A successful business transition requires more than identifying a successor. It requires a plan for ownership, valuation, liquidity, taxes, financing, family dynamics, and the financial impact on the business continuity itself.
For many business owners, the most difficult question isn't who should take over? It is:
How do we financially make the transition work without putting the business, the owner, or the family at risk?
Dan Parrish Insurance Services works with business owners and their existing advisors to identify the financial gaps that can stand between today's business and tomorrow's transition—and develop insurance and financial strategies designed to address those gaps.
To help you achieve your goals, we start with the problem—not the product.
What Is Business Succession Planning?
Preparing for the future ownership and leadership of your business.
Business succession planning is the process of preparing for the future ownership and leadership of a privately held business, while positioning owners to harvest the financial benefits of years of hard work and effort.
A succession plan may involve:
- A transfer to children, other family members, or key people
- A sale to key employees or management
- A management buyout
- An ESOP
- A sale to a strategic or third-party financial buyer
- Staged transfer of ownership
- A combination of strategies
The right structure depends on the owner's time frame, the value of the business, the financial resources available to the successor, the financial needs of the seller, the needs of the family, and the future needs of the business.
A strong succession plan should consider who will own the business, how the transition will be funded, and the successful continuation of the business.
The Financial Gaps Can Be the Hardest Part
A plan in principle isn't a plan in practice.
Business owners often have a succession plan in principle, but the financial mechanics—including valuation and terms—have not been fully addressed for events such as:
- Retirement
- Dispute
- Death
- Disability
- Divorce
- Unexpected disruptions
Questions Business Owners Should Be Asking
Before implementing a succession strategy, consider:
- Who has the proven experience to own and operate the business when I'm no longer involved? The successor could be a family member, key employee, management team, ESOP, or outside buyer.
- How will a successful transition be funded? The successor may not have the personal liquidity or borrowing capacity necessary to complete the transaction without seller financing.
- What will the owner need to support their lifestyle on an after-tax basis? Do they need to stay involved after the sale? Will the company need to achieve certain earn-out goals to reach the full sale price? How can the deal be structured to minimize taxes? The business may represent a significant portion of the owner's net worth, so the succession strategy should consider how the owner's family will receive full value.
- How will my other children or heirs be treated fairly? Equally? If one child receives the business, other heirs may need to receive other assets or liquidity to create an equitable overall inheritance.
- Will the transition affect the company's working capital or borrowing capacity? A transaction that removes too much cash from the business or adds significant debt can affect the company's ability to operate and grow.
- Could the transition affect bonding capacity or my relationship with the bank? For companies that rely on surety bonding and/or credit lines, ownership changes and financial restructuring will have implications that should be considered early in the planning process.
- Will existing life insurance policies support the plan and are they designed for the purpose they are being asked to serve? Existing life insurance should be reviewed for ownership, beneficiaries, coverage amount, policy performance, funding, and the original purpose of the policy.
- Is your valuation stagnant? Is your valuation current and have you run the tax adjusted cash flow required under the buy-sell formula to determine if the business can support itself?
Succession Planning for Construction Companies
When the business depends on bonding capacity, succession planning gets more complicated.
For construction companies and contractors, a business transition is not simply about transferring ownership. The transition may also involve:
- Bonding capacity
- Working capital
- Bank relationships
- Surety requirements
- Company valuation
- Key employees
- Estate liquidity
A strategy that works on paper may create unintended consequences if it reduces the financial strength supporting the company's ability to obtain and maintain surety bonds.
We work with business owners and their CFOs, lenders, and surety professionals to identify the financial considerations that should be addressed as part of the succession process.
Where appropriate, we can also evaluate strategies designed to help protect working capital and preserve bonding capacity while addressing the owner's broader succession and liquidity objectives.
Learn more about Surety Bonding & Working Capital Protection.
Family Business Succession
What happens when one child runs the business and the others don't?
Family business succession can create a unique challenge.
The business may be the owner's most valuable asset, but dividing it equally among children may not make sense if not all children are involved in the company.
At the same time, leaving the entire business to one child can create an inheritance imbalance.
Equal and equitable are not always the same thing.
A succession strategy can consider the business interest alongside other assets and sources of liquidity to create a more equitable overall plan for the family—addressing estate equalization and avoiding the need to sell business interests.
Learn more about Family Harmony & Governance.
Funding the Succession Plan
A plan without funding may not be a plan yet.
One of the most overlooked aspects of succession planning is determining the terms of how the transition will actually be completed.
The Role of Life Insurance in Business Succession
Life insurance can provide liquidity at a time when a business or family may need it most.
Depending on how it is structured and the planning objective, life insurance may be considered for:
- Funding a buy-sell agreement
- Providing liquidity following the death of an owner
- Helping equalize inheritances
- Providing key-person protection
- Supporting an ownership transition
- Providing estate liquidity
- Funding certain business obligations
The policy itself is only one part of the strategy. Ownership, beneficiaries, policy design, funding, valuation, tax considerations, and the intended use of the proceeds all matter.
That is why we evaluate the insurance strategy within the context of the overall business and estate plan.
Learn more about Insurance & Executive Benefits Planning.
Working With Your Existing Advisors
Succession planning works best when the advisors are not working in silos.
Business succession planning can involve multiple professionals, each addressing a different part of the strategy. We facilitate and communicate, allowing each specialist to work in their subject area:
- CFOs
- CPAs
- Attorneys
- Estate Planning Advisors
- Lenders
- Surety Professionals
- ESOP Trustees
Our role is not to replace those professionals.
Our role is to help connect the insurance and financial components to the broader strategy being developed by the owner's advisory team.
When Should You Start Succession Planning?
Earlier than you think.
Business readiness and preparedness is different for every owner and every business. There is no need to wait until retirement is imminent. A succession plan may take years to implement.
Starting earlier provides more time to evaluate options, address gaps, obtain appropriate insurance coverage when needed, and coordinate the various professionals involved.
The best time to identify a succession-planning gap is before you need the solution.
Why Dan Parrish Insurance Services?
To help you achieve your goals, we start with the problem—not the product.
Business succession planning can involve significant financial, legal, tax, and family considerations.
Our role is to help identify where insurance and financial strategies may fit within that larger picture.
We work with business owners and their existing advisors to help connect the pieces and develop strategies designed around the actual problem—not simply around a particular insurance product.
Your business is more than an asset. It's part of you and your family's future legacy.
Planning for what comes next deserves the same level of attention you gave to building it.
Succession Is More Than a Transition
It's connecting the right pieces today to protect tomorrow.
- Business The business you've built
- Owner Your goals, your legacy, your transition
- Family Providing for the people who matter most
- Next Generation Preparing the next stewards of your legacy
The Planning Pieces That Work Together
- Ownership Structuring and transferring ownership to achieve your objectives.
- Liquidity Ensuring cash is available when your business or family needs it most.
- Valuation Understanding the true value of your business, now and in the future.
- Financing Aligning debt, capital structure, and financing to support today and tomorrow.
- Insurance Using insurance strategies to manage risk and create liquidity.
- Estate Coordinating your estate plan with your business transition plan.
- Taxes Minimizing tax impact across income, transfer, and the estate.
- Surety Protecting bonding capacity, working capital, and business strength.
Integrated planning. Connected outcomes. Pulling together the key planning considerations that impact your business, your family, and your future.
