Search Site
Menu
Four Ways to Fund your Business Succession Plan

Four Ways to Fund your Business Succession Plan

An important part to a business succession plan is considering how to fund your succession plan.  After all, the most intricate and thoroughly considered succession plan will fail if it lacks the funds necessary it execute the plan.  The method of planning will depend on a multitude of factors but ideally a business owner will pick a funding mechanism that will take advantage of current business strengths in order to (a) compensate for expected weaknesses that arise during the transfer and/or (b) utilize current provisions under the law (e.g. tax code) to create an advantage for the business.

Business owners use a variety of funding technics to navigate these issues, such as:

  1. Cash Sinking Fund: Stated colloquially simply, this method could be called “saving for a rainy day.”  In essence, this method of funding involves the process of setting aside funds on a regular basis in order to build up the cash reserves necessary to carry the company through the succession plan.  An issue that arises with this type of financing is the failure to fund.  For instance, the business (or owners) may fail to put aside sufficient funds or the funds may be needed sooner than expected.
  2. Installment Payments: This is essentially seller financing.  Under this plan the owner that is selling their interest in the company (or that owner’s estate in the case of death) agrees to accept payments from the purchaser over time.  A natural consequence of stretching payments over time is that it may cause liquidity issues for the seller early on when the need for cash is usually the greatest.
  3. 3rd Party Lender: Some succession plans address the liquidity issues arising from installment plans by utilizing third-party financing.  3rd Party financing will allow the buyer to provide the seller with an immediate influx of cash while still deferring the seller’s payments over time.  An issue that can arise with 3rd party financing is finding a willing lender.  This difficulty usually presents itself when the lender determines that it is being asked to lend funds for the purchase of a company that is vulnerable (e.g. if the company is losing an owner that contributed to the company’s past success).
  1. Insurance: Insurance products can be utilized to allow the business to fund business succession through the payment of premiums now for a source of liquid funding later.  An issue that arises with insurance funding is that it requires careful consideration to obtain the right policy from the right insurer and can, in some cases, involve some significant “tax traps” depending on the structure of your succession plan.

Each funding method has strengths and weaknesses.  No funding mechanism is correct for every business or every succession plan.  Accordingly, it is important to identify your goals and discuss them with your planning professional.

Leave a Reply

Your email address will not be published. Required fields are marked *

Contact a Dedicated Texas Business Lawyer To Schedule a Consultation
Call 281-367-1222 or contact us online to schedule a meeting.

Strong In Action

  • Spring 2019

    The Strong Firm represents borrower in $42.3 million HUD construction loan for multifamily real estate development in Walton County, Florida.

    Read More
  • Spring 2019

    The Strong Firm acts as legal counsel for borrower in $32.1 million HUD construction loan for multifamily real estate development in Conroe, Texas.

    Read More
  • Spring 2019

    The Strong Firm aids borrower in $31.7 million HUD construction loan for multifamily real estate development in Nueces County, Texas.

    Read More
  • Spring 2019

    The Strong Firm represents borrower in the refinancing of a $3.57 million commercial mortgage-backed security for a commercial office facility in Montgomery County, Texas.

    Read More
  1. 1
  2. 2
  3. 3
  4. 4
  5. 5
  • Peer Rated 2019 Award

Recent Blog Posts

2019 Legislative Update – Texas POA Laws

In odd numbered years, Texas property owners associations (POAs) must consider any new laws affecting POAs that became effective following the Texas legislative session earlier that year. For 2019, a few such laws recently went into effect specific to residential POAs (but excluding condominium associations). HOUSE BILL 234 – Protection of
Read More
2019 Legislative Update – Texas POA Laws

Wrapping Up a Decade: Meaningful New Year’s Resolutions

As 2019 comes to a close, it’s a good opportunity to reflect on what we’ve accomplished and make resolutions for what we hope to do in 2020. I have never been a fan of New Year’s resolutions as they often seem like short-term, immeasurable goals. Things like “I am going
Read More
Wrapping Up a Decade: Meaningful New Year’s Resolutions

Not Worth the Paper It’s Written On

We have all heard the saying that something is “not worth the paper it is written on.”  This is usually said about a contract that is unenforceable or even if enforceable, it may have no value because the party has no ability to pay or perform under the contract.  Many
Read More
Not Worth the Paper It’s Written On

“So…What Happens to My Bitcoin When I Die?” Modern Estate Planning for Digital Assets and Cryptocurrencies

Millennials have complicated everything. Socializing in person wasn’t enough, so they created Facebook. Dollars weren’t enough, so they created Bitcoin. Every new app, technology or cryptocurrency brings with it more uncertainty legal uncertainty around these digital assets. Are they currency? Are they property? Can they be gifted? Can they be
Read More
“So…What Happens to My Bitcoin When I Die?” Modern Estate Planning for Digital Assets and Cryptocurrencies
  • Video Vault


    Watch videos done by our legal team to gain a better understanding of your legal needs. Our lawyers give video insight into areas such as Real Estate, Business Law, Mergers & Acquisitions and much more.

Pay Retainer Online

Use our easy-to-use and secure online payment feature.
We accept all major credit cards.

Pay Your Retainer

Contact us

Quick Contact Form