6 Tips to Kickstart Succession Planning with Your Business Owner Clients

Key Takeaways:

• A sudden or unexpected departure of a business owner is a key business risk that can be managed with an effective succession plan.
• Implementing a succession plan can help families beat the odds and ensure a successful transition of the business to future generations.
• Life insurance can be used both to provide continuity for the business when owners depart and to retain key employees.

For business owners whose retirement may be 10 or even 15 or more years away, it’s easy to find reasons to put off succession planning. They may think they are too young or their business is not profitable enough yet to consider it. They also might not have clear successors in place, either because their children are young or they do not have any partners who could take over the business.

As a financial professional, you know none of these are valid reasons for procrastinating with a succession plan, and you need to help your clients recognize that, too. It may take some convincing, but here are some strategies for explaining the risks of waiting and demonstrating the sophisticated guidance you can provide with succession planning.

1. Emphasize the risks of not having a succession plan.

Business owners may be used to dealing with common risks to their businesses. Still, they often overlook one of the most critical risks – what would happen to their business if they were no longer able to continue leading it? An untimely death or a significant disability could leave the business owner’s employees and any partners, as well as their family, in a highly vulnerable position.

Even when retirement is many years away, owners often view their business as a legacy they can pass on to the next generations of their family. Surprisingly, history would suggest that it’s uncommon for small and mid-sized businesses to stay in the family, especially beyond the second successive generation. In 2010, a study from the Conway Center for Family Business found that the lifespan of a family business was just 24 years. Additionally, in that same year, Business Week, published a study that found that only 40% of family businesses pass to the next generation, and 13% to a third.

The lack of an effective succession plan is often a key reason why businesses do not continue to thrive as they pass to future generations of the owning family. According to a 2023 PwC survey, only around one-third of family businesses said they had a robust, documented and communicated succession plan in place.¹

2. Reinforce the benefits a succession plan will provide.

An effective business succession plan is a critical risk management tool. If the business owner dies or becomes disabled, the plan can help ensure the remaining partners will be able to buy the departed partner’s interest in the business or help identify potential outside buyers. The plan could also help ensure the former owner’s family will have the resources to continue the business, or at least maintain the lifestyle that the departed partner’s interest in it provided for them. Even in far more pleasant circumstances, when the owner is ready to stop working, the transition to retirement will be much smoother if the owner had taken the time earlier to develop an effective plan for succession.

3. Stress that developing an effective succession plan takes time.

It’s difficult to create a succession plan on quick notice, particularly in response to a crisis that demands a fast transition. Business owners should expect to spend 18-36 months developing an effective succession plan, according to guidance from the Society for Human Resource Management.²

The process could be even longer when identifying potential successors and training them for a leadership role are part of the plan. Some legal professionals recommend starting the planning process 5-10 years before the expected transition.³ Procrastination does not work well when it comes to succession planning.

4. Let them know how much you and other experts can help.

Business owners do not have to face this important task on their own. Demonstrate the expert support you can offer, along with all the resources on this critical issue that partners like Nationwide can provide. Also emphasize that you have close working relationships with other trustworthy experts, like attorneys, who can help them implement an effective succession plan.

5. Show how life insurance can be used with a buy/sell agreement to ensure a smooth business transition.

A business owner’s untimely departure – because of a death, disability, or sudden need to retire – can cause considerable turmoil for a business. A buy/sell agreement may be an effective way to avoid that disruption. There are many forms of these agreements, but there are two commonly used types.

• With a cross purchase plan, each business owner buys a life insurance policy on each of the other owners. When one owner dies, the others can use the payout from the policy to buy the deceased owner’s share of the business.
• With an entity purchase plan, each employee-owner enters into an agreement with the business to sell their interest in it. As part of the agreement, the business buys insurance policies on the life of each owner. The business pays the premiums and therefore exists as the owner and beneficiary of the policy. When an employee-owner dies, that share of the company passes to the heirs of his or her estate. The business can then use the policy’s death benefit to buy that interest from the estate.

6. Show how insurance products can be used to retain key employees and offset the impact if they do depart.

The departure of key personnel can also be disruptive to the continuity of a business. Replacing these critical staffers can take considerable time and be expensive. Valuable clients could also be lost during the transition. Insurance products can be used in a variety of ways to both retain these employees and offset the impact if they die unexpectedly.

Nonqualified deferred compensation can be provided to key employees with a supplemental executive retirement plan (SERP), which can also be a valuable additional retirement option for those critical employees. Split-dollar life insurance arrangements, which divide the cost and benefits of life insurance between the business and an employee, can also be used to incentivize key staffers to stay and keep contributing to the success of the business. Key person life insurance can also help cover the financial losses for the business if an important contributor dies.

Let Nationwide Help

For more insights on the strategies discussed here, as well as other succession-planning tips that could be useful to your clients who own businesses, be sure to contact Nationwide’s Advanced Consulting Group.