds in installments over a period of years. These last two options are often used when an owner is transitioning to an existing management employee.

For assistance with any legal matters related to your business or estate planning, contact Fournier Legal Services at or 860.670.3535 now.