A succession plan ensures your business can continue — and its value is preserved — if you exit, become incapacitated, or pass away.
For many business owners, the business is both their largest asset and their life's work. It is where decades of energy, risk-taking and sacrifice have been invested, and it is often the source of the family's financial security. Yet succession — the plan for what happens to that asset when an owner exits — is frequently the last thing that gets attention. Without a plan, the very thing the owner has spent a lifetime building can be eroded or lost in a matter of months when an unexpected event occurs.
Succession planning is about preparing for that eventuality while you still have choices. It addresses three principal trigger events: retirement, incapacity (whether temporary or permanent), and death. For each of these, a well-structured plan defines who will take over the ownership and management of the business, how the departing owner or their family will be compensated, and how the business will continue to operate through the transition. The alternative — relying on good intentions and last-minute arrangements — is a recipe for conflict, value destruction and, too often, the forced sale of a business at a fraction of its worth.
The centrepiece of most succession plans is a buy/sell agreement, sometimes called a business succession agreement or business will. This is a contract between the owners of a business that sets out what happens to an owner's interest if a trigger event occurs. The agreement typically gives the remaining owners the right or obligation to buy out the departing owner's share, at a price and on terms that have been pre-agreed or that are determined by an agreed valuation method. For the departing owner or their estate, the agreement provides a guaranteed buyer at a fair value — something that is otherwise extraordinarily difficult to achieve when the business's other owner has just died or been incapacitated.
“The trigger events covered by a buy/sell agreement typically include death, total and permanent disablement (TPD), and sometimes critical illness or trauma, and retirement. Each trigger has different consequences for the business and for the affected owner's family, and the agreement should be drafted to respond appropriately to each. For example, death and TPD are usually compulsory triggers — the remaining owners must buy and the departing owner or their estate must sell — while retirement may be optional, giving the retiring owner a put option or the remaining owners a call option.
Funding the buy-out is where the plan meets reality. If a remaining owner has to find hundreds of thousands or millions of dollars to buy out a deceased co-owner's estate, the practical result is often that the business must be sold or that the departing owner's family takes a deferred, uncertain payment. This is where insurance becomes the funding engine of succession planning. Life and TPD insurance policies are taken out on each owner, with the proceeds structured — often through a funding agreement — so that the money is available precisely when the buy/sell agreement is triggered. The result is that the remaining owners receive the funds to buy the share, and the departing owner's family receives the proceeds as the purchase price, without either side facing a cash crisis at the worst possible moment.
For family businesses, succession planning also addresses the difficult question of who will lead next. Not every family member is suited to manage the business, and not every child wants to. A good succession plan distinguishes between ownership and management: it may pass ownership to the next generation while providing for professional management, or it may split the business among children in a way that reflects their respective involvement. It should be documented, communicated honestly with the family, and aligned with the broader estate plan so that the ownership of the business and the distribution of other assets are considered together. A common and destructive problem is the inadvertent transfer of control of the business to a child who has no involvement in it, while the child who runs the business day-to-day receives no corresponding control — a situation that can only be avoided by careful, coordinated planning between the Will, the business succession documents and any shareholder or unit trust agreements.
Buy/sell agreements also need to deal with valuation. The most robust approach is to agree a valuation method in the agreement itself — whether a fixed price reviewed periodically, a formula based on a multiple of earnings, or an independent valuation by an agreed firm or accounting methodology at the time of the trigger. The certainty this provides is invaluable: it removes the most contentious issue from an already difficult conversation, and it allows the insurance sums insured to be set with some confidence so that the funding matches the likely purchase price.
Tax is a further consideration. The way a buy-out is structured — whether by the remaining owners acquiring the shares directly, by the company redeeming the shares, or by a trust buying out the units — can have very different tax outcomes for the departing owner or their estate. For life insurance proceeds owned by the company, there may be implications for the treatment of the proceeds and for the cost base of the shares. Specialist tax advice at the time the agreement is drafted, rather than at the time it is triggered, can avoid costly and sometimes irreversible outcomes.
We work with business owners and their advisers — accountants, lawyers and insurance specialists — to put binding succession agreements in place and to coordinate them with Wills, trusts and powers of attorney. The objective is a plan that works in practice, not just on paper: one that will deliver a fair outcome for the departing owner or their family, preserve the business for those who remain, and avoid the disputes that destroy both wealth and relationships when succession is left to chance.
If you own a business with co-owners — or a family business where the question of succession is unsettled — a Discovery Call is the right place to start. We will help you understand the moving parts, the costs, and the protections involved, and to put a plan in place that gives you and your family the certainty that your life's work is protected, whatever happens.