5 types of succession plans

A successful business succession plan outlines who, how and when your business will pass to another person or company when you retire, are disabled, or pass away. Most plans involve a buy-sell agreement, secured with life insurance or a loan. The five most common types of business succession plans are:

1. Selling your business to a co-owner

If the business was founded with just two partners, the surviving partner could agree to purchase the other’s interest if one owner retires, dies, or becomes disabled.

2. Passing your business on to an heir

Popular with business owners who have children or family members who work in the organization, this type of agreement needs proper planning, so as not to stir up family conflict.

3. Selling your business to a key employee

Choosing a key employee to take over can help you ensure that your business will be run by someone who is experienced, respected by your staff, and knows the essential procedures and relationships.

4. Selling your business to an outside party

Depending on the type of business you have, if there isn’t an obvious successor, you may look to the community to sell your company – perhaps to a local entrepreneur or a competitor.

5. Selling your shares back to the company

If your company has multiple owners, establishing an “entity purchase” or “stock redemption” plan will enable the surviving owners to keep control of the business by purchasing the shares of the owner who retires, passes away or becomes disabled.

In all these cases, life insurance can be used effectively to ensure that funds are available when it’s time for the business to pass from one owner to another.