What You Need to Know About a Business Succession

January 15, 2020

Welcome back to the Advisory Group West blog! Here you can find more information about financial strategies that can help you achieve your financial goals and have your finances reflect your personal values. Today, we are discussing the basics of a business succession plan — what it is and how it can help you. 

Stick around to read our blog, or if you’re ready to create your own plan, visit the Advisory Group West website to learn about our approachour team, and the resources we can offer you. We believe that educating our clients is one of the best ways we can serve them and the future they want. Be sure to schedule a Complimentary Cornerstone Vissions™ Strategy Session with one of our personal financial advisors in Glendale. 

Business Succession Plan Basics

When thinking about passing your business on to someone else, it isn’t all business. meaning that there is often a large emotional component to the process that can add to the stress and potential complication of stepping away from your business. This is understandable as you have probably poured countless hours into your businesses, dedicated your life to it, and hoped that your business is something that will outlive you.

Having a personal financial advisor to help you create a succession plan is an effective way to transition from being a pivotal individual actively involved in dictating the direction of your business into retirement. 


A business succession plan is a means to transfer your business to key employees or partners in the event of your retirement or death. With a succession plan, you can dictate the direction of your business and choose who will mold and shape your business once you are no longer involved. When considering who will take over for you, you have several options that are both within and outside your company. 

Five Ways to Transfer Ownership

There are several ways and individuals to transfer the ownership of your business to. Each of these options presents its own advantages and ways to continue your business’ legacy the way you want. Those that you can pass onto your business to include:

  • Co-owner – sell your part of the business to a co-owner (buy-sell agreement)
  • Heir – pass the business to a family member of your choice
  • Key employee – pass your responsibilities and ownership to a key employee
  • Outside party – sell to an entrepreneur or another outside source
  • Company – sell your shares to the other business owners (buy-sell agreement)

Who Should Take Ownership of Your Business?

Choosing who to take on your responsibilities after you are gone can be a daunting task. In some cases, you may feel like you have a lot of options; in other cases, it may take investigation to not only know how you want to have your business continue but also who would best carry out your visions. It is best to consider someone: 

  • Who will have the professional expertise/ experience to take on the business
  • Who is invested in the business as much as you are
  • Who has the same vision or will uphold your vision for your business

Every Succession Plan Should Include

A business succession plan is summed up in a document that discloses the instructions laid out by the owner. If the business owner decides to sell, this document will include the sale price and purchase terms. Other elements that will be specified in a succession plan include: 

  • Succession timeline – information telling when the succession will occur and, if necessary, will include specific dates 
  • Potential successors – a list of potential successors with their strengths and weaknesses included
  • Formalized standard operating procedures (SOPS) – clear documentation of procedures, the employee handbook, as well as training documents
  • Valuation of the business – the value of the business as well as the method by which it was evaluated 
  • Funding of the succession – a business succession can be funded through life insurance, seller’s note, or other options

Who Should Create a Business Succession Plan?

Usually, the best time to consider a business succession plan is near retirement, but in some cases, you may want to consider creating one before retirement is on the horizon. Creating one for circumstances like you accidentally pass away can help your heir or business partners to avoid potential legal headaches, family drama, and monetary loss. Additionally, as your business becomes more complex, it can be a good idea to draft a succession plan. Other factors to consider include: 

  • If your business has complex processes
  • You have employed more employees than just yourself
  • Your business has repeat clients and on-going contracts
  • You have chosen a successor 

Why Create a Succession Plan?

For certain businesses, it may seem like overkill to create a succession plan before the owner is even considering retirement. However, it is important to consider these questions when you are unsure if a succession plan is something you need to invest in: 

  • How will your expertise be duplicated if you can no longer run your business? 
  • How do you wish your business to operate once you are no longer in charge? 
  • Who will lead your employees if you should pass or are no longer able to lead them? 
  • Who will maintain relationships with your clients? 
  • Who would keep your business viable? 

Even if you don’t mind if your business changes with new leadership, it is best to consider these questions and let your answers inform your decisions as you create a plan.  

When Do You Need a Business Succession Plan?

If you are nearing retirement or foresee your involvement with the business nearing its end, it’s a good idea to create a succession plan. A succession plan not only ensures that your business continues to operate and operate in line with your legacy, but it also ensures that your business continues to operate smoothly throughout the transition of ownership. As we mentioned earlier in this blog, it isn’t a bad idea to consider drafting a succession plan before you are even considering retirement in the case that you pass away, are unable to operate the business, or you must step away from it unexpectedly. 

What Are The Benefits? 

There are many benefits to creating a succession plan. One of the most obvious is the peace of mind that you will experience when you know what will happen to your business once you are ready to step away or you die. However, there are a few more benefits including: 

  • If succession occurs with your death, a plan can allow your estate to be settled in a timely manner 
  • The benefits of your share of the business, if you should pass away, will be available immediately avoiding no liquidity or time restraints 
  • Avoid external takeover due to cash flow issues, or the need to cover your interest, if you should pass away 
  • Assurance that your legacy and vision of your business is upheld 
  • The price named for your portion of the business is agreeable as it has already been resolved before your death with a succession plan 
  • Your business continues to function during the transition period 
  • The person you wish to take over or you wish to buy your shares is able to do so 


The steps to creating a business succession plan are dependent on a few different factors. The first aspect to consider is the instigation of succession planning, meaning is it: 

  • A defined departure – the C-suite’s exit is planned
  • On-going planning – the succession plan is under continual assessment, evaluation, and development 
  • An emergency or interim – a plan created in response to unforeseen circumstances

Your succession plan will also be dependent on the means by which you wish to transfer your business or who you would like to take over your share of the business. There are a variety of options both within and outside your business to choose from — it depends on what you wish for your business. 

Transferring to a Partner

If you plan to transfer your business to a partner, you will most likely need to buy a life insurance policy. In the case that your business has multiple partners, once the succession plan is defined, each business partner will take out a life insurance policy so that when one of the partners passes away, the death benefit will be used to buy out the deceased partner’s shares, which will be distributed amongst the other partners as it was agreed upon. This is called a cross-purchase agreement. 

Two of the most basic arrangements for business partners to use when transferring their business are: 

  • Cross-purchased agreements – each partner is paid for their deceased partners share of the business
  • Entity-purchase agreements – the business takes out a policy on each partner and is considered both the beneficiary and policy owner. This can be a beneficial means when there are more than five partners. 

Defining the timeline of succession as well as who will receive your share of the business are the best places to start when you are beginning the planning process. Once you know these two elements, you can continue the planning process. 

Contact Your Local Business Succession Planning Expert

There is a lot to consider when creating a business succession plan for your Glendale-area business. If you wish to create your own plan, the best place to start is contacting a personal financial advisor at Advisory Group West. We can advise you and lead you through the entire process to help you create a plan that fits your needs. Contact us for a Complimentary Cornerstone Vissions™ Strategy Session and learn more about our approach and how we can help you. Visit our website!

*Advisory Group West does not offer business valuation or legal services. Please consult an attorney for your individual situation.