Succession Planning Part II Selling to Key Managers, Partners or Employees

Succession Planning Part II Selling to Key Managers, Partners or Employees

“Plans are nothing; planning is everything”

Dwight D. Eisenhower


In our last issue we talked about the framework and options to transition your business to another family member or members. In this issue we would like to discuss another option, that of selling to a partner, key managers or employees, when your ability to keep it in the family is not a viable option.



The first step in creating a succession plan involving a business sale to partner(s), management or employees is to value the business. This can be as simple as an agreement between partners as to the value, however it is best accomplished by hiring a certified business appraiser or a CPA. Whichever way one chooses it is best to revisit the valuation as the business grows and changes over time.


Life Insurance

Life insurance policies are the most frequently used vehicles to ensure the smoothest transition in the unfortunate case of a partner’s untimely death. Each partner would purchase life insurance on the other partners in an amount equal to each partner’s share of the business based on the agreed upon valuation. If one partner passes away, the remaining partners would purchase the shares from the deceased partner’s estate with the proceeds from the policies. This could also be done with the company buying the policies and purchasing the shares, then distributing them on a pro-rata basis to the remaining partners.


Buy–Sell Agreements

Also known as Cross Purchase Agreements, Buy/Sell Agreements are agreements between shareholders or partners whereby each shareholder agrees to purchase the shares of the others upon some trigger event. Unlike Life Insurance a Buy/Sell Agreement has a broader set of uses than just death. They can be used for retirement, disability, relocation or simple exit from the business by one or more shareholder. These agreements can be funded with cash, debt, letter of credit or sinking fund. Be sure to consult with your tax attorney and CPA to determine the most efficient method.


Employee or Management Buyout

Management or Employee buyouts are important strategies to keep the business operating soundly and they have the added benefit of it remaining closely held. Current management knows the business well and would be able to handle the ownership transition more efficiently than an outsider.  In this scenario the management team buys the business from the current owner(s) using a combination of personal, and or company equity and debt. Many Management buyouts also include the use of an Employee Stock Ownership Plan or ESOP, which could have certain tax advantages in some situations.




There are many ways to implement the sale of all or a partner/shareholder ownership in a business. We have discussed some of the most popular options in this issue. For a more in-depth discussion of the many options discussed here and others, or if you are looking toward the possible sale of your business, please do not hesitate to contact us by phone (732) 741-7024 or email mvacca@tworld.comand visit our website