Business Succession Planning And Buy-Sell Agreements: What Business Owners And Families Should Know

Many Nigerian family-owned and founder-led businesses grow into profitable enterprises, yet succession planning remains rare. A survey by the Lagos Business School's Family Business Initiative found that only 22.8% of Nigerian family businesses have a completed succession plan. About 57% are still working on one, while 20.2% have not started at all.¹

That gap creates significant uncertainty and risk—raising fundamental questions about who assumes control upon the founder's exit, how ownership, management, and decision-making authority will transition, and whether the business can continue to operate smoothly through a change in leadership. When a founder retires, becomes incapacitated, or dies without a clear transition plan, ownership and leadership issues often escalate quickly—especially where family expectations and business realities collide. This risk is not limited to incorporated businesses. Sole proprietorships face the same continuity challenge, often with fewer formal tools in place to manage control, succession, and value transfer. The consequences can be severe. Research commonly cited in Nigeria suggests that about 95% of Nigerian family businesses do not survive to the third generation, often due to leadership disputes and weak continuity structures.²

This article offers practical guidance for Nigerian business owners and families. It explains the purpose of succession planning, the role of buy-sell agreements (and their practical alternatives for sole proprietors), the key provisions these arrangements should contain, and common mistakes to avoid. The focus is on helping businesses plan transitions deliberately, protect value, and maintain stability when leadership change becomes unavoidable.

What Business Succession Planning Really Means

Business succession planning is the process of deciding—before a crisis—how management and ownership will transfer when a key owner exits. Exit may be planned (retirement) or unplanned (death, disability, insolvency, divorce, or a forced separation among owners). The same continuity issue also arises in sole proprietorships, where the business is closely tied to the founder and can stall quickly if authority and access are not clearly handed over.

A proper succession plan answers three questions clearly:

• Who will run the business? (leadership continuity and decision-making authority following the exit)
• Who will own the business? (who holds equity, voting rights, and economic interests after the transition, where applicable)
• How will the transition happen? (timing, valuation, funding arrangements, and the legal documentation required to complete the transfer)

The risk of doing nothing is real. A leadership vacuum can stall operations, weaken stakeholder confidence, and destroy value. Even globally, survival rates through generational transfer remain low: studies often place successful transition at 30–40% to the second generation, and about 13% to the third generation.

In practice, effective succession planning focuses on three outcomes:

• Operational continuity – ensuring the business continues without
• Dispute prevention – establishing clear rules to reduce conflict among heirs, co- owners, and management.
• Value preservation – protecting the business and family wealth through orderly and tax-efficient transfers.

Succession planning is not a box-ticking exercise. It is a governance and risk-management tool.

The Role of Buy-Sell Agreements

A buy-sell agreement is a binding arrangement that sets out what happens to a business interest when a defined trigger event occurs. In businesses with more than one owner, it takes the form of a contract among the owners and determines who may buy, when the buyout applies, how the interest will be valued, and how the purchase will be funded.

For sole proprietorships, the concept applies differently. Because there are no co-owners to buy out the business, succession planning typically relies on wills, powers of attorney, trusts, or conversion into a corporate structure. In these cases, the functional equivalent of a buy-sell arrangement is a clear plan that specifies who takes over the business, whether the business will be sold or transferred, and how value will be realised for beneficiaries.

For Nigerian businesses with multiple owners, a buy-sell agreement is often one of the most important succession documents. It reduces uncertainty at the point of exit, prevents forced co-ownership, and protects the business from unintended ownership changes—such as a situation where an owner's interest passes to an estate, an ex-spouse, a creditor, or another third party who was never part of the original ownership and governance arrangement.

Common Buy-Sell Structures

• Cross-Purchase Agreement: The remaining owners buy the departing owner's shares directly, usually in proportion to their holdings. This works best with a small number of owners, but it becomes harder to manage as ownership grows.³
• Entity Purchase (Redemption) Agreement: The business itself buys back the departing owner's shares. This structure is often easier to administer where there are several shareholders, because the company executes a single buyback transaction rather than multiple individual purchases. Businesses commonly fund redemptions through
• Hybrid or "Wait-and-See" Agreement: The company has the first option to buy; if it does not, the remaining owners step in. This approach gives flexibility when the trigger event occurs.⁴

These structures generally apply to companies and partnerships with more than one owner. Where a business operates as a sole proprietorship, succession planning typically depends on estate planning tools and clear management handover arrangements. Many founders therefore consider early incorporation (and, where appropriate, bringing in co-owners through a structured shareholding plan) to make share-transfer and buyout mechanisms legally workable and easier to implement.

What a Well-Drafted Buy-Sell Agreement Should Cover

A well-drafted buy-sell agreement sets clear rules for ownership transitions when an exit event occurs. At a minimum, it should define when it applies, how the ownership interest will be valued, how the buyout will be funded, and how the transaction will be structured to manage tax exposure. These provisions reduce uncertainty, protect business continuity, and promote fairness between the departing owner (or estate) and those who remain.

While buy-sell agreements apply directly to businesses with multiple owners, the same principles—clarity, valuation, liquidity, and tax planning—are equally relevant for sole proprietorships. In those cases, similar outcomes are achieved through wills, trusts, management succession arrangements, or early conversion into a corporate structure.

1. Clear Trigger Events

The agreement should clearly define the events that activate a buyout. Common trigger events include death, permanent disability, retirement, bankruptcy, divorce, or irreconcilable disputes among owners.

This clarity is particularly important in Nigeria. In partnerships, the death or bankruptcy of a partner can dissolve the partnership by default unless otherwise agreed. In companies, poorly drafted transfer provisions can leave surviving shareholders dealing with unintended co- owners. A well-structured buy-sell agreement avoids these outcomes by mandating a controlled transfer when a trigger event occurs.

For sole proprietors, the same trigger events should prompt pre-agreed outcomes—such as temporary management handover, sale of the business, or transfer to named beneficiaries— to prevent operational paralysis.

2. Valuation Method

Pricing disputes often cause more disruption than the exit event itself. A buy-sell agreement should therefore set out, in advance, how the business or ownership interest will be valued when a trigger event occurs.

In Nigerian practice, three valuation approaches are commonly used:

• Fixed price – a value agreed in the contract, reviewed periodically to reflect current
• Formula-based valuation – such as a multiple of earnings (EBITDA) or net asset
• Independent professional valuation – engaging a qualified valuer to determine fair market value at the time of exit.

Many shareholder agreements adopt a hybrid approach, using a formula as a baseline while allowing either party to request an independent valuation if a dispute arises. Regular review of the valuation method is critical. Outdated or unrealistic pricing often leads to unfair outcomes and delayed execution.

For sole proprietorships, valuation planning remains essential, particularly where the business represents a significant part of the owner's estate.

3. Funding the Buyout

Even a clearly valued buyout can fail without a realistic funding plan. Nigerian businesses commonly rely on:

• Life insurance – to provide liquidity on the death of an owner; proceeds are generally tax-efficient and can be aligned with the value of the insured interest.
• Installment payments – spreading the purchase price over
• Company reserves or sinking funds – built up
• External financing – such as bank

The agreement should align funding methods with specific trigger events and require periodic review of coverage levels and reserves.

For sole proprietors, liquidity planning plays a similar role—ensuring the business can continue, be sold, or be transferred without forcing a distressed sale.

4. Tax Impact

Tax considerations often determine whether a buyout structure works in practice. In Nigeria:

• Capital Gains Tax (CGT) may apply to share disposals depending on statutory thresholds and compliance with filing requirements.⁵
• Probate fees may apply at the state level; in practice, Lagos probate costs are often cited around 10%, subject to applicable rules.
• Share transfers are generally more tax-efficient than asset sales for VAT and stamp duty⁶

A well-drafted buy-sell agreement should steer transactions toward structures that preserve value, minimise tax leakage, and avoid unnecessary delays during execution.

Common Mistakes to Avoid

Even well-intentioned owners weaken succession planning through avoidable mistakes:

• No plan or planning too late –Crisis-driven succession is rarely orderly. It increases disputes and costs and can stall operations—especially in sole proprietorships where bank mandates, signing authority, and key vendor access remain with the founder.
• Outdated valuations – A valuation method that is not reviewed can produce unfair outcomes. One side may overpay, another may undersell, and the resulting dispute can delay the transfer at the very time the business needs stability.
• No funding plan – A buy-sell agreement without a realistic funding mechanism often fails in practice. Where liquidity is unavailable, owners may default to instalments, emergency borrowing, or distressed sales that erode value. Similar liquidity gaps also affect sole proprietorships, especially where beneficiaries must fund operations or settle obligations before the business can continue or be sold.
• Tax left until the end – Tax issues affect timing, value, and net proceeds. Poor structuring can increase exposure to CGT or probate costs and can also create documentation gaps that slow down implementation.

Practical Lessons

Research repeatedly links business survival to preparation and governance discipline:

• A case study of long-standing Nigerian family businesses found that businesses that mentored successors, maintained financial readiness, and implemented structured leadership transitions were more likely to last.
• A Lagos-based study involving 382 family-owned businesses found that clear communication and preparing heirs for leadership correlated with business sustainability.⁷
• Other Nigerian research reports that 2% of family business owners lacked an effective succession plan, with many founders dying in active service and leaving no transition structure—an outcome that significantly raises the likelihood of business failure.⁸

These findings point to a practical conclusion: the businesses that survive treat succession planning as part of ongoing governance, not as a late-stage estate issue.

Next Steps for Business Owners

Succession planning is a business imperative, not a contingency exercise. Nigerian experience shows that businesses with clear transition structures are more likely to preserve value, avoid disputes, and continue operating when leadership change occurs. Those without such structures often face uncertainty, conflict, and rapid decline—regardless of prior profitability.

The planning approach should match the business structure. Sole proprietorships often require clear management handover arrangements and estate planning tools to prevent operational paralysis. Partnerships and companies typically benefit from formal buy-sell arrangements that regulate exits, protect ownership control, and provide funding and valuation certainty.

A practical succession framework rests on clear trigger events, credible valuation methods, realistic funding arrangements, early tax planning, and deliberate mentorship and preparation of successors—supported by documentation that can be implemented under pressure. Regular review keeps the plan aligned with business growth, ownership changes, and family realities.

Footnotes

1 https://businessday.ng/opinion/article/preparing-the-next-generation-for-stewardship-building-a-lasting- legacy-for-family-businesses/

2 https://businessday.ng/opinion/article/family-business-longevity-understanding-the-secret-and-strategy- option/

3 https://www.wilkinsonlawllc.com/succession-planning/2024/11/20/the-critical-role-of-buy-sell- agreements-in-business-succession-planning/

4https://www.financestrategists.com/tax/business-entity/wait-and-see-buy-sell-agreements/

5 Section 34 Nigeria Tax Act, 2025

6 Section 186(1) Nigeria Tax Act, 2025

7 Succession Strategy and Sustainability of Selected Family Businesses in Lagos State < https://ajm.org.ng/ajm- journal-archives/volume-5-issue-2/succession-strategy-and-sustainability-of-selected-family-businesses-in- lagos-state-nigeria/?utm_source>

8 Most Family Businesses Fail Beyond Founder's Exit", Journal of Business and Social Science Review https://jbssrnet.com/wp-content/uploads/2021/08/3.pdf?utm_source

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.