How to Fund a Business Succession Plan

With the daily and weekly cash flow issues your business faces, it may seem that funding a business succession plan is challenging. Some companies may be able to fund their succession plans out of their own pockets, although this may require careful planning. But when the process requires a cash payout to existing shareholders that is more than a company has available, it has to turn to alternate funding sources.

Succession Planning Strategies

Businesses in this situation find that there are two basic financing options for funding their succession plans: debt and equity. 

Debt is simply a loan. You get a lump sum for funding your succession plan, and you pay it back with interest over a period of time.

Equity financing involves the sale of a share of ownership in the company to another party.

Business Succession Planning: Advantages of Debt and Equity Strategies

Both of these forms of financing have their advantages, and one of them may suit your situation better than the other. As you read the lists of advantages for each method, consider your own business and how it meshes with the two options.

Advantages of Debt Financing

• It’s finite. Once the business has paid the lender, the obligations have ended, and the owner retains control of the business.
• Interest payments are tax deductible. If you’re looking for a way to reduce your taxes, debt financing may work to your advantage. Interest payments on corporate debt are usually tax deductible, which can lower your net borrowing costs.
• Interest rates are low. When interest rates are low, debt financing is an attractive option. Inflation may make the effective costs even lower since your business pays off the debt in future dollars.

Advantages of Equity Financing

• No repayments are necessary. With equity financing, money received by the business stays with the business.
• It may provide cash from outside investors. Multiple classes of shares (both voting and non-voting) allow companies the possibility of receiving an injection of cash from outside investors without giving up management control.
• It doesn’t require as many resources. Some businesses simply don’t have the capacity to take on more debt. In cases like this, equity financing is the most viable option.

Succession Planning Model

Creating the most appropriate capital structure can help your business to weather storms encountered before, during, and after the succession. For assistance with your own succession planning model, contact us at Altus Financial.

For more information of how to create an effective succession plan, download your free copy of our popular Succession Planning 101 eGuide: