Ways of Funding Successful Succession Planning

In order to ensure a smooth transition of leadership once a business owner retires, becomes disabled, or unexpectedly passes away, all business owners should consider developing an effective succession plan designed to provide for the continued success of not only their business, but also those individuals responsible for managing the business in the future. As part of the succession planning process, one of the biggest issues commonly overlooked by business owners is funding. Accordingly, the purpose of this article is to explore the various funding options which may be available to business owners when developing their own succession plan.

Types of Funding for Succession Plans

There are a few possibilities for funding the succession planning process, and your chosen path depends on the nature of the intended successor.


When third parties or critical employees intend to take up the mantle after the current business owner steps away, the best option is to pay for the succession plan through funds held by the purchaser. If the funds are not on hand, this can be accomplished by taking out a loan through debt financing or opening an external line of credit.

Life insurance

Funding the succession planning process using the previous owner’s life insurance gives the buyer the liquidity needed to fund their purchase. This is the typical course of action for the following cases:

  • Unilateral successions, where a key employee or family member purchases your interest upon the occurrence of your death or disability.
  • Redemption agreements, in which an entity buys the entirety of any interest held by a departing owner (or their estate).
  • Cross-purchase agreements, which give remaining owner(s) the option (or requirement) to purchase any interest held by a departing owner.
  • Hybrid agreements, which combine elements of cross-purchase and redemption agreements.

Promissory Note

By signing a promissory note, crucial employees, co-owners, or an outside third party can agree to make payments on the business throughout the previous owner’s life, with the understanding that the remaining balance is canceled upon their passing.

Acquiring Documentation for Your Funding Method

However you choose to fund your succession planning, you’ll likely need to secure certain documents to provide employees and stakeholders with an established and legally-verified plan for the future.

Estate Planning Documents

Estate planning and succession planning often go hand-in-hand. If a relative is lined up to take over the family business, the previous owner or CEO will need to procure some or all of the following documents to validate the transfer of responsibility:

  • Last Will and Testament: As the legal foundation of any estate plan, the Last Will and Testament clearly designates rightful ownership of many aspects of the creator’s life once they pass — including their business. 
  • Revocable or Irrevocable Living Trust: Creating a trust allows a business owner to clarify during their lifetime how they want assets (including the business) distributed upon their passing. Revocable trusts can be changed over the course of the owner’s lifetime, while an irrevocable trust typically cannot be altered without the approval of all the trust’s beneficiaries or a court order. Consult an attorney to understand which option is best for your needs.
  • Durable Power of Attorney: This estate planning tool gives a specified party the right to handle the financial affairs of the business should the owner become incapacitated during their lifetime.

Legally-Binding Agreements

Regardless of who is chosen to take up responsibility and ownership of the business, you’ll likely need to procure some or all of these legal documents to validate the transfer of power:

  • Stockholders Agreement: It’s crucial that stockholders in your company are kept current on any major decisions about succession. A Stockholders Agreement/Shareholders Agreement is a contract that ensures these contributors to your organization’s livelihood are fully informed about plans for the future of the company’s leadership. 
  • Buy-Sell Agreement: Funded by a life insurance policy, buy-sell agreements or buyout agreements mitigate confusion among co-owners about company leadership in the event one of the co-owners passes or departs from the business.
  • Operating Agreement: Since there are less rigid legal stipulations involved in maintaining an LLC, Operating Agreements are needed to give all team members written clarification on internal regulations and provisions in a variety of circumstances — including the death or departure of a business owner.

Internal Continuation Plan

Finally, business owners intending to transfer legal and leadership responsibility to one or more employees must detail these plans within the organization’s Business Continuity Plan (BCP). As a comprehensive plan, the BCP lists specific strategies to enact in case of serious risks and challenges to normal operations — including the unanticipated absence of essential team members. Specifying the order of leadership internally will help employees and stakeholders in your company navigate this new reality.

Your Premier Financial Expert and Advisor

Jon Watson, Esq. and the other attorneys at Bagley & Rhody use their estate planning expertise to assist business owners before, throughout, and after the succession planning process. As a vital part of Chesapeake Growth Network’s well-rounded advisory team, Bagley & Rhody attorneys extend these resources to small businesses throughout Maryland’s Chesapeake Corridor region. With combined expertise ranging from legal counsel to financial planning and CPA services, Chesapeake Growth Network creates and implements strategies that meet both your individual needs and the needs of your business.

Never feel unprepared when it comes to your business’s legal and financial future — contact Chesapeake Growth Network today to learn more about our comprehensive services. And look out for the final installment in this series, which will explore strategies for successful cash flow management.

Share this article: [addtoany]