The Plan B Nobody Wants to Write
Updated: 4 days ago
Most business owners have a Plan A. You'll grow the business, bring in the right successor or buyer, and leave on your terms, on your timeline, to the party of your choice.
Plan B is the one nobody wants to write. It's the plan for when the exit isn't your choice.
Industry research, including the Exit Planning Institute, suggests that about half of all business exits are involuntary. They're usually caused by one of the “5 Ds”: Death, Disability, Divorce, Disagreement, or Distress. None of these shows up on schedule, and each can force a transition before you or the business is ready.
What a Plan B Should Answer
A business continuity plan answers the hard questions ahead of time, so your family, employees, and partners don't have to answer them in a crisis:
• Who runs the business tomorrow? Name an interim leader and make sure that person has the authority to sign checks, contracts, and loan documents.
• Will your key people stay? Your top employees are the business's value. A key employee retention or “stay” bonus plan gives them a reason to stay through the uncertainty.
• Who buys your ownership, and at what price? A current, funded Buy-Sell Agreement turns a crisis into a planned transaction.
• Can your family find what they need? Keep a confidential letter of instruction covering advisors, passwords, bank relationships, and key contacts.
• Is your valuation current? A Buy-Sell price set 10 years ago can seriously shortchange your family or your partners.
A Supreme Court Warning for Buy-Sell Agreements
If you co-own a business and your Buy-Sell Agreement is funded by life insurance owned by the company, a 2024 Supreme Court decision may mean it needs updating.
In Connelly v. United States, two brothers owned a Missouri building-supply company. Their agreement required the company to buy back a deceased brother's shares, and the company carried about $3.5 million in life insurance on each brother to pay for it. When Michael Connelly died, the company used $3 million of the proceeds to redeem his shares.
The IRS argued, and the Court unanimously agreed, that the insurance proceeds counted as a company asset when valuing Michael's shares for estate tax. The company's obligation to buy back his shares did not offset that value. The company's value rose to about $6.86 million, and his estate faced nearly $900,000 in additional estate tax.
Put simply, the same insurance meant to fund the buyout also increased the value of the shares being taxed.
Why this matters now:
• Entity-Redemption (Company-Owned) plans may need restructuring. Common alternatives include a Cross-Purchase Agreement, where owners hold policies on each other, or a separate Insurance LLC or Trust that owns the policies outside the company.
• Moving existing policies is tricky. Transferring a policy the company already owns can trigger tax traps, including the “transfer-for-value” rule. Don't do it without your attorney, CPA, and insurance advisor working together.
• The federal exemption isn't the only estate tax. The federal exemption is now $15 million per person, but Minnesota has its own estate tax, with a 2026 exemption of just $3 million. A Minnesota estate tax return is generally required when an estate's gross value exceeds $3 million. Once you add the business, your home, retirement accounts, and life insurance, many owners who assume they're “under the limit” may not be.
• Follow your own agreement. The Connelly’s never completed the valuation process their agreement required. A Buy-Sell Agreement only protects you if it's current and followed.
Your Plan B Action Checklist
1. Pull out your Buy-Sell Agreement and read it again. When was it last updated?
2. Confirm who owns each life insurance policy, who the beneficiary is, and whether the coverage matches today's value.
3. Get a current business valuation.
4. Name an interim leader and document their authority.
5. Put retention incentives in place for the key employees you can't afford to lose.
6. Bring your attorney, CPA, insurance, and wealth advisors together at one table.
Plan B isn't pessimism. It's protecting the value you've spent your career building. The best continuity plans are the ones that never have to be used, but they have to be written first.
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