How to Create a Succession Plan for Your LLC
Many LLC owners focus on day-to-day operations but fail to plan for the future of their business when an owner retires, leaves, or becomes unable to...
7 min read
If you're nearing the point where you want to step away from your LLC—but don’t have a family successor or don’t want to sell to a stranger—there’s a smart alternative: selling the business to a key employee or manager.
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This type of internal succession offers unique advantages. You’re not just handing the business off to someone who understands the operations—you’re passing it to someone who’s already invested emotionally, trusted by your team, and familiar with the way things run.
But like any ownership transfer, it requires careful planning, the right legal structure, and a clear roadmap to make sure the deal works for both sides. This guide walks you through exactly how to do it.
What Is a Key Employee Buyout Agreement?
A key employee buyout agreement is a contract that outlines how a manager or high-level employee will acquire ownership of your LLC—either all at once or gradually over time. It’s most common when the owner is ready to retire, shift roles, or exit the business entirely, and wants to keep the company in trusted hands.
This option works especially well when the employee has:
- Demonstrated leadership within the company
- Built strong relationships with clients, vendors, and staff
- Expressed long-term commitment and interest in ownership
Rather than searching for an outside buyer, you create a path for internal succession by selling equity to someone who already knows the business inside and out.
Benefits of Selling to a Manager
Choosing an internal successor brings several advantages:
- Continuity: There’s no learning curve for the buyer, and customers experience a seamless transition.
- Trust: You’ve likely worked with the manager for years and can gauge how they’ll lead.
- Stability: Your team knows the new owner, which helps avoid the morale dips that sometimes follow ownership changes.
- Flexibility: These agreements can be tailored around financing, performance goals, and gradual transitions.
While an outside sale might bring in a higher lump sum, selling to a key employee can preserve your company’s culture—and ensure your legacy lives on.
When to Consider Transferring Ownership to a Key Employee
Not every business is a fit for an outside sale or a family handoff. In fact, for many LLCs, a trusted internal manager is the most natural successor—they already know your systems, your people, and your leadership style. But timing and readiness still matter.
Ideal Scenarios for a Manager Buyout
This route works best when:
- You’re planning to retire or reduce your involvement within the next 1–3 years
- There’s no clear family successor—or you prefer to keep family separate from ownership
- Your key employee has expressed interest in buying the business or taking on more responsibility
- You’re willing to help with a transition period, rather than exit overnight
It also helps if the business has strong, predictable cash flow—since many of these deals involve installment payments or partial equity buy-ins over time.
Signs Your Manager May Be Ready
Not all managers are cut out for ownership. But there are signs you can look for that suggest they may be:
- They’ve made decisions that align with the company’s long-term goals—not just short-term wins
- They care about profitability and cost control as if it were their own money
- They’ve earned the trust of employees, vendors, and clients
- They’ve handled a crisis or two without leaning on you too heavily
When those qualities show up consistently, it may be time to start the conversation.
Example – From GM to Owner—One LLC’s Smooth Transition
In a logistics company based in Colorado, the owner began thinking about retirement in his early 60s. His general manager had been with the company for nearly a decade and already handled most of the day-to-day operations.
Rather than list the business for sale, the owner approached the GM with a buyout proposal. Over the next 18 months, the GM purchased 40% equity using profits from the business, then secured financing to purchase the remaining 60% with the owner’s support. The owner stayed on as an advisor during the transition, but by year two, the GM was running the company solo—and the clients never missed a beat.
Structuring the Buyout: Common Approaches
The way you structure a key employee buyout can shape everything—from how smooth the transition feels to how financially viable the deal is for both sides. While there’s no one-size-fits-all model, most successful buyouts fall into one of three general approaches.
Self-Funded Buyouts
In this structure, the employee uses personal savings, investments, or third-party financing (like an SBA loan) to buy the business outright or over time. This approach gives the seller a clean break and immediate payment, but it can be tough for the buyer to manage financially—especially if the business doesn’t have strong recurring revenue or collateral.
Owner-Financed Buyouts
This is the most common route for LLCs with long-term managers. The owner agrees to be paid over time—usually through a promissory note—with payments funded by the business’s profits. This structure is attractive because it keeps outside lenders out of the picture, gives the buyer more flexibility, and aligns incentives during the transition.
Hybrid Models and Gradual Transfers
Sometimes, the best option is a gradual ownership transfer. You might sell a minority stake first (say, 20%–40%), let the manager get experience with partial ownership, and then structure a buyout of the remaining equity once certain benchmarks are hit. This can be helpful if the employee isn’t ready financially—or if you’re not ready to walk away entirely.
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Common Structures to Consider
While every deal is different, here are three structures that show up often:
- Installment payments over 3–7 years using business profits
- Owner retains partial equity temporarily with the intention of a full buyout
- Third-party loan + equity vesting, where ownership increases over time as performance milestones are met
Pro Tip – Include Performance-Based Milestones
Incorporate milestones into the buyout agreement tied to revenue, profitability, or team development. These benchmarks create accountability and help protect your interests while your successor earns full ownership. They also give the manager clear goals to work toward—which is especially important if the buyout is being phased in over time.
Key Terms to Include in the Agreement
A well-structured buyout agreement doesn’t just cover the price—it covers the process. The clearer you make the terms, the smoother the transition will be. This is especially important when you're dealing with someone you already know and trust. Good relationships can sour quickly when expectations aren’t spelled out in writing.
Set the Purchase Price and Valuation Method
Your agreement should either include the purchase price or explain how it will be determined. You might bring in a third-party appraiser, use a valuation formula based on earnings, or update a pre-agreed price annually. Just make sure the method is clear to both sides—and won’t feel outdated two years into a long-term deal.
Outline the Payment Terms
Most key employee buyouts involve payment over time. The agreement should spell out:
- Payment frequency (monthly, quarterly, annually)
- Interest rates, if applicable
- Consequences for missed or late payments
- Any balloon payments or buy-in phases
A strong payment plan doesn’t just protect you financially—it builds confidence that the employee is truly invested in the business’s future.
Define Roles During the Transition Period
Unless you’re walking away on day one, there needs to be clarity around who’s doing what. If you’re staying on as an advisor, consultant, or partial owner, define the scope of your involvement and the decision-making authority of both parties.
Add Protections: Non-Compete and Reversion Clauses
Don’t skip the “what-if” scenarios. Your agreement should include terms like:
- A non-compete clause in case the deal falls through
- Reversion terms if the buyer can’t complete payments (i.e., you retain or regain ownership)
- Confidentiality obligations that survive the transition
These clauses aren’t about mistrust—they’re about ensuring that if things go off track, both sides are protected.
Pro Tip – Set Clear Exit Terms for Both Sides
Give your successor a path to back out gracefully if things don’t work out—and give yourself the ability to re-take control if payments or performance obligations aren’t met. It’s easier to negotiate those terms now, while things are positive, than to scramble if the relationship deteriorates later.
Legal and Tax Considerations You Shouldn’t Skip
Even when the buyer is someone you know well, a key employee buyout is still a complex legal and financial transaction. Skipping professional advice here can lead to big surprises later—especially around taxes and enforceability.
Understand the Tax Implications on Both Sides
For the seller, the sale of your LLC interest will likely trigger capital gains taxes. If you’re receiving payments over several years, you may be able to spread out the tax burden using the installment sale method—but that only works if the deal is structured properly from the start.
For the buyer, there’s a different challenge: they generally can’t deduct the purchase price of the business as an expense. If the buyout is structured as a stock or membership interest purchase, they’re essentially paying with after-tax dollars.
Key Legal Considerations to Address
You’ll also want to make sure these elements are covered:
- Promissory note: This formalizes the payment structure if the seller is financing the deal.
- Security agreement: Gives you legal recourse if the buyer defaults on payment.
- Operating agreement updates: Reflect changes in ownership, voting rights, and management structure.
- Buy-sell provisions: Especially important if the buyer will eventually bring on other partners.
Why You Need a Lawyer and CPA Involved Early
Even if the deal feels informal, treat it like a real business transaction. Have your attorney draft or review the agreement, and make sure your CPA evaluates the tax implications based on your personal and business structure.
Trying to “DIY” a buyout agreement—even with someone you trust—can lead to unintentional tax penalties or gaps in protection. The investment in professional help upfront is almost always cheaper than trying to clean up a mess later.
How to Prepare a Manager for Ownership
Structuring the deal is one thing—but making sure your manager is ready to step into ownership is just as critical. A buyout will only succeed if the new owner understands not just how to run the business, but how to lead it.
Build a Foundation Before the Paperwork
Start by gradually pulling your manager into high-level decision-making. Include them in strategic planning, vendor negotiations, and financial reviews. The goal is to shift their mindset from employee to owner—so they begin seeing the business through the lens of risk, reward, and long-term thinking.
Introduce them to your attorney, CPA, and other key advisors so they get familiar with the support system that surrounds your LLC. Let them lead projects that impact margins, hiring, or customer retention. These experiences build confidence and give you a preview of how they’ll handle the real thing.
Pro Tip – Use a Trial Leadership Period
Before finalizing the agreement, consider a 3–6 month trial phase where the manager acts as the de facto owner. You step back, they step up. This phase helps both sides test compatibility in a leadership role without full commitment.
It also gives you a chance to evaluate:
- How they handle pressure
- Whether they respect the team and the culture you’ve built
- How well they adapt to seeing the whole picture—not just their department
If the trial goes well, finalizing the buyout becomes a natural next step—not a leap of faith.
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