Succession Planning: “I know we have to do this”

October 19, 2022

3 minute read – The likelihood of successful transitions of family-owned and closely-held businesses to the third generation and beyond is distressingly low: less than 12% of businesses survive to the third generation.  Why the dismal results in succession planning for these businesses?

Succession planning is critical to supporting the effective transition of a business from one owner to the next;  whether that transition occurs due to a planned exit by the owner — like the owner’s retirement — or an unexpected or tragic event — like death or disability. Without a plan in place, a thriving business could fail in an instant, jeopardizing the financial futures of all those who rely on the business and its continued success.

Unfortunately, statistics show that up to 60-70% of business owners do not have any formal succession plan for their business.

Why is this the case? • For more established businesses, the owner has probably spent a good portion of his or her life creating or supporting the business and working to make it profitable. Given how much these owners have sacrificed to build their “life’s work,” they cannot imagine (or do not want to imagine) a time when they will not be involved in their business. • For newer businesses, the owner may be more concerned about keeping the business afloat and thriving in the present rather than spending time to consider what will happen to the business in the future. • For all owners, the process of creating a business succession plan also may seem too cumbersome and time-consuming, especially when a “successor” is not already identified or requires the owner to choose among family members or valued employees. When so much of a business owner’s time is consumed by the day-to-day activities associated with running the business, taking the time to discuss what should happen to the business at some unknown date in the future may have the owner running for the hills. Despite many owners’ reluctance to sit down and make a plan, the reality is that no owner will be involved in his or her business forever.

In fact, 40% of business owners have indicated that they expect to retire by 2030. For family businesses and closely-held corporations, which comprise 80% to 90% of all business enterprises, lack of planning also could have a significant effect on the viability of a business as it passes down through the generations — considering that currently only 30% of this American businesses segment survive into the next generation and 12% remain viable until the third generation.

WHAT ROLE DOES LIFE INSURANCE PLAY IN A SUCCESSION PLAN? Life insurance is a powerful tool that allows a business owner to protect the value of the business by having access to liquidity at the most critical of times. Not only can life insurance provide much needed liquidity after the death of a business owner or other key employee, but a cash value permanent life insurance policy can provide access to cash during the life of the insured, which can be used as a funding source for a lifetime buy-out of the business owner, for a deferred compensation plan, as security for a bank loan…just to name a few. The tax advantages of life insurance also make it very desirable and a competitive asset for business planning purposes.

The proceeds paid upon death typically are received income-tax free and the owner can access the cash that has accumulated in the policy while the insured is alive also free of income taxes. Given that so many businesses today are designed to be pass-through entities (whether it’s in the form of an S corporation, partnership or LLC), which requires the business owners to pay taxes on all income generated by the business (including investment income), the tax advantages of life insurance may make this type of asset even more desirable than other investments.

4 Key Scenarios: Which one is your organization?


I often hear, “I know, we need to all get together and formulate a buy-sell agreement.” Or, “We have one……it’s probably 15 years old, and things have changed since we did that!”

A buy-sell agreement can be an essential factor in planning for the continued success of a business, particularly in the following areas: • Creating a market for an owner’s interest in the business, usually when it is needed most — e.g., death of the owner, disability or retirement • Establishing a purchase price for the business interests • Protecting owners who continue in the business interest by restricting transfer of ownership interests to outside parties • Providing liquidity for the deceased owner’s estate to pay estate taxes or other debts of the estate.

Lot’s to talk about, let’s take that next step together.

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