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Practice Management > Building Your Business

How to Start the Succession Planning Conversation

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As insurance providers, you are aware of the fact that the majority of your business-owning clients are ignoring the reality that at some point in time they will have to relinquish management and ownership of the enterprise that they have created or inherited. You have probably had a hundred interviews that touched on this topic but generated no action. Procrastination is rampant. It is easy to accept this behavior and simply respond with products that serve the client’s immediate coverage requirements. 

I am of the opinion that this is a mistake. It is a disservice to the client and to yourself. Your client’s exit is inevitable. Preparation for the inevitable is the core of your service to the community. Additionally, accepting a client’s state of denial is a loss of revenue opportunity for you.

You build client relationships around conversations. This practice is most effective when you are deliberate about the direction that the conversation is going to take. The Business Exit conversation has more components than most other topics, and consequently requires more thought and rehearsal. 

You can start by presenting a document that summarizes the realities of the succession expectations of typical small business owners.  This document should refer to the need to protect the current equity value in the company, the need for time to implement an exit strategy, the benefit of knowing the valuation of their company and the risk of loss of wealth. 

This is an emotional conversation. As an owner contemplates relinquishing control and giving up the enterprise that provides for their family and establishes their prestige in the community, you will need to be prepared to respond. Your objective is to initiate a process of rational situation assessment, lifestyle review and commitment to a plan of action. 

Why would you undertake this assignment? Because it identifies unprotected risk in the client’s portfolio and you offer protection from risks.

Evaluating the risks

The first risk is to continue in the function of the company in the event of death or disability of the principal. Your conversation could lead with the question, “If you died, who would own and run the company, and would they provide for your family?” This leads to consideration of equity ownership following a demise of the principal, a shareholder or a key employee.  You can offer to manage that risk in the form of life insurance that underpins Buy-Sell agreements.  Ask your client, “What predictable threats does the company face? The loss of a key employee? A business interruption?” Your offering would include key-man and business interruption insurance.

Another conversation could begin with the questions, “Do you have a vision for your lifestyle at some time after owning this business? Have you calculated what funds you would need to live that life? Is there enough value in the business to fund that dream? How would you use the funds from the sale of the company to sustain that lifestyle?” Your support may include consideration of annuity products.

Most business owners expect to arrange a family business succession or sale to employees.  In either case risk mitigation is necessary, and if you are at the hub of the discussion, you have an introduction to the next generation in the family, or a group of employees.

Remember: Business owners have inflated expectations of the value of their companies. They also expect that the funds from the sale of the company will support their retirement. Only well-prepared companies will secure a fair valuation at sale, and only well-prepared owners will be able to retire in a way that meets their aspirations. Continuity and succession planning are essential and you have the opportunity to participate by beginning the conversation.

For more on succession planning, see:

Succession Planning, Step-by-Step

Exiting Your Practice, Stage Left

A Day in the Life: Father-Daughter Financial Superheroes


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