Transferring the Business to the Next Generation: A Blueprint for Success

By: Attorney James A. Spella, Schloemer Law Firm, S.C. and Attorney Amanda N. Follett, Schloemer Law Firm, S.C.

A “succession plan” can help a family transfer the business—and the ability to continue to build wealth—to the next generation.  Building a successful business is a time and energy consuming process, so it is appropriate for a business owner to do their due diligence and carefully plan the transfer, and their exit.

As we discussed in our last two blogs on Transferring the Business to the Next Generation: 7 Initial Questions to Ask Yourself to Start the Process  and 13 Questions to Discuss with your Children to Avoid a Failed Succession Plan, a well-thought out succession plan can help avoid disastrous consequences for both the business and the family, such as loss of income, loss of employees, litigation, and a breakdown in family relationships.

If you plan to transition the business over time, an essential part of that plan is an Ownership Restriction Agreement, which will memorialize the agreement between the current owners and the next generation regarding control of the company, transfer of shares, and other important matters.

For example, parents may decide to bring their children in as minority owners, and in that case an agreement needs to be put in place regarding decision-making, who each of them can transfer shares to, what happens if an owner passes away, etc.

This article will address some of the basic concepts you should be aware of when starting the process.  Working with a qualified and experienced attorney early in the process can help ensure a successful and profitable transition – and avoid family feuds and nightmares.


An Ownership Restriction Agreement addresses restriction on transferability of an ownership interest as well as governance provisions. Though the ownership interest could be stock in a corporation, a limited liability membership interest, or a partnership interest, for purposes of this blog, we will reference a Stock Restriction Agreement, though the concepts apply to any co-owned entity agreement.

A Stock Restriction Agreement can be based as an “Entity Agreement” or a “Cross Purchase Agreement.”  An “Entity Agreement” is usually utilized when there are more than two owners.  A “Cross Purchase Agreement” is generally utilized when there are two owners.

An “Entity” based agreement has the entity being not only a party to the agreement, but the purchaser of an owner’s interest.

A “Cross Purchase” Agreement is between/among the owners, and the owner(s) are the purchasers.

The fact that life insurance may be purchased for purposes of a Cross Purchase Agreement, between two owners, requires the additional consideration of the marital interest of the owner’s spouse.  The owner’s spouse has a claim on the one-half of the insurance proceeds which otherwise was intended to be used in full by the surviving owner to purchase the deceased owner’s interest. The spouse of the owner should be a signator to the Cross-Purchase Agreement acknowledging the full use of his/her marital interest for the purchase of a decedent’s owner’s interest.

As stated above, the Cross-Purchase Agreement is not a practical basis when there are more than two owners, especially because the ownership of life insurance policies becomes complex and may even require the creation of a trust to own the policies.

With this background, consider the following provisions of a Stock Restriction Agreement.

    1. The decision must be made whether it is an Entity Purchase Agreement or a Cross Purchase Agreement. What will the trigger events be for (i) the purchase of an ownership interest or (ii) an option to purchase the ownership interest?  The trigger events need to be identified such as death, disability, termination of employment, financial concerns such as bankruptcy, owner’s spouse having a marital component transferred other than to the owner spouse, or the owner’s divorce. Once the trigger events are determined, then a decision needs to be made that upon the occurrence of a trigger event, then the ownership interest must be purchased or then an option to purchase arises.
    2.  Generally, when the owner/entity has the option to purchase the other owner’s interest and does not exercise that option, then the option provision customarily provides for the liquidation of the entity’s assets and a distribution to all the owners.


Death is the most obvious trigger event.  Since an owner can have his or her life insured, many times death provides for a mandatory purchase because of the availability life insurance proceeds.


If the owner is a key participant in the business operation, disability which extends for a significant period of time, i.e. two years, can be viewed as tantamount to the death of the owner.  Again, if the disability occurs as the trigger event, the purchase of the disabled owner’s interest would either be mandatory or optional.

Though available, disability insurance to finance a purchase is rarely used.


Many times, the owner is a key employee of the business operation, Accordingly, if that employment is terminated, then from the employee’s viewpoint, a mandatory purchase should occur.  If there is an optional purchase, and not exercised, then the entity is subject to the liquidation alternative.

In termination of employment, there are many times additional provisions, whether the termination was (i) voluntary, (ii) involuntary not for cause, or (iii) involuntary for cause.  If voluntary or involuntary for cause, then covenants not to compete and covenants not to solicit could be incorporated.  If involuntary and not with cause, then the covenants not to compete and not to solicit would not be applicable.


Many agreements will allow an owner to tender his or her ownership interest.

In some agreements, this tender provision is based on obtaining a certain age.

Regardless of whether the tender provision is based on obtaining an age or not, an adequate notice must be given to the entity of the intent to “retire”.

Again, the mandatory/optional provision selection needs to be inserted.

If there is a tender, then there should be covenants not to compete and not to solicit put into effect on the tendering owner.


If the owner is a resident of the State of Wisconsin and does not have a Prenuptial or Postnuptial Marital Property Agreement classifying the business interest as the owner’s individual property, then the owner’s interest in the entity is most likely marital property.  In other words, the owner’s spouse has an ownership interest in the company, whether his/her name appears on the stock certificate and books of the company as an owner or not.

Upon the death of the owner’s spouse, the spouse could—for legitimate planning reasons—distribute all of his/her assets to a Trust for his/her children.  In this case, their one-half of the entity ownership would pass to the Trust.  The Stock Restriction Agreement needs to address the ability of the owner to obtain that spouse’s ownership interest, and if the spouse does not do so, provide options to the other owners or the entity to do so.  This is usually reflected in provisions that provide these options upon this triggering event’s occurrence.


If the owner is subject to claims of creditors or threatened claims of creditors, the Agreement should provide that he or she provide a notice to the entity.  Upon receipt of the notice or upon the entity becoming aware of the creditor claims, the Agreement can provide an option for the entity to purchase the debtor owner’s ownership interest.


The key provision of an Agreement is what is the value of the ownership interest.  Many times, the value can be determined by a formula attached to the Agreement as an Exhibit, which can contain a descriptive formula with an example of its computation based on most recent financial information.

Though at times the formula may be simply book value as of the most recent fiscal year end, there are certainly variations on this valuation theme with book value adjusted for the fair market value of certain assets which would be depreciated.  This would include machinery, equipment, and buildings.

There are many formulas that can be developed which are appropriate for the business utilizing an asset value (with provisions to restate for fair market value for certain assets) and a goodwill value based on earnings.

Many times, the agreement mandates an appraisal for determining value.  Though this may seem to be the best way to determine value, unless an appraisal is obtained every year (with the attendant costs), the owners will not have a current value, which may make funding decisions outdated.

Another approach is to set the value each year.  If not updated for a two (2) year period, then the appraisal method is put in place. This allows the owners to review every year and update the value based on their own mutually agreed upon determination.

As the owners consider valuation, the company’s accountant should be consulted as to the appropriate formula/approach for valuing ownership interests.

The Agreement can also address whether a discount would be applied based on the trigger event.  For example, an owner may receive a 100% purchase price buyout if the trigger event is death, whereas they may receive a discounted payout of 70% of the value if the trigger event is termination of employment, either voluntary or with cause.


Payment of purchase price generally is an installment payment.  In order to make it affordable for the purchasing owner or entity, the purchase price is usually paid in accordance with a five-year note amortized over twenty years at an interest rate specified in the Agreement.  The interest rate could be the lowest AFR rate, or a reference to the prime rate or the prime rate plus one or two points, all annually adjusted.

In addition, the purchase could be subject to a Stock Pledge Agreement so that if there is a default by the purchaser, the selling owner has the ownership interest as collateral.

Note, however, that if there is adequate life insurance available in the event of a purchase on death, then the purchase price would be paid immediately.


A valuable provision in an Entity Agreement, is an option to allow the purchaser to be the other owner(s) instead of the entity.  So, in effect, a ‘toggle’ to Cross Purchase Agreement.  This may be especially useful in pass-through income entities such as partnerships and S Corporations.  By allowing the owner(s) to be the purchaser, the buying owner(s) are increasing their tax basis in the ownership interest.  The increased tax basis may provide lower income tax on the sale of their ownership interests.


The Agreement should have a condition precedent to the purchase of an owner’s interest if the owner has personally guaranteed.  A non-owner should not be personally liable for the debts of the entity.


The Agreement can also include provisions related to a possible future sale. These may be important if an opportunity comes along or circumstances change so that the majority shareholder wishes to consider a sale.

A “tag along” provision would allow minority shareholders to “tag along” if a larger group of shareholders finds a buyer for their shares.

A “drag along” provision would allow majority shareholders to require minority shareholders to join them in a sale of their shares.

Both provisions would give the minority shareholder the right to receive the same price, terms, and conditions as the majority shareholder in a sale.

Put options & Call Options

Should there be a “Put Option” or a “Call Option”?

Under a Put Option, minority shareholders have the right to ‘put’ the shares to the entity or other shareholders, who then have an obligation to buy the shares at a pre-agreed upon price.  This right is an exit option for shareholders.

Under a Call Option, one shareholder or the entity has the right to ‘call’ the shares of the other shareholder(s) and have the obligation to purchase them at a specified price.  This clause would permit one shareholder a right to force the exit of other shareholders from the business.


Many times, the owners will incorporate ‘governance’ provisions in the Agreement.  For corporations, these provisions are usually incorporated in a separate Shareholder Agreement. For a limited liability company, these are usually incorporated in the Members’ Operating Agreement.  These Agreements would address among other discussed decisions:

  • Election of Directors
    • Are all decisions by majority, super majority, or unanimous consent?
    • Are certain decisions by majority, super majority, or unanimous consent?
  • Shareholder Decisions – again, are all or certain decisions by majority, supermajority, or unanimous consent?
  • Election of Officers – many times there will also be a provision that the elected President cannot terminate a fellow officer merely because of holding that title.
  • Agreement to participate in any life insurance underwriting.
  • Designation of salaries and bonus formulas.
  • Benefits.
  • Distributions in excess of salary or agreed upon bonuses.


Other questions that should be considered in a succession plan include:

  • Will ‘permitted transferees’ be allowed to receive an ownership interest by gift, inheritance, purchase, or a combination of these transfer techniques?
  • Will such ‘permitted transferee’ be required to join in the Ownership Agreement?

Prior to allowing ‘permitted transferees’, a well thought out Succession Plan needs to be developed.


If you have questions about this article or would like to begin the discussion with a qualified and experienced attorney, please contact this article’s authors, Attorney James A. Spella or Amanda N. Follett, or one of our estate planning attorneys.

Originally published: November 10, 2020.

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Disclaimer: The information contained in this post is for general informational purposes only and is not legal advice. Due to the rapidly changing nature of law, Schloemer Law Firm makes no warranty or guarantee concerning the accuracy or completeness of this content. You should consult with an attorney to review the current status of the law and how it applies to your unique circumstances before deciding to take—or refrain from taking—any action.  If you need legal guidance, please contact us at 262-334-3471 or [email protected]