One Businessman’s Ownership Transition “Plan”

Recently, a financial planner called to talk about a client that was discussing his ownership and management succession plans and the life insurance associated with his “planning.”  The businessman owns 100% of his privately held company and is in his late 50s.  His son works in the business.  There is life insurance on the father’s life.

The ownership succession plan under discussion was that they would work along for another decade or so and then the son would buy the business from the father, essentially funding his retirement with a stream of purchase price payments.  In the event of the father’s death, the plan was for the mother to have sufficient assets to live for the rest of her life.

From limited information, the father appears to have an inflated view of the worth of the business, although it is a nice and profitable one.

I asked what would happen now if the father died.  Well, the company would purchase 100% of his stock and, presumably, the estate would then own the business.  Mother would have liquidity and the son would be in a position of having to purchase the company from her.  That would not be a favorable result for the son and would create unplanned estate tax issues for the mother.

I suggested that the father might consider gifting or selling some stock, say 20%, to the son.  At that point there would be two owners.  If the father does work for another ten years, the son will be working with him as a co-owner.  That would probably increase the likelihood of retaining the son’s interest over the period and he would have a leg up on any later purchase.

In the event of the father’s death, if the company repurchased his shares, the son’s shares would reflect 100% of the shares then outstanding.  Life insurance proceeds would flow to the mother and the son would have the company, fully paid for, which would certainly provide more flexibility to help the mother if that were necessary.

One little tweak to the father’s plan – transferring some stock to the son – would increase the potential for long-term success, engage the son as an owner in the business, and provide protection against what I call the Law of Unintended Consequences, which can deal harshly with business owners.  That one little tweak, providing the son with a significant ownership interest today, would help prove or disprove the father’s long-term plan.  Consider the following questions:

  • What would happen if things rocked along and when the father is ready to retire, the son decides he doesn’t want to buy the company?  Busted.
  • What would happen if the father died unexpectedly with the son holding no stock?  I don’t know what happens to the company if the company repurchases 100% of its stock from the father’s estate?  Who owns the company?  The company?  How does the son gain control?  Maybe busted.
  • What happens if the father waits long years until he is ready to retire and the son predeceases him?  His market for the company just went away and he is faced with the need to sell the business when he is past retirement age, or perhaps worse, he is forced to keep on running the company.
  • What happens if the son gets 20% of the business and decides early on that he doesn’t want to hang around?  The father may be stuck, but at least he has time to work on an alternative plan.
 The full plan that I suggested to the financial planner for consideration included the following steps:
  • Obtain in independent appraisal.  The appraisal would be developed at the  financial control and nonmarketable minority interest levels of value.  The financial control portion would reflect a realistic value for the company and provide a benchmark for the amount of life insurance needed.  The nonmarketable minority value would be available for gift tax purposes should the father decide to make a gift of stock to the son.  It would also be available to set the price at which the father could sell a minority interest to the son and avoid gift tax consequences.
  • Gift or sell 20% of the company to the son.  This step would make the son an owner in the business.  It should either encourage his motivation or else, identify his commitment or lack thereof to the company.
  • Develop a buy-sell agreement.  The father and son could use the appraisal as the basis for their price for the agreement.  The parties could decide if it would be necessary or appropriate to purchase life insurance on the son’s life as part of the buy-sell process.
  • Revalue the business at least every other year.  The reappraisal would provide a basis for updating life insurance needs and for resetting the price for the buy-sell agreement.
  • Operate under this plan for a year or two.  After a year or two under the new ownership plan, both the father and son would have a better idea regarding whether the plan to sell the company to the son to fund father’s retirement is workable.  Regardless, both father and son (and mother, too) would have better knowledge about the likelihood of things working out.  If things are not working out, better to find out after a year or two than after ten years.
  • Adjust the plan as needed over time.  With the benefit of the passage of time, both father and son will have better ideas of how things are working.  Dad might even have the flexibility to retire early if all is going well.  The son’s ownership could be increased over time to minimize the difficulty of a future buyout of the father’s shares.

The father’s initial plan is really just a hope and a prayer that things will work out.  The amended plan provides benefits for both father, son and company, and mother as well.  What I know from many years of working with closely held and family businesses is that a workable plan that is well-executed is far better than mere hope.

My father had an expression.  He used it several times when I may have been looking for an easy way out of kid situations.  He said, “Son, wish in one hand.  But keep on working with the other one.  Then see which hand helps you solve your problem!”  Perhaps this businessman needs to hope in one hand and take action with the other.

Please do call (901-685-2120) or email ( to discuss this post or any other valuation-related matter in confidence.  If you would like to continue the discussion publicly, do comment on the post.

Until next time, be well!


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