Ownership and Management Transition Planning or Mere Hope?

Recently, an attorney and financial planner called me to talk about a client who was discussing his ownership, management succession plans, and the life insurance associated with his “planning.”  During our two-hour discussion, I learned about the client’s situation and was able to offer potential modifications to the current transition plan.

The Current Situation and “Plan”

The businessman owns 100% of his privately held company, is in his late 50’s, and has some life insurance on his life.  From limited information, the father appears to have an inflated view of the worth of the business, although it is nice and profitable. The ownership and management succession plan under discussion is that the businessman and his son—who also works for the business—would work together for about another decade, and then the son would buy the business, essentially funding his father’s retirement with a stream of purchase price payments.  This “plan” is more in the father’s mind than in the son’s, because they have only talked around the subject.

I asked what would happen if the father died now.  The plan is for the company to purchase 100% of his stock with the life insurance proceeds from the existing policy on the father’s life.  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.  However, if the company purchases the father’s stock under current ownership, the mother has both the life insurance proceeds and the company, which doesn’t sound like good estate planning for anyone.  The mother would have liquidity, and the son would be in a position of having to purchase the company from her. One can read more here to understand what needs to be done when it comes to real estate and property planning.

This result would be unfavorable to the son and would create unplanned estate tax issues for the mother.  What’s more, the son is in a position of having to purchase 100% of the company at a point in time when he should have a significant interest in it already.

A Tweak to the “Plan”

The attorney asked me if I had any ideas based on our short conversation, and the most obvious thought was to get the son into a significant ownership position now.  I suggested that the father might consider gifting or selling some stock—say 20%—to the son, at which point there would be two owners.  If the father works 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 future purchase.

In the event of the father’s death in the interim, if the Company repurchased his shares, the son’s 20% of the shares would become 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 as necessary.  It would put the son in an entirely more favorable situation than the existing “plan.”

One little tweak to the father’s plan, transferring some stock to the son, would increase the potential for long-term success for both management and ownership transition.  This modification would engage the son as an owner in the business, and it would 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?  What happens to the company if the company repurchases 100% of its stock from the father’s estate?  Who owns the company?  The company?  Actually it would be the estate and thus, the mother.  How does the son gain control?  Maybe busted.
  • What happens if the father waits 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.  This is one thing that father and son need to talk about, and that’s a tough conversation.
  • 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..

Outline of a New Ownership and Management Transition Plan

I am not in the ownership and management transition planning business.  Mercer Capital is a business valuation and financial advisory firm.  That does not mean, however, that we don’t use our experience working with business owners and the valuation process to assist other advisers as they work with owners.  We help focus on creating liquidity from private businesses, transitioning ownership, and working to enhance value over time.  Those skills were among those needed to help move the father’s planning along.

The full plan that I suggested to the attorney and financial planner for consideration included the following steps:

  • Reassess the father’s spending versus saving habits.  If the father is 55 years old and has not accumulated significant assets outside the business, then now is a good time to begin saving.  This can be another tough conversation for an adviser to have with a client, but sometimes such conversations must happen.  Saving can come from normal income from the business as well as distributions.  Perhaps the father can make a solid contribution to his retirement savings needs during his remaining work years.  This decision would lessen his dependence on the business for total retirement needs and increase flexibility going forward.  This suggestion may seem like meddling, but it is always good to spend less than one makes (and to save and give away the remainder).
  • Obtain an 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 a significant owner in the business.  It will likely either encourage his motivation or identify his commitment, or lack thereof, to the company.
  • Develop a buy-sell agreement between the father and the son.  The father and son could use the above appraisal as the basis for the price for the agreement should a trigger event occur.  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.  The parties could also assess the reasonableness of the existing life insurance on the father’s life.
  • 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.  Recurring reappraisals provide numerous other benefits for shareholder planning, investment monitoring and others, as outlined in my book, Unlocking Private Company Wealth.
  • 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 when available options will be minimal and likely not favorable.
  • Adjust the plan as needed over time.  Benefiting from the passage of time, both the 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.  This provides an opportunity for the father’s advisers to stay involved, and to encourage following through with the new plan.

I have not been informed by either the attorney or the financial planner regarding whether they presented the outline above to the father, or even another outline that might have incorporated some of the ideas.  We have not yet been contacted to provide that initial appraisal of the business, so perhaps there is some procrastination underway.

The father’s initial plan is really just a hope and a prayer that things will work out.  The proposed outline of a plan provides benefits for the 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 reasonable plan that is well-executed and adjusted over time is far better than no plan and mere hope.

I hope the father will work with his advisers, his son, and his wife to implement a personalized plan for them.  They are welcome to use my ideas above, but I do hope they will call me when it is time for the appraisal!

Be well,



My two most recent books are available in an Ownership Transition Bundle.  The bundle, priced at $35 plus s/h, has been attractive for many business owners, appraisers and attorneys.


Please note: I reserve the right to delete comments that are offensive or off-topic.

Leave a Reply

Your email address will not be published. Required fields are marked *

2 thoughts on “Ownership and Management Transition Planning or Mere Hope?

  1. As always, very nicely presented Chris.
    I’m sure many of us have been involved in some “and that’s a tough conversation” situations. As you know, those moments of discomfort can often help a person clarify their goals and lead to better decisions for all involved. Best regards. Dan

  2. If not today, then…well…there’s always tomorrow! Until there isn’t of course.

    Thanks Chris, well said as always.