Failing to Plan Is Planning to Fail – Three Business Succession Case Studies
By Victor Levy, Dylan Elgart, and Mason Clatterbuck
Failing to Plan Is Planning to Fail – Three Business Succession Case Studies[i]
Planning for the proper succession of a business is one of the most important and often overlooked areas in all of financial planning. The Deloitte 2026 Family Business Succession Survey found that while 85% of family business leaders recognize succession planning as critical to their long-term success, only 57% have established a formal succession plan and less than one-quarter are actively implementing one, highlighting a significant gap between intention and action.[ii] Establishing a business succession plan requires creativity and thoughtful analysis. What follows are three case studies identifying different types of businesses with different succession goals. Identifying the issues and coming up with a sustainable plan requires an understanding of both tax exposures as well as what is in the best interest of the business.
Case Study #1: Family Business Succession Planning
Thirty-five years ago, two brothers, Stephen and Harry, started a jewelry design company called Jacobson Designs LLC, located in Jenkintown, PA. As their business grew, they hired designers, sales representatives, jewelry repair specialists and consignment specialists for estate sales. Their reputation was strong: they were known for elegant pieces, a trustworthy and kind staff and careful craftsmanship. Over the course of three decades, the company grew into thirty-eight locations and employed 265 people, and the firm was valued at $80 million. Stephen and Harry were equal owners.
As the brothers began to think about their retirement, they considered the continuity of the business. Notably, each brother was married but neither of their spouses worked in the company. Also, two of Stephen’s three children, Sarah and Samuel, worked for the company. Stephen’s youngest child, Sophia, was a real estate agent. Harry had no children. Their organizational chart looked like this:
As Stephen and Harry considered their future, they thought about estate and business succession planning. Both owners agreed that the business should remain within the family. Since Harry had no children of his own, his attention was directed to his brother’s children as the natural heirs of the business. Harry preferred only Sarah to run the business because she was the more “natural leader.” However, they both agreed that all three of the children should ultimately share in the ownership in some way.
Question: What issues should Stephen and Harry consider for their succession plan?
Harry’s Goals: He wanted to make certain that his wife would receive ongoing cash flow for life from his interest in the business and that his estate, which would be held for the benefit of his wife, would at his wife’s later death be passed to his brother or his brother’s descendants with minimal estate and transfer taxes.
Tax Considerations for Harry’s Death: Harry’s estate consisted of a modest home worth $1M, a retirement account valued at $10M, and the ownership of his share of the business valued at $40M. Given that he had a taxable estate, he needed to do tax planning. The family considered that they could obtain an appraisal for a discounted valuation of his interests in the LLC, a position supported by lack of marketability (based on the provisions of the LLC operating agreement) and lack of majority ownership of the shares. Also, moving assets outside of Harry’s taxable estate was incorporated into the plan.
Recapitalization of Company Shares: The first idea presented by their business advisor was to recapitalize the company into voting and non-voting shares. This approach would lead to an opportunity to discount the shares for lack of marketability and lack of control. The valuation specialist hired prepared a report which discounted the shares by 30%.
Planning With the Use of Spousal Lifetime Access Trusts (“SLATs”): Harry and his wife liked the idea of SLATs as a way to hold the non-voting shares for the benefit of each of them, which provided ample cash flow to support their retirement goals. The 30% discount on the value of the shares enabled a split gift to be made of the $40M LLC at a value of $28M, using most of Harry and his wife’s $30M exemption. Half of the non-voting shares were gifted from Harry to his wife, and then over time, shares gifted by both Harry and his wife into SLATs (if these transfers were all part of one plan, there is a risk that the reciprocal trust doctrine would invalidate the planning). By moving the shares outside of their estates, any appreciation was removed from estate and inheritance taxes. At the death of each beneficiary, the respective trust would continue for the benefit of Stephen, or if he predeceased, for Stephen’s descendants.
Loss of Cash Flow upon First Death: Harry and his wife wanted to be sure that their cash flow would be maintained after the first passing, when indirect access from that spouse to the SLAT would no longer be available. A combination of income from the IRA ($10M at 4% withdrawal rate) and from the remaining 24.5% share of the non-voting shares was considered sufficient such that life insurance was not needed.
1% Voting Shares: Harry would retain the 1% voting share, leaving it outright to his brother, Stephen, who could then run the enterprise upon Harry’s passing.
The next step was to address the transfer of the voting shares to the next generation successor, Harry’s niece Sarah. Sarah would enter into a buy-sell agreement to buy the voting shares upon the death of the second-to-die of Stephen and Harry. A survivorship life insurance policy, insuring Stephen and Harry, was implemented to create the liquidity for the purchase from the estate of Harry or Stephen, whomever was the last to pass.
Stephen’s Goal: He would like to take advantage of the tax efficiency that his brother accomplished. In addition to the tax planning, Stephen was focused on:
Making sure his wife is protected and has ongoing cash flow following his retirement
Maintaining control of the company is a key goal
Planning for his daughter Sarah to take over the business as the leader, while making sure to treat all his children equally.
Stephen’s Plan: Like his brother, Stephen and his wife will pursue complimentary SLATs to own the non-voting shares in the company. Unlike his brother’s trust, Stephen and his wife’s trusts are for the benefit of each other and then to their children and more remote descendants.
Conclusions: With this structure, the business would largely exist outside of their respective taxable estates, along with the appreciation after the date of transfers. Furthermore, since the SLATs were set up as grantor trusts, the income would flow back to Stephen’s and Harry’s tax returns, allowing more value to accrue in the trusts.
The insurance planning provided the source of funds for Sarah to purchase the voting shares to run the company going forward; the non-voting shares held in trust allowed each of the three children to be equal non-voting shareholders, further fulfilling Stephen’s wishes.
A potential downside of the plan is a loss of stepped-up basis on the assets gifted to the SLATs. This was a decision to trade a 20% capital gains tax against a 40% estate tax.
As an observation, it is important that Sarah and Samuel (active members in the business) take reasonable salaries from the business so as not to drain profit distributions to the detriment of the one sibling that is not in the business. This point should be written into the by-laws of the company, and the family would be well served to appoint an independent successor trustee to make certain that the salary levels are properly maintained.
Stephen and Harry’s plan for unexpected death or disability protected their business over the years and provided a means to transfer Jacobson Designs LLC to the next generation. With the help of their advisor, Stephen and Harry were able to continue to benefit from the business while creating a plan that gave fair treatment to all three children in the future.
Case Study # 2: Unrelated Parties Case Study
At age 65, Gerald Johnson dedicated the last 35 years to building one of the region’s most respected business law firms. Many of the firm’s largest clients worked directly with Gerald, and these long-lasting relationships contributed significantly to the firm's success. Retirement was no longer a distant contemplation for Gerald, particularly as health concerns became a more significant consideration.
Founded in 1991, Johnson, Cole, & Smith LLP began as a two-lawyer practice focusing on middle-market businesses and closely held companies. The firm expanded its services to include mergers and acquisitions, employment law, commercial real estate and business succession planning. Eventually, the firm employed 45 attorneys while generating annual revenue exceeding $30 million. While there were several senior attorneys that handled important clients, Gerald Johnson remained the sole owner, public face and brought in the highest revenue for Johnson, Cole, & Smith LLP.
Even with capable and trusted partners, many clients held their relationship with Gerald closer than that of the rest of the firm. He was often the one to bring in new clients and did not delegate responsibilities often. As his retirement neared, leadership realized that the absence of a formal succession plan could place important client relationships, future revenue and long-term growth at risk.
Gerald had complete confidence in his team and believed they were fully capable of maintaining these relationships, but he understood that, for clients, trust must be intentionally transferred rather than assumed.
Question: Gerald would like to retire and transfer ownership of the firm to the next generation of attorneys – what is the best way to accomplish this goal?
Gerald’s Personal Goals: With the advice of his advisor, Gerald decided to sit down with his leadership team to develop a strategy that would align his personal goals with ensuring future success for the firm. Due to his increasing health concerns, he wanted to guarantee an upfront payment and a predictable income stream for retirement without jeopardizing the transition.
Service Business Challenge: Gerald also recognized a common challenge for service businesses: much of the firm’s value was tied directly to relationships that he had personally created and maintained over decades. Ultimately, the firm's leadership concluded that successful succession involved more than replacing a founder. It would require transferring trust, relationships and institutional knowledge to the next leaders, while maintaining a structured strategy for transferring ownership and preserving the firm's financial stability.
An advisor encouraged leadership to determine how much of the firm’s worth is tied to Gerald’s involvement and how much of that worth can be transferred to the next generation. Gerald decided to engage with a valuation professional who determined Johnson, Cole, & Smith LLP had an estimated fair market value of $18 million. That analysis determined Gerlad represented a key person risk with nearly 40% of annual revenue being tied directly to his clients. This reduced the firm’s valuation to approximately $12 million if he retired without a business succession plan.
The Plan – Moving Clients: The firm developed a client transition strategy to support the $18 million valuation while setting up the next generation for success. They started by identifying their top clients that might leave when Gerald retired. According to the plan, they began to assign younger employees as relationship managers for a number of clients alongside Gerald. Gradually, Gerald shifted from the lead attorney to the supporting attorney during client meetings to foster closer relationships between clients and his younger partners. Success was measured by clients viewing multiple attorneys as trusted advisors rather than relying on Gerald alone.
The Plan – Leadership: The next challenge was to identify who would step into leadership roles and develop the knowledge required to manage the firm. Gerald started by mentoring those identified as future managing partners while gradually transferring his responsibilities. He included key employees in strategic planning meetings to see which employees were natural leaders and had strong ideas to help the firm succeed. Gerald's goal was not to create a replacement for himself, but rather a leadership team capable of carrying the firm forward.
Buyout Structure: After determining future leaders and reassigning client responsibilities, they addressed ownership transfer and buyout structure. Gerald’s desired deal was $8 million up front, and the remaining $10 million to be paid over 20 years.
For the $8M, the successors would have to borrow $5 million while personally paying $3 million out-of-pocket. The bank would agree to a 7-year term at 7.5% interest rate and to use the company’s accounts receivable as collateral, due to it being the largest asset for the firm. This deal ensured the firm would have healthy annual debt service compared to cash flow. It also ensured that Gerald could have a liquidity event while gaining a predictable income stream during retirement.
Conclusion: This deal benefited Gerald andhis family. His seller’s note would transfer to his family if he passed away (an ongoing concern due to his deteriorating health). Also, he was able to transfer future business appreciation to the successor owners and out of his estate. Therefore, he could use the cash he is receiving to have estate planning flexibility and provide for his spouse and next generation.
Case # 3: ESOP Case Study
At age 29, John Reynolds stepped away from a secure role at a large technology consulting firm to follow an entrepreneurial vision. Having spent the last eight years helping manufacturers modernize their operations, he saw a growing need for developing software that can implement analytics tools to improve decision-making, reporting and operational efficiency.
In 1990, John founded Precision Technologies in a small office in Philadelphia. With only three employees and five clients, the company developed custom software solutions for mid-sized manufacturers struggling to digitize their operations. The early years were difficult, as John spent countless hours traveling to customer sites while barely making a profit. However, as manufacturing automation accelerated in the early 2000s, Precision Technologies gained traction across the industry.
Over the next three decades, the company grew from a small software developer into a leading provider of enterprise manufacturing software. Through consistent product innovation, strong customer service and strategic acquisitions, Precision Technologies grew to more than 1,500 employees serving clients around the world.
By the time John approached retirement, the company had generated strong recurring revenues through software subscriptions and support contracts. An independent valuation placed the business’s value at approximately $500 million, making it one of the most successful privately owned software firms in its sector.
At age 63, John began to think seriously about retirement and succession planning. His children had already established themselves with careers outside of his business, and he and his wife were comfortable with the savings they already had accumulated.
Question: What should happen to the company and its employees after John’s departure?
Assessing the Options: As the sole shareholder, John had several options available. He could sell his business to a strategic buyer, private equity firm or arrange a management buyout with existing employees. None of these options caught John’s attention because he did not want a culture change or restructuring of the company. He sought out a way to reward existing employees while ensuring himself a payout to reward his success.
Employee Stock Ownership Plans (“ESOPs”). After learning about ESOPs, John recognized that this strategy aligned closely with his long-term financial and professional goals for his business, most importantly benefiting the employees that helped him build Precision Technologies. An ESOP is a retirement plan that gives employees ownership in their company through stock shares. The company creates a trust to acquire shares from the current owners, funded by company cash or a loan. Over time, shares are allocated to employees based on compensation or years of service. Employees then receive the value of their shares when they retire.
Feasibility Study. John hired a staff of financial consultants to form his succession planning team and assist him in executing the ESOP. To begin, the consultant and Certified Public Accountant conducted an ESOP feasibility study to determine company cash flow, project future performance and assess management depth. They decided that Precision Technologies brought in enough consistent cash flow to support an ESOP’s initial debt. They ran a business valuation to confirm the company’s fair market value: $500 million.
ESOP Structure. Following the valuation, the planning team designed the transaction structure. John decided to sell 100% of Precision Technologies to the ESOP, making the business entirely employee owned. Through loan negotiations, the team took a $400 million loan from the bank at 5% interest over 10 years. For the remaining $100 million, John wrote a seller’s note at 7% interest over 10 years. With both financing and seller participation secured, the advisory team moved forward by establishing the ESOP trust and preparing the transaction documents.
Once the transaction closed, the purchased shares were placed into an ESOP suspense account to be released and allocated into employee ESOP accounts as the debt reduced. John determined in the ESOP plan document that the allocations would be determined based on compensation and years of service for the company. To encourage retention, employee accounts also were subject to a vesting schedule.
Ultimately, the ESOP was more than a financing transaction for John; it was a succession strategy that transformed the company's employees into stakeholders, provided a successful retirement exit for the founder and positioned the business for continued success for generations to come. John was able to identify his objectives for his business and determine the best course of action to reward his employees.
Conclusion: Converting Precision Technologies to an ESOP made sense for John because it guaranteed him a fair payout and achieved his desire to have employees buy it from him. As part of the transaction, he collateralized employees’ retirement benefits against the loan, meaning if the business went under in an employee’s lifetime, they would lose all their retirement account and deferred compensation. John’s intent wasn’t to be punitive, but rather to encourage employees to be invested in the success of the firm by putting their own retirement funds on the line.
Each of these scenarios highlights a simple truth: every business will eventually face a leadership transition. The difference between a smooth transition and a costly disruption to the business is being prepared. A successful business is not defined solely by how it started, but by how well it continues after its founder steps away. As advisors, we have an important role to play in that success.
Victor Levy is a Senior Vice President, Financial Advisor for Wealth Enhancement Group in Philadelphia, PA.
Dylan Elgart is a senior at Lafayette College majoring in Psychology, with a minor in Economics.
Mason Clatterbuck is senior at West Chester University double majoring in Accounting and Finance.
[i] This information is not intended to provide individualized tax or legal advice. Discuss your specific situation with a qualified tax or legal professional. Advisory services offered through Wealth Enhancement Advisory Services, LLC, a registered investment advisor and affiliate of Wealth Enhancement Group®.
[ii] https://www.deloitte.com/us/en/about/press-room/deloitte-private-survey-reveals-family-businesses-are-facing-a-succession-paradox.html
