Sales Strategy

How to plan for a smooth business succession

Estimated 4m read
Sales Strategy

How to plan for a smooth business succession

Sales Strategy

How to plan for a smooth business succession

Learn the three main ways business owners can pass on their companies and how life insurance ensures a smooth transition of ownership.

Estimated 4m read
Sales Strategy

How to plan for a smooth business succession

Learn the three main ways business owners can pass on their companies and how life insurance ensures a smooth transition of ownership.

Estimated 4m read
Sales Strategy

How to plan for a smooth business succession

Learn the three main ways business owners can pass on their companies and how life insurance ensures a smooth transition of ownership.

Estimated 4m read
Sales Strategy

How to plan for a smooth business succession

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By Modern Life
August 29, 2023
By Modern Life
Aug 29, 2023
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Business succession planning is the process of preparing for the transfer of leadership and ownership of a company from one generation or set of leaders to the next. It involves creating a strategic plan to ensure the smooth transition of a business to new owners or managers, typically in the event of retirement, disability, or death.

Business succession planning is important for several reasons:

  1. Continuity and stability: A well-thought-out succession plan ensures the smooth transition of leadership and ownership, helping maintain the business's stability and continuity. Sudden leadership changes can disrupt operations and harm the company's reputation without a plan.
  2. Preservation of wealth: Business owners invest substantial time, effort, and capital into their businesses. A succession plan helps preserve the wealth and value created within the company by ensuring a smooth transition that maximizes the return on investment.
  3. Minimizing disruption: Without a succession plan, businesses can face significant disruption during leadership change. Customers, employees, and suppliers may become uncertain about the company's future, potentially leading to decreased productivity, decreased morale, and even the loss of key talent.
  4. Employee retention: Employees who see a clear path for advancement within the company are often more motivated and loyal. Succession planning can identify and develop future leaders from within the organization, increasing the likelihood of retaining top talent.
  5. Mitigating family conflicts: In family-owned businesses, succession planning can help prevent conflicts and disagreements among family members over who should lead or own the company. A well-structured plan can outline roles and responsibilities, reducing potential disputes.
  6. Estate planning: Succession planning allows business owners to consider the financial implications of transferring ownership, including tax consequences. With proper planning, owners can minimize tax liabilities and ensure a financially sound transition.
  7. Business value maximization: A succession plan often includes strategies to enhance the value of the business in preparation for a transfer. This might involve improving operational efficiencies, increasing profitability, and enhancing the company's competitive position.
  8. Legacy preservation: For many business owners, the company represents their life's work and legacy. A well-executed succession plan can ensure the business thrives, preserving the founder's vision and values.

Business succession planning is essential for maintaining the health and longevity of a company. It safeguards the business and supports stakeholders' interests, including owners, employees, and customers. A thoughtful and comprehensive succession plan can make the difference between a successful transition and potential business disruption or failure.

Types of succession planning

When it comes time to sell or transfer ownership of a company, there are three common scenarios:

  1. Selling the business to a co-owner or key employee: This approach can provide continuity and familiarity, as the successor is already familiar with the business's operations and culture.
  2. Passing the business to an heir: The transfer can occur through various means, such as gifting shares, selling them at a discounted rate, or through an estate plan. Family succession can be complex due to potential conflicts and differing interest levels or qualifications among heirs, making effective communication and planning crucial.
  3. Selling to an outside party: Potential buyers can include other businesses, private equity firms, investors, or individuals interested in acquiring and running the business. This approach can provide liquidity to the owner, often at market value. It may be the best option if no suitable internal successors or family members are interested in taking over.

Each of these succession scenarios has its advantages and challenges, and the choice among them depends on factors such as the owner's goals, the business's value, the presence of capable successors, and the owner's financial and personal circumstances. A well-executed succession plan considers these factors and outlines a strategy that aligns with the owner's objectives and the long-term sustainability of the business.

Key components of succession planning: Buy-sell agreements

No matter how the owner chooses to pass on their business, a buy-sell agreement is crucial. A buy-sell agreement, also known as a business continuity agreement or a buyout agreement, is a legally binding contract that outlines what should happen if a co-owner or partner in a business decides to leave the company or experiences a triggering event, such as death, disability, retirement, or a desire to sell their ownership stake.

If you want an in-depth look at buy-sell agreements, make sure you take a look at this article

Here’s a high-level overview:

  • Parties involved: Buy-sell agreements involve at least two parties: the business owner (or owners) and the potential buyers. The potential buyers can be co-owners, other partners, the company itself, family members, or external parties.
  • Triggers: The agreement specifies the events that trigger the buy-sell provisions. Common triggers include the death, disability, retirement, resignation, bankruptcy, or divorce of a business owner.
  • Valuation: The agreement outlines how the business's value will be determined when a triggering event occurs. Common valuation methods include appraisals, fixed prices, or a predetermined formula based on financial metrics.
  • Funding mechanisms: Buy-sell agreements detail how one owner can purchase the departing owner's shares. There are typically three main funding mechanisms:
  • Lump sum cash payment or installment sale: The buyer(s) can pay the departing owner (or owner’s spouse or estate if death occurs) with a predetermined amount in cash upfront.  If liquidity is an issue, the buyer(s) could also purchase the shares over a number of years through an installment sale.
  • Third-party loan: The buyer(s) could obtain a loan from a third-party lender to obtain the necessary funds to buy out the departing owner’s shares. However, a loan may be difficult to obtain in some cases after the death or retirement of the owner.
  • Insurance funding: Life insurance policies provide the necessary funds to buy out the departing owner's shares. This is common in cases of death or disability triggers. Life insurance is the one vehicle that can potentially guarantee that the necessary funds are available at the exact time they are needed most. 
  • Restrictions on transfer: The agreement may include restrictions on who the departing owner can sell their shares to, protecting the remaining owners' interests.
  • Rights of first refusal: This provision gives the other owners the right to purchase the departing owner's shares before an external buyer can do so. It ensures that ownership stays within the company.
  • Buyout process: The buy-sell agreement outlines the process for executing the buyout. It typically includes steps for notice, valuation, negotiation, and the actual transfer of ownership.
  • Dispute resolution: The agreement may include a mechanism for resolving disputes related to valuation or the buyout process, such as mediation or arbitration.
  • Termination: Buy-sell agreements often specify conditions under which the contract can be terminated or amended, ensuring that it remains flexible as the business evolves.

Life insurance and business succession planning

Life insurance plays a significant role in business succession planning. While a life insurance policy is not a mandatory component of succession planning, it can simplify the process, making it a popular choice. Here are some of the benefits of using life insurance in business succession planning:

  • Funding mechanism: Life insurance policies can serve as a funding mechanism for a buy-sell agreement. In the event of a business owner's death or retirement, the proceeds from a life insurance policy can be used to provide the necessary funds to buy out the owner's shares at a predetermined price, ensuring that the surviving owners have the liquidity needed to complete the buyout.
  • Estate planning: Besides funding the buy-sell agreement, the remaining death benefit proceeds can be passed on to a spouse or heirs.
  • Flexibility: Life insurance policies can be customized to meet the specific needs of the business and the succession plan. The coverage amount, beneficiaries, and payment terms can all be tailored to align with the buy-sell agreement's requirements.
  • Affordability: Life insurance premiums are often relatively affordable, especially compared to the potential financial burden of buying out a deceased owner's interest using other funding mechanisms like a loan or liquidating assets.
  • Tax efficiency: The proceeds from a life insurance policy are typically tax-free to the beneficiaries. This can help reduce the financial impact of the buyout on both the business and the deceased owner's heirs.

While there are many different types of life insurance products, all of which could be used in a buy-sell arrangement, Modern Life typically recommends permanent life insurance policies for business succession planning. Permanent policies ensure that the death benefit will be available when needed, as opposed to a term policy which will likely expire before the business owner's death. In fact, one survey found that 99% of term policies never pay a death benefit. In addition, with a permanent policy, if an owner decides to retire, the policy could be transferred to him/her, and the policy's value could be used as part of the buyout agreement.  

Case study

Business overview:

Sarah Thompson owns Thompson Marketing Solutions. With 15 years of hard work and dedication, she has built a thriving business known for its creative marketing campaigns and high client retention rate. As she approaches retirement age, she is keen on ensuring a seamless transition of ownership and leadership within her company.


Sarah has always believed in the potential of her key employee, David Mitchell, to lead the company into the future. David has been with the company for over a decade and has proven his leadership abilities and deep understanding of the business. However, Sarah did not have immediate family members interested in taking over the company, so she needed a concrete plan for David to acquire her ownership stakes.


To address this challenge and secure the future of Thompson Marketing Solutions, Sarah decided to implement a buy-sell agreement with a permanent life insurance policy as a funding mechanism. She worked closely with her financial advisor, Susan Davis, to structure the plan.


Sarah and David signed a comprehensive buy-sell agreement outlining the potential ownership transfer terms and conditions. The agreement specified that David would have the option to purchase her shares upon Sarah's death.

The buy-sell agreement stipulated that the purchase price for the ownership stake would be set by a predetermined formula based on the company's current valuation. The funding mechanism for this purchase would be a permanent life insurance policy owned by David on the life of Sarah. The company paid David an income-taxable bonus each year to pay the premiums for the life insurance policies, which were tax-deductible to the company as a business expense.

In the event of Sarah’s passing, the proceeds from the life insurance policy would be used to fund David's purchase of her shares. This arrangement provided the necessary liquidity to facilitate a seamless transition of ownership and management.


The success of this business succession plan demonstrates the importance of thoughtful planning, clear agreements, and the strategic use of permanent life insurance. It not only preserves the company's value but also honors Sarah's vision for the future of her business. As she continues to approach retirement, she is confident in the business's future under David's capable leadership, all made possible by their well-structured succession plan.

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