For many business owners, their business is one of the most valuable and important things they own. When it is time to sit down and create an estate plan, it is critical that business owners plan for their business just as they would plan for their home or finances. Effective business succession planning ensures a seamless transition of ownership upon the potential occurrence of many different events, such as the business’s owner’s retirement, disability, or death. All businesses need a succession plan, but many business owners overlook it.

An important part of being a responsible business owner includes developing systems to help other people operate the company without you. A business succession plan clearly states who will take over specific roles, hopefully reducing any potential disputes between family members or key employees. If the business is sold after a transition event occurs, a comprehensive business succession plan will also clearly outline the sale price and purchase terms.

Here are four common business succession or exit strategies to consider:

Whether you are a sole proprietor or a business with multiple employees, understanding your options is crucial for making informed decisions that align with your business goals and desired family legacy.

Leaving Your Business to a Co-owner

Co-owners or partners can play an important role when you plan for anticipated or unexpected changes in the future. Selling to a person who is already involved in daily operations and committed to your company may be an easy way to ensure ongoing success. You can draft a buy-sell agreement for the co-owner that addresses different scenarios, such as a gradual sale for retirement or a quick transfer in a medical emergency or upon death.

It is important to ensure that your partner has enough funds to make the purchase. This can be done in a few different ways: One popular way is by securing term life insurance that can pay out at death or permanent life insurance that pays out at retirement or disability.¹ Another way is to include terms in your buy-sell agreement for the partner to pay over time.

Passing Your Business to a Family Member

Selling or transferring your business ownership to a child, grandchild, sibling, or other family member allows you to keep your business in your family. This is a great option if your children or other family members are already working for you. There are estate planning strategies available that may help lower your tax liability by transferring some of your business as a gift using your lifetime federal gift tax exemption. Federal gift taxes on amounts exceeding the exemption will apply, but once you transfer ownership, the ownership interest is no longer part of your estate.

If you have multiple relatives that you would like to take over the business, you need to provide clear instructions as to specific roles and responsibilities in your buy-sell agreement. You may also want to address in your estate plan how to equalize the inheritance of other family members who are not going to receive ownership in the business so that these family members do not think they are being disinherited or slighted just because they have not been involved in the business.

Transferring Ownership to a Key Employee

Selling an ownership interest to a trusted employee ensures that the business is run by someone who appreciates it and is familiar with the daily operations. Selling to a key employee also requires a buy-sell agreement to purchase your business at a predetermined retirement date or in the event of death or disability.

But similar to the discussion above about selling to a co-owner, employees do not always have cash on hand. You may consider seller financing, that is, lending money for the sale with a promissory note and allowing them to pay you back directly. Not only does the purchaser benefit from the opportunity to own your business, but you (or your family in the event of your death) also receive a steady stream of income from the principal and interest for the agreed-upon period. In the buy-sell agreement, you would establish a down payment amount and monthly payments with interest until the purchase is paid in full. Negotiate the terms and clearly document them in your succession plan.

This strategy can actually work with any buyer, including family members and competitors.

Selling to a Competitor

Depending on your business type and ownership structure, selling to an outside individual or competitor in the same industry may be the right move. As with any transition, you’ll need a buy-sell agreement in place. To position your business for a successful sale, consider putting an experienced manager in place, documenting your operating procedures, and organizing your financial reports. A buyer can more confidently evaluate the purchase and step into operations when you’ve laid this groundwork.

Additional Considerations

Estate planning covers two critical phases: planning for what happens while you’re alive but unable to make your own decisions, and planning for what happens after you’re gone. The earlier you start your business succession planning, the better prepared you’ll be for the unexpected. The decisions you make today while building and operating your business directly affect your options to sell or transition it later.

At White Law Practice, we help business owners across Georgia and Michigan develop estate plans that properly address the valuable things they own; including their businesses. If you already have an estate plan in place, we recommend reviewing it periodically to make sure it still reflects your current circumstances. Contact us today to schedule a consultation.

¹ Will Kenton, Succession Planning Basics: How it Works, Why It’s Important, Investopedia (Nov. 28, 2022),
https://www.investopedia.com/terms/s/succession-planning.asp