Insurance smooths transitions

Strategic advice

Business transitions can often provide the key to unlocking a company’s value. Transitions, including mergers, leadership changes, equity investments, or business sales can monetize your business’s assets and future earnings to generate the cash that fuels the next phase of your life.


You can prepare for a transition by being alert to the business risks that can threaten your business value. Insurance and insurance-funded benefits are powerful, yet underutilized, tools for addressing risks and safeguarding your business’s value during a transition.

“When it comes to transitions, the expectation is that risks are actively managed and covered. There’s really no room for surprises or unfunded events.”

Duncan Moseley, managing director, Business Transition Advisory Group

Value creation to value protection

Middle-market business leaders are often skilled at growing a business or handling family business issues but are rarely experts at risk mitigation. Ryan Clodfelter, regional insurance strategist at Truist Life Insurance Services, explains, “Delicate events in a business’s lifecycle – like transitions – have very specialized risks, and many leaders don’t have a risk analysis mindset or experience dealing with these infrequent events.”

Businesses miss the opportunity to use insurance and benefits to take risks off the table and avoid business disruption. In many cases, a bit of insurance can be a small price to pay for continuity and value protection through a transition. While there’re plenty of risks to consider in planning for a transition, three top ones include: unplanned transitions, retention of vital managers and staff, and funding payouts.

3 risk considerations for transition planning

Unplanned transitions. Transitions are common for middle-market businesses. Seventy-seven percent of businesses either experienced one in the past five years or expect one in the next five.Disclosure 1 The key players in a business - those who create, grow, and sustain the company’s value - can die or become incapacitated and trigger a transition.

Losing a key player exposes a company to operational risks. The business can suffer without that person’s talents. If they’re truly “key” to the organization, business disruption can magnify the loss and threaten the business’s value. Productivity can drop as employees experience shock and grief. Shifting responsibilities and executive search to fill the gap can sap momentum.

A loss can affect corporate governance. A surviving spouse or partner might be thrust into a more active role. Moseley says, “A company can suddenly find itself with a partner they never chose and who may not even know the business. Ownership discord and divergent goals are a recipe for disaster in a closely held business trying to recover from a loss.”

And the surviving family may need to secure cash to replace the deceased’s income or to pay estate taxes. And it can put pressure on the company to pay dividends or buy the family’s ownership. It can trigger the search for an investor or buyer. In each of these situations, key person insurance can provide funds to make it through the unplanned transition. Insurance can fund share buyout payments to the surviving family (protecting against the potential loss in value due to the passing of the key-employee owner). Cash from insurance can offset loss in company value or cover extra business disruption or unplanned transition expenses.

Retaining vital managers and staff. A strong management team protects a business’s ongoing value post-transition. Most buyers will look for assurance that the management team will stay in place, particularly if the owner’s looking to transition out. Russell Sanders, managing director, Business Transition Advisory Group, explains:

“A company’s value rests with its people. Value is based on a business’s continued generation of results and earnings, and it’s the staff and management running the business who can react to the economic shocks, competitor initiatives, and customer needs to keep results coming.”

Russell Sanders, managing director, Business Transition Advisory Group

Holding onto valuable managers and employees during a transition can depend on carefully constructed benefit plans to retain them. Executive benefits including restricted shares, phantom stock, and non-qualified deferred compensation and retirement plans can offer the upside that keeps key staff engaged during a sale or major investment.

“Ninety-one percent of large employers use supplemental executive retirement plans. 70% of these discriminatory, customized plans are used to recruit and keep key players. This is a terrific way to retain talent through a transition using upside and compensation as an incentive and without giving up equity.”Disclosure 2

Ryan Clodfelter - regional insurance strategist, Truist Life Insurance Services

Funding payouts. Funding some or all of a buyout at transition provides cash for the departing owner to move on and can make for a clean break. Insurance can provide the funding discipline and payout to let you transition when you’re ready.

Law firms are a case in point for using insurance to creatively rethink transitions. Traditionally, a junior partner bought out a departing senior partner. But, in today’s world, junior partners are reticent to make a lifetime commitment to a firm or want more flexibility to match a spouse or partner’s career. Using insurance, a firm can structure a sinking fund to buy out the departing partners. This secures funds and guarantees that senior partners have a path out (and don’t block the way for junior partners.)

Insurance-funded payouts work for a variety of professional practices. By setting up a funded exit plan, practices can ease the financial burden of an exiting professional, without heavily taxing new ones.

Sometimes business partners want to leave at different times. But taking on debt or using future cash flow to buy out an exiting partner can starve the business of funds to run the business. Company-owned life insurance can be used to create a sinking fund for a potential buy-out while also providing a death benefit. The insurance creates an attractive pre-transition balance sheet asset—and provides flexibility around transition timing.

No surprises

Planning drives successful transitions. Often buyers, particularly strategic acquirers and private equity investors, expect that you’ve covered key persons and set up benefit plans to retain managers through a transition. Discovering otherwise can slow a deal.

The same expectation goes for any significant business risks. When a buyer finds the first defect in your business, they assume there are others to be uncovered. Unless you have the patience for due diligence to drag on, you’ll want to have everything buttoned up.

Make insurance part of your transition planning.

Talk to your relationship manager or wealth advisor for referral to an insurance strategist to make sure insurance plays a part in your transition planning.