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Create a formal business succession plan in seven steps

July 20, 2020  By Mark Leyden

Many owners of small and large family businesses are reluctant to undertake succession planning and end up doing so as a result of other personal planning. Whether the owner or owners are addressing their estate or their retirement, neither can be adequately structured without having made plans for what is most likely the owner’s largest asset, the family business.

According to PwC’s 2019 U.S. Family Business Survey, 58 per cent of family businesses report having succession plans. However, most are informal, and only 18 per cent claim to have robust plans in place.

The reluctance to plan is understandable given the number of emotional decisions which need to be made. An owner can’t simply think about the future of the business. He or she also needs to consider personal involvement and the potential involvement of other family members. Is there a time the owner plans to step back and cede responsibility to others? If so, who are those ‘others’? What happens to the business if the owner dies or becomes disabled? Is there a plan to eventually sell the business? Are there plans for key personnel, including those who are non-family members, for not only instances of death or disability, but also to retain and reward?

The process of creating and implementing a business succession plan often means having honest and sometimes brutal discussions with other family members (and with employees). For example, imagine having to tell a son or daughter who has struggled working in the business that he or she is not fit to take over. It’s no wonder so few family businesses have followed through to a formal plan, which involves not only a written strategy, but also the ability to fund all the liabilities uncovered to make sure the future vision for the business is realized and not knocked off course.


Approaching succession planning in distinct steps makes it clear to the business owner what needs to be accomplished. Here are the seven steps to create a formal succession and continuity plan for a family business.


An owner of a business must know where the business is headed. The plan might be as simple as shutting down the company someday which—if the company is reliant upon the unique skills of the owner or the company is not readily transferable—may be the most realistic outcome. The company could be transferred to the next generation or other family members. Employees or outsiders could purchase the company. Hand-in-hand with considering the disposition of the company is the need to understand the exit plan for an owner and what that means to continued operations.


This just doesn’t mean identifying future owners. It also involves knowing of those currently employed, who could be a key manager or executive.  Methods for training, retaining and rewarding will need to be implemented. If the current employee pool lacks leadership potential, a plan to recruit that talent should be a priority.


This means planning for “what if” scenarios. What if an owner or other key employee dies or becomes disabled? What if a key employee leaves the company? What if an owner gets married or divorced or has other family members they want to have working for the company? Closely linked to all these scenarios involving personnel are questions about the shares of the company any of these individuals might hold and what happens to those shares.


For a succession plan to be effective, it must be shared with those on whom it has an impact. Successors should know the opportunity ahead. Family and non-family members alike need to understand their roles with respect to the company. These conversations can often be difficult, and many companies bring in professional facilitators, often attorneys, to help.

“The more communication, the better,” says John Olivieri, a partner in the Indianapolis and New York offices of Barnes & Thornburg, LLP, whose practice focuses on estate and business succession planning. “In the absence of communication, family members will have expectations which may be unrealistic and can lead to disharmony and litigation. When everyone knows the plan, some may not be happy, but no one is surprised. As a result, a smoother succession can take place.


An independent appraisal to determine the fair market of the company is useful for both personal and business purposes. From a business perspective, the value to each owner is important for buy-sell and key person provisions and for funding any liabilities which arise from having to apply those agreements. Personally, the business value enables the estate and retirement plans of an owner.

“When interest in a family business is to be transferred to the next generation, it may be necessary to start by reorganizing the capital structure of the company,” says Dan Rosio, ASA, the partner-in-charge of Katz, Sapper & Miller’s Valuation Services Group in Indianapolis. “This often involves classifying a small number of shares as controlling so that a majority of the shares, which are non-controlling, can be gifted or sold to other family members. There are similar considerations for transfer or sale to non-family members.”


This includes:

  •   Shareholder agreements
  •   Buy-sell agreements, including trust agreements where there are intra-family transfers
  •   Key-person agreements
  •   Key-person compensation arrangements
  •   Power of attorney(s)

In addition, the following records should be collected, well-organized and easily accessible when needed:

  •   Legal will
  •   Property deeds/titles, leases, rental agreements, etc.
  •   Mortgages and notes payable
  •   Tax returns, financial records and financial statements for the last five years
  •   Bank account information
  •   Contact listing of all professional service advisors
  •   Life insurance and property & casualty policy information

Life insurance provides the liquidity to make good on promises made in various of the planning agreements at any time. Under a buy-sell agreement, funds are readily available to purchase the shares of a deceased owner. The same policy can also be used to provide additional proceeds to the family of the deceased owner. Many key person executive compensation programs are funded with life insurance and include non-qualified deferred compensation plans, split-dollar arrangements and executive bonus agreements.

Additionally, life insurance can be useful to a business owner in order to equalize the disposition of the company. Where a business is left to one or more family members to the exclusion of others, life insurance can ‘equalize’ not inheriting the family company.  Learning a parent has selected another sibling other than you to own the business is easier to accept if the value of the company in cash can be expected.


Perhaps the most important thing a business owner should understand when faced with creating a succession plan is that the plan will not be set in stone. Just about any element of the plan can be changed as conditions demand. A company thought to be carried on for years and passed to children could suddenly be sold the next month if an attractive offer was made. Identified successors might turn out to not be a fit, while others thought to be lacking in leadership potential blossom.

Changes should be expected and usually do not create complications as long as they are well documented and communicated. Often growth of a business creates imbalance in the succession plan. Agreements, valuations and life insurance funding can become obsolete in a company that is expecting growth. Most importantly, any liabilities impacted by changes to a succession plan should be evaluated along with the life insurance funding solution in place to see if existing coverage should be re-positioned, or if additional policies are needed.


Mark Leyden, CLU is the CEO and founder of Mark Leyden & Associates, an Indianapolis-based firm specializing in assisting businesses and families in the acquisition and management of life insurance assets. He specializes in assisting business owners and families, including some members of the Forbes 400, in design and funding of wealth transfer and business succession plans.This is accomplished working closely with clients and their advisors. The objectives commonly achieved include: tax-efficient wealth transfer, business succession, asset protection, and management team retention plans.

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