By: John P. Napolitano, CFP®, CPA, PFS, MST

Success hides a lot of risks. 

When cash flow is great, debt is low and business is booming – clients are not often thinking about what could happen to make things turn ugly. But as we know, many things can go wrong to derail your clients’ financial plans whether they are phenomenally successful or fledgling and working hard to get to point B. The derailments are common to those who don’t plan or to those who take daily risks without protection or understanding the potential consequences of any particular peril. Not all risks jump out at your clients and tell them to get protected, and that’s exactly where a sharp Certified Public Accountant (CPA) can add value.

As CPAs, we are frequently accused of being numbers people.  And after all, that is how the profession started centuries ago.  Today I still hear many CPAs proclaim that they never met a spreadsheet that they didn’t like and how proudly they carry that Pentel pencil right in their shirt pocket.

This is good.  An understanding of numbers and being able to interpret them for the betterment of your clients’ financial future is important.  But today, I believe that these skills have become table stakes as the bare minimum of talent needed to perform the most perfunctory of tasks that we as CPAs are asked to perform. Behind the numbers are all of the other stuff that can go wrong to derail a client’s world, and that is the main focus of this article.

Your business clients live with risks that they gleefully look past as they grind it out day after day. I feel the most significant of which are their succession plans.  I find it pure negligence when a CPA for a company doesn’t ask if the client has a written succession plan and then further review it to expose gaps. The succession plan needs to be considered from two points of view.  One is with respect to the ongoing operation of the entity and the other has to do with creating a favorable transition for ownership, including any purchase of shares that needs to happen.

Absent a clearly communicated plan regarding the ongoing operation of the business – chaos often rules. It may be easy if your client has a well-defined corporate structure where people have job descriptions and everyone knows their role. But for anything other than a larger enterprise with many skilled people serving in specific roles, there is frequently a “Who’s on first” kind of reaction as soon as the news settles in regarding the loss of their owner/leader.

We see everything from power struggles to employees who see this as an opportunity to steal the businesses clients and open their own competing business. To prevent this isn’t easy, but it can be done with the guidance of a skilled business counselor.

Begin by role playing with your business owner client.  The role play is that you, Ms. Business Owner, just passed yesterday and because you read this article you get one more day to come back to establish a business continuity plan for your business to operate without you. How great would that be? But because it isn’t reality that conversation can still happen today as if yesterday was the day of reckoning.

Who would be the leader?  Is it one leader or will there be multiple key people?  What about ownership?  Do you expect that the business will pass to your family and that your employees will remain loyal to the new owners as they were to the founder? Will any of your key employees become owners?  Will the business be sold after your passing?  Will you create any bonuses of other incentives for your loyal employees as they help the family unwind and sell the business?

Rather than a checklist of great questions, what you need to do as that business owner’s advisor is to have a conversation where all of these issues and whatever else is germane in that business are discussed.  In most cases, the business owner is most capable of assessing talent and envisioning the business operating without him or her. Although sometimes the owner’s vision is blurry when it comes to people where issues like loyalty and longevity may drive their thoughts rather than independently evaluating the talent and capabilities of those needed to continue the business. This is another area where good advisors can help.  Perhaps your business owner client needs your firm or some other professional to help sort out the “who’s on first” before the fire drill becomes reality.

The conversation should extend to the key people that you think are a part of the continuity.  They’ll be flattered to know that you’ve considered this serious issue and that you may view them as a part of the solution.  Owners don’t often appreciate the fact that employees do think about what happens to them with the loss of the owner.  They wonder about continued work, who will be their boss and how things will be run. This is sometimes the topic of water cooler conversation that your business owner client never hears about.

Help your client decide on some of the significant financial issues regarding their succession. What will be the titles and compensation structure of those chosen to be a part of your leadership team beyond you? The conversation should talk about pay increases or bonuses and any equity incentives that may be important.

Most owners don’t realize is that merely having the conversation gives comfort to your key people. They are relieved to know that you recognize the situation and that the owners passing does not guarantee doom and gloom for them too. You may even see an improvement in overall morale.

This is also an opportunity for your client to memorialize this agreement through an employment contract that can lay out compensation and roles today and in the future. This agreement can provide some protection for the employer in terms of non-competition or non-solicitation language both now and after the owners passing.

Moving over to the transition of ownership, once again there are two possibilities. One is where your client is the sole owner and the other is where your client has partners. Business owners and professionals alike give little attention to the succession for businesses with one owner.  One of my very first financial planning clients over 20 years ago was the sole owner of a business that was worth over $90 million – with no succession plan.  It was even more interesting to me to learn that this client in particular really didn’t want to devote any time to this material matter as he was planning to sell this business in less than 10 years.  Thankfully, he lived long enough to realize that liquidity event – but I have to admit that I was deeply concerned for every minute of every day.

If your sole owner client doesn’t want to properly address this issue you must do a few things.  You must document your attempt to have the conversation as well as the concerns that you have for the ongoing value of the business absent the owner.  You also should ask about the client’s life insurance if the value of the business and its subsequent sale would be material for the survivors to continue to live in the lifestyle to which they are accustomed.

For a business with multiple owners, please do not get lulled into complacency if the owners have some sort of shareholders agreement that addresses the loss of an owner. In my experience, two things have consistently been revealed.  One is that most do not have a written agreement.  Second is that for those who do, there are so many gaps in the agreement that they may have been better served without any agreement at all. 

You need to carefully review the agreement and see what happens if your client passes away, becomes permanently disabled or simply wants out of the business.

The first issue we often find is an outdated valuation or an unreasonable formula to create a valuation.  The best practice is to get a formal business valuation every few years and have that value ratified by the owners and updated between valuations by a vote at the annual meeting.  I know, your business clients probably don’t have an annual meeting either… but now you can show them one more good reason to have it. This is very important!  In the past year alone, we have had multiple situations where a spouse received far less than fair market value (FMV) from family partners for the business simply because they had an agreement that was very outdated with respect to enterprise value.

The second issue is one of practicality and reasonableness. Many agreements have language about three valuations, blah blah blah…. Really?  At a time of stress do you really want to pay for three valuations and battle it out?  As stated previously, get your valuation and make that the number that is used. It is not practical to do the valuation post-mortem.  Is the business worth more or less after the loss of a key owner?

This section of your clients existing shareholder agreement also talks about the payment terms.  Even if the value is accurate, I find that frequently the payment terms are untenable by the surviving business.  It isn’t easy for an enterprise to pay out FMV, plus interest over 5 years after the loss of a key person.  If the business needs to replace the services of the deceased owner or incur other costs to replace their value that only compounds the difficulty of meeting the ill-agreed obligation.

Funding and format also play a significant role.  The primary tools for funding would be cash in the possession of the surviving owners, life insurance or an installment buyout. In terms of life insurance, the issues include having an adequate amount of coverage, the right type of coverage and the proper ownership of that coverage.  I won’t get into all of those details here today, but that topic is not to be taken lightly as it can severely impact the transaction and the possible tax consequences of the sale.

If the buyout is to be an installment sale, make sure that the terms are affordable by the business. Too many times this payment stream is equated to what the previous owner took for compensation.  But making similar sized non-deductible payments to a survivor may not be affordable or recommended in all cases.

I completely understand that not all clients want to talk about their demise and the consequences thereof.  But as their fiduciary, especially if you’ve been engaged as their financial planner, I feel that you must have these conversations or find a competent professional who can have them for you.


John P. Napolitano CFP®, CPA is CEO of U. S. Wealth Management in Braintree, MA.  Visit JohnPNapolitano on LinkedIn or The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.