How to formalize the transition and put funding in place
About Nationwide Retirement Institute Retirement savings & income
Health care costs & longevity
Legacy, estate & wealth transfer
Business growth, protection & transfer
Market & news
About Nationwide Retirement Institute
Succession planning stage 3: Implement the plan
Key aspects of implementation:
|
|
Succession planning helps business owners protect what they’ve built and pass it on according to their vision. It’s a process that involves much more than choosing a successor. It requires a thoughtful, step-by-step approach to ensure a smooth, secure transition.
In stage 1 and stage 2 of this series, we discussed the discovery and planning phases: identifying the vision and then turning that vision into a concrete plan. The next stage is implementation, during which documents are signed, funding mechanisms are selected, and the transition structure is made legally and financially real.
For financial professionals, stage 3 offers an opportunity to bring structure, clarity and confidence to what can otherwise be an overwhelming process. It’s also a critical moment to ensure that the plan works under pressure — whether the transition happens next year or (unexpectedly) the next day.
Put the buy/sell agreement in writing
At this point, the buy/sell agreement should be finalized. This legal contract outlines how and when ownership will transfer, under what circumstances and at what price. Without it, even the most well-considered succession strategy may fall apart.
A strong buy/sell agreement should define:
Triggering events such as death, disability, retirement or voluntary exit
Valuation method, which may be based on a fixed price, a third-party appraisal or a formula
Payment terms, including whether the buyout will happen through a lump sum, installment payments, life insurance or other funding sources
This agreement should be tailored to the business’s structure and ownership. In closely held businesses — especially those with multiple partners or family members involved — a formal agreement can help prevent confusion and conflict. In fact, agreements between co-owners are among the most common and practical approaches, often serving as the foundation for long-term continuity.
Coordinate with other documents
A buy/sell agreement doesn’t exist in isolation. It needs to work in tandem with:
Estate planning documents to ensure that the owner's wishes are followed and their family is protected
Business governing documents, such as operating agreements or shareholder agreements, which should reflect the terms of the buy/sell plan
A business continuity plan to address operational decisions if the owner exits unexpectedly
Encourage clients to work with their legal team to ensure consistency across all documents. This reduces the risk of conflicting instructions and helps preserve business value during a transition.
Ensure that the succession plan is funded
Even a well-drafted agreement can fail if the funding falls short. The plan must clearly outline how the successor — or another buyer — will pay for the business. Without proper funding, agreements can fail, creating strain for successors and leaving families without needed liquidity.
Common funding strategies:
Life insurance:
Provides immediate liquidity at death, ensuring that the business and family are protected. The policy’s cash value can also create flexibility while the owner is living.
Installment payments:
Allow successors to spread the cost over time. This makes ownership more affordable but introduces risk if business performance declines.
Other options to consider:
Sinking fund:
Regular contributions build a pool of money for a future buyout, though sudden events may leave it unfunded.
Outside loan:
Bank financing can provide capital but often requires collateral and depends on the business's income to repay.
Cash on hand:
It’s rare, but a successor with enough liquidity may purchase outright.
Most buy/sell agreements in closely held businesses are structured between existing co-owners and funded with life insurance. This approach provides liquidity for the departing owner’s family while ensuring that the business remains stable with the remaining partners. Installment arrangements are also common, with other methods used less frequently depending on the situation.
What if things don’t go according to plan?
Even with documents in place, transitions don’t always unfold as expected. An owner’s sudden death, disability or withdrawal can trigger the agreement years ahead of schedule. That’s why implementation isn’t just about paperwork; it’s about testing whether the plan is practical under pressure. Financial professionals can add value by stress-testing agreements, confirming funding sources, and ensuring that family members and partners know what steps to take if the unexpected occurs.
Start the ownership transition process
The implementation stage sets the wheels in motion. This includes confirming a timeline, documenting milestones, and preparing the business to operate without the current owner. For financial professionals, this is a key moment to step in as a long-term partner, supporting both the exiting owner and the incoming successor with guidance on financial strategy, tax planning, insurance needs and ongoing reviews.
Up next is Stage 4: Review
The plan should be revisited regularly to ensure that it continues to meet the needs of the business, even if circumstances change.
Want to print this article?
Nationwide and its representatives do not give legal or tax advice. An attorney or tax advisor should be consulted for answers to specific questions.