Strategies For Developing A Successful Succession Plan

Successful financial professionals work hard to build their practices and develop trusting relationships with clients, but too few have considered a succession plan for their own business.

According to a recent LIMRA study, 50 percent of financial professionals are not prepared for an unplanned exit from their business, yet 85 percent of clients expect their financial professional to “fulfill their obligation to me and always be there for me.”¹

By planning ahead for your business, you can maximize your legacy and help protect those you serve every day. Here are some suggestions to help you get started.

Identify a successor
There isn’t any “one-size-fits-all” model for business succession planning, but most successful strategies involve finding and training a successor. You may even identify multiple people as potential successors. Some important factors to consider:

  • Experience and/or age.
  • Existing market base and productivity.
  • Ethics and values.
  • Management style.
  • Ability to finance a purchase (if desired).

Once you have identified your successor(s) and believe they will be the right fit, it’s always a good idea to begin working together for a period of time, often five or more years. This will help smooth out the experience of your clients when you transition out of your active role.

First things first
Involve your CPA and a qualified estate planning attorney at the beginning of the succession planning process. For example, your tax and legal advisors may recommend establishing your business as a formal entity. Business entity structures help make transition and succession planning possible and they can often provide tax and creditor protection advantages.

You will also want to involve the organizations you do business with early in the planning process. For example, your renewals and other compensation elements may or may not be transferable as part of a succession plan. Some companies may recommend a corporate contract for a more streamlined transition. In any case, it is important to communicate with these organizations as you plan for the future of your business.

Ownership time horizon
The next step is to consider when and how you want to exit your business. Just as “Rome wasn’t built in a day,” your succession plan likely won’t be either.

For some financial professionals it may be sufficient to implement a succession plan that protects your loved ones from emergencies, such as your unexpected disability or death. A well-rounded succession plan might also include a strategy for your retirement, which may be an all-at-once departure or a gradual transition over time.

Here are a few different time frames to consider for your business succession planning:

  • Preparing for the future: Death, disability or retirement.
  • Retirement: A gradual transition.
  • Retirement: An immediate departure.

Preparing for the future (death, disability or retirement)
There are three primary ways you can prepare a business succession plan for your future death, disability or retirement: A buy/sell agreement, a will or trust, or a lifetime gifting program.

Financial professionals who want to realize their business value by sale should consider a properly drafted and adequately funded buy/sell arrangement. Similar to a last will and testament, a buy/sell agreement controls the passing of your business interest upon a triggering event, such as death, disability, retirement, bankruptcy, divorce or loss of professional license.

One of the critical steps in drafting a buy/sell agreement will be deciding how to value your business. Since there isn’t any one method guaranteed to be free from tax challenges, you should consult a professional who specializes in this field.

Regardless of the value you choose, your buy/sell agreement should contain provisions for reviewing the price or formula over time to account for changing circumstances.

After setting a value for your business and entering into a written buy/sell agreement, you will want to consider how the purchase will be funded. Life insurance is often the ideal funding mechanism for a buy/sell agreement triggered at death of a business owner. It is often the most affordable option when compared to a bank loan, a sinking fund or an installment sale, and the death benefit provides liquidity precisely when the need arises—upon the death of a business owner.

For some financial professionals it may seem simple and very practical to leave your business by will or trust to your heirs who are already active in the business. However, consider that state licensing requirements, competing family members, probate proceedings (where applicable), delays and liquidity needs may create a perfect storm just large enough for your customers to take their business elsewhere. Regardless, if you decide to go this route, it tends to work best if you do not have a taxable estate, if you can wait until your death to transfer your agency and if you intend to provide liquidity for your surviving spouse and/or dependents through other means such as life insurance.

Owners of family businesses–especially those owned by individuals with sizeable, taxable estates–might consider gifting shares of their business to younger generations over time. A lifetime gifting program can be effective when the family member is active in the business. Working with your attorney and tax professional you may be able to use your annual gift tax exclusion amount to minimize or even eliminate gift and estate taxes owed on the transfer.

However, you will want to consider the potentially negative impact of lifetime gifts on the recipient’s tax basis. Tax basis is important if your receiving family member intends to sell the business at a later date.

Alternatively, you could bonus blocks of ownership in the business to employees, perhaps as part of an incentive program, resulting in potential tax savings for the business and taxable income to the employee. This involves a separate tax regime than gifting, but it can accomplish the same result: Transferring your agency during your lifetime without requiring your successor to provide the capital needed for a purchase.

A gradual transition to retirement
Many successful financial professionals choose to scale back their hours and gradually pass operations to a successor. The right transition plan can build flexibility, allowing you to gradually hand off day-to-day operations and/or management.

If this is your vision, you might consider a hybrid plan combining several strategies, such as:

  • Initiate a sale over a period of time: Allows the buyer to incrementally purchase a definitive amount of ownership each year.
  • Transfer your agency now, but continue working: Stay on as a consultant and producer, working the hours and cases you choose and continuing to make introductions for your successor.
  • Develop a bonus incentive program: Gradually transfer ownership shares in your business to selected employees as a performance bonus over time.
  • Sell a block of your business to a successor (e.g., your benefits or securities business): Retain the aspects of your business you enjoy most.

An immediate retirement
If you choose to retire completely, you could transfer your business by sale or by a lifetime gift.

A sale could be either a one-time purchase with payment in full or in installments, or a series of purchases over time. A lifetime gift could be a one-time gift or a series of gifts. For example, if you have a son or daughter working in your business, you may consider selling or gifting the business to him or her; the choice often depends on your liquidity needs in retirement. You should work with your tax and legal advisors to structure the transaction.

You should always work with your CPA and a qualified estate planning attorney when creating a business succession plan. By taking some of these recommendations in mind to plan ahead, you can enable the future success of your business and your transition to retirement.

LIMRA Study, “Why Financial Professionals Need to Plan for Tomorrow” (2016)

Jenna R. Washatka, JJD, CLU, ChFC is an advanced planning consultant with Ohio National Financial Services in Cincinnati, OH. She uses her background as an estate planning attorney to provide technical consultation and case design with respect to estate planning, business insurance and individual retirement planning. At Ohio National, Washatka enjoys focusing on the financial side of estate planning with financial professionals across the country.

Washatka can be reached via telephone at 513-794-7537. Email: