David S. Alexander

Senior Wealth Advisor

Business Succession Planning: Considerations for Every Stage

Depending on what stage you are at in the lifecycle of your business, business succession may have very different meanings. While revenue, expenses, profits, and opportunities for growth will always be a focus for your business, the succession concerns will evolve over time.


Developing an effective business succession plan will require that you engage multiple professionals, including but not limited to attorneys, accountants, commercial/investment bankers, wealth management/investment advisors and insurance specialists. Regardless of where you are in the lifecycle of your business, it is important to recognize that your business planning and your personal wealth planning are interconnected. Identifying and addressing your business goals in conjunction with your personal wealth goals will help to set you up for a successful transition into the next phase of your life and the life of the business.


A common trait of business owners is a singular focus on the success of their business. Frequently, this focus allows owners to achieve their objectives and overcome obstacles in the operation of their businesses. While that focus may achieve great business results, it may also leave gaps that could result in negative consequences for the personal financial goals of owners and their families. Let’s examine some of these challenges over the lifecycle of new, established, and mature businesses.

New Business: Growth vs. Risk Management

A new business owner may be concerned with issues such as: how to balance debt service, operating cash flow, and opportunities to invest for growth. These concerns can take attention away from personal planning needs such as risk management and setting aside assets for retirement.


  • Do you maintain adequate life insurance to pay outstanding business and personal debts, replace lost income, and fund financial goals such as education for your children? Term life insurance can be an effective way to obtain coverage for these concerns at an affordable price.
  • Have you chosen the appropriate entity structure to minimize personal liability? Sole Proprietorships and Partnerships, while easier to establish and operate, expose your personal assets to liability while operating your business. An LLC or S-Corporation may be a better choice to provide personal liability protection as well as the pass-through tax benefits associated with Sole Proprietorships and Partnerships.
  • Do you have appropriate liability insurance (business and umbrella), business interruption insurance, and cyber security protection in place? The cost of coverage versus the benefit provided is always a factor to consider depending on the nature of your business. Careful thought should be given to what risks you decide to self-insure.
  • Do you have a retirement plan in place? Most business owners prefer to invest earnings back into the business. Although growth of the business is important, setting up an appropriate retirement plan for your business will help you start saving for retirement in a tax-efficient manner.
  • Have you updated your estate plan? A 2022 survey found that 67% of Americans have no estate plan.1 If you own a business, it is critical that you have an estate plan that addresses how your business assets and liabilities are managed at your death. If you have other business partners or shareholders, a separate buy sell agreement or provision within your operating/shareholder agreement should be documented and coordinated with your personal estate plan.

Established Business: Optimizing Your Business & Personal Balance Sheets

As an established business, you may share many of the concerns of a new business, namely risk and liability management. However, optimization of the business becomes a bigger focus especially in three areas: identifying and retaining key employees, accumulation of earnings versus distribution, and progress toward personal financial goals.


Identifying & Retaining Key Employees


Certain employees become key contributors to the organization because they produce significant revenue and/or they have special skills. These key personnel may already serve in an executive capacity, and their premature death would have significant revenue impact on your business. In these cases, many businesses purchase key person life insurance to help replace lost revenue and expenses associated with replacing the employee.


Equally important is the issue of employee retention. In addition to traditional benefit plans, businesses may offer non-qualified compensation plans to incentivize employees to remain with the company. These plans provide a retirement and/or survivor benefit and are financed through employee deferrals of salary or bonus, employer contributions to the plan or both. These plans have a vesting schedule before the employee receives the full benefits to encourage the employee to stay with the company.


Some business owners may choose to provide equity compensation and/or ownership in the company through a variety of mechanisms such as: stock options, equity bonuses, restricted stock awards, and stock purchase plans. These plans incentivize employees by allowing them to benefit from the growth of the business. For private companies, these plans can include restrictions that prevent the employee from selling to a third party when they retire or leave the company.


Accumulation of Earnings Versus Distribution


Business owners often have a deep understanding of the risks of business ownership and their ability to control or manage that risk. As a result, they frequently choose to reinvest in the business or retain earnings rather than distribute them. After all, many business owners observe that they can earn a higher return on investment through their business than from a diversified investment portfolio. Business owners may also feel that keeping earnings in the business will reduce their need for external financing or act as a reserve in the case of emergencies.


For most owners, their business interest is a concentrated position on their balance sheet. As Z. Christopher Mercer writes in his book Unlocking Private Company Wealth,” dividend (distribution) policy is a starting point for portfolio diversification.” 2 Owners can use distributions to build personal liquidity, diversify into other investments, and reduce concentration of their private business interests relative to their overall net worth. Mercer further notes that “…companies that do not pay dividends and instead accumulate excess assets, tend to have lower returns over time.” His observation is that absent good business reinvestment opportunities, the excess cash in the business may lead to “lazy-minded” management decisions or worse, an unwise investment such as a poor business acquisition. Mercer believes that an effective distribution policy for private companies will focus attention on financial performance in addition to the diversification and liquidity benefits to the owner.


Progress Toward Personal Financial Goals


The distribution of business earnings can create significant progress toward achieving your financial goals such as retirement and education for children. Your wealth advisor should be engaged in building a comprehensive wealth plan that can help direct your sources of income (W-2, business distributions, other investments) to accomplish your objectives. In addition, the wealth plan can help you identify the target amount you will eventually need when you decide to exit the business through transition to family or outright sale.


Eventually, business owners will arrive at the keep-versus-sell decision to monetize their business and transition to new ownership. Building your balance sheet outside of the business can enhance your options if you want to transition the business to family members. Lack of personal liquidity coupled with excessive accumulation of earnings in the business, may make the cost of transferring the business to the next generation during your life or at your death more difficult.

Mature Established Business: Develop a Transition Plan to Family or Third Party

If you are an established business that has evolved into a mature enterprise and you are thinking about the next chapter in life (retirement, other entrepreneurial opportunities, philanthropy), then you may be considering how to transition your business so that you can move to the next chapter. One of the first considerations is whether you want to keep the business within the family or consider a sale to a third party such as the management team, other partners, or a strategic buyer.


Transition to the Next Generation of Family


Some of the benefits of transitioning your successful business to other family members who have worked in the company include that they share your values and understanding of the company culture, can keep the beneficial interests within the family, and can benefit from your advice through the transition.


According to a 2020 Forbes article by Marjorie Adams, almost one-half of family businesses do not have a succession plan, but 3 out of 4 of those businesses plan to pass ownership to the next generation. Adams notes that only one-third of all family businesses survive into a second generation. 3 Further, she states that transitioning the control of the business is “one of the toughest management decisions most of them (owners) will ever make.” Adams goes on to say that the process of planning a business transition takes time and the “decisions often can’t be finished in six months or, with some families even in a year.”


Amy Castoro and Fred Krawchuk in their September 2022 Harvard Business Review article, Plan a Smooth Succession for Your Family Business, provide additional context on the need for proper planning quoting research that shows that “25% of failed transitions occur due to the lack of a prepared heir.” 4 Castoro and Krawchuk advocate for a “co-designed transition plan” between the founding generation and the next generation to achieve a smooth transition.


A successful transition to the next generation will require that you invest the time to build a succession plan well in advance of the decision to turn over the keys to your heirs. Before moving forward, you should carefully consider whether the next generation is ready to lead and whether their values and vision for the business are in alignment with your own.


Sale to a Third Party


For many business owners, a sale to a third party may be the best solution. There are four categories of sales to a third party for you to consider. Each has their own benefits and challenges.


Sale to Current Management


Selling to the current management team gives you the benefit of an experienced team taking over the business. In many cases, these sales will have a structure where part of the purchase price of the sale is financed by the management team and the rest is financed privately by the owner. This structure carries risk to the owner in terms of how much liquidity can be received upfront, how the business will perform under the proposed debt structure and the risk the owner takes by personally financing the deal.


Sale to Partner


The sale of a majority or partial interest of your business can occur with an existing partner or new investors including private equity firms. When a private equity firm purchases an interest in your business, you get the benefit of the financial and strategic resources of the firm usually coupled with liquidity and potential upside when the rest of the business is sold in the future. The downside is that you may have a discount on the valuation of the business as compared to a complete sale and there may be an issue with your control of the business once the new investors come into the picture.


Strategic Sale


A strategic sale occurs when a third party, usually a competitor, purchases the entire interest of your business. The advantage of selling your business to a strategic buyer is the deal usually gives you complete liquidity and a favorable valuation of your business. The buyer is usually well capitalized, with a goal to grow the business. The deal may be structured to retain your expertise for a defined period to facilitate the transition to the buyer.


One of the challenges of this type of sale is the complete loss of control, especially if you continue to work for the buyer during an earn-out period. Another concern is that the new buyer may not retain your existing management team, or they may want to assign them to other roles within the organization.


Employee Stock Ownership Plan


Business owners may find an Employee Stock Ownership Plan (ESOP) to be an attractive option because qualifying employees of the business can participate in equity ownership with limited voting rights increasing their motivation and commitment to the company. An ESOP structure can provide liquidity to the owners and tax benefits in the form of deferred capital gains tax under section 1042 of the Internal Revenue Code.


The downside to an ESOP sale is that your business may not be a good fit for this type of plan. There are ongoing administrative costs to maintain the plan. An ESOP is a qualified plan subject to ERISA rules, and there will be a requirement to repurchase shares when employees depart the company. Finally, the tax deferral benefits require that proceeds from the sale be invested in qualified replacement property (QRP) which will add complexity to your investment plan. Consultation with professionals familiar with ESOPs and a feasibility study is recommended.


Planning for the succession of a private business presents multiple challenges to the owner. Balancing the current demands of your business should be made within the context of your personal liquidity, taxes, estate plan, charitable goals and your family vision and values. It is essential to seek expert guidance from your advisors to craft a plan to meet your objectives. Regardless of where you are in the lifecycle of your business, defining and clarifying your goals and consulting with your advisory team sooner rather than later is the best strategy for success.


1 67% of Americans have no estate plan. Here’s how to get started on one, CNBC, Lorie Konish, April 11, 2022, www.cnbc.com/2022/04/11/67percent-of-americans-have-no-estate-plan-heres-how-to-get-started-on-one.html.


2 An Introduction to Dividends and Dividend Policy for Private Companies, Mercer Capital, Excerpt from the Book Unlocking Private Company Wealth, Z Christopher Mercer, October 1, 2014, mercercapital.com/article/introduction-dividends-dividend-policy/.


3 Four Considerations When Passing the Family Business to the Next Generation, Forbes, Marjorie Adams, October 8, 2020, www.forbes.com/sites/theyec/2020/10/08/four-considerations-when-passing-the-family-business-to-the-next-generation/.


4 Plan a smooth Succession for Your Family Business. Harvard Business Review, Amy Castoro & Fred Krawchuk, September 13, 2022, hbr.org/2022/09/plan-a-smooth-succession-for-your-family-business.


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