Succession planning for your small business

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Sooner or later, most people retire. More and more small-business owners are inching closer to retirement age.
According to recent statistics from the U.S. Small Business Administration, more than 50 percent of business owners are older than 50.

In Iowa, this means at least 26,500 small business owners — those with 20 or fewer employees — have come to the point where they need to decide what’s next for their business.

Brothers Mark and John Parrish, the owners of Caldwell Parrish Funeral Home and Crematory in Urbandale, began working at the funeral home when they were mortuary school students at Des Moines Area Community
College. They formed a close relationship with owners James and Karolyn Raddatz that remained as both began their professional careers working elsewhere. They filled in when the family went on vacation or needed extra

“I always kept a relationship with him and told him: ‘When you’re ready to retire, I would be interested in acquiring the funeral home. I don’t want to push you, but I would appreciate an opportunity when the time comes,’ ” Mark

They purchased the business in April 2014 from the Raddatzes after Karolyn died and James was ready to retire. The Parrish brothers took the same approach with funeral homes in Adel and Winterset and acquired those
businesses when the owner was ready to retire.

Not everyone has aspiring entrepreneurs who step up asking to purchase the business, which is why experts say a written succession plan is the answer for most business owners to what will happen to their business after they
retire or die.

“Business owners will sometimes have in mind what they want to happen, but they’re so busy working in their business that they don’t have time to see their succession plan or to plan it out,” says Erin Herbold-Swalwell, an
attorney with Brick Gentry P.C., who handles succession planning for business owners.

Here are several steps to consider:

1. Should I have a succession plan?

Brothers John, left, and Mark Parrish purchased three funeral homes, including one in Urbandale from business owners with whom they had maintained long-term relationships.

If you want your business to continue, then the short answer is yes.

“Typically, only about one-third of businesses actually have a business succession plan,” says Lisa Shimkat, the
state director of Iowa Small Business Development Centers. “It’s really hard for some businesses to talk about ‘What happens when I’m gone’ because the business is part of them; it’s an extension of them.”

It’s important to remember that a business succession plan isn’t just about mortality, she says. It’s about the
future of the community, as well. Many local organizations, schools and civic organizations depend upon small businesses for their support with after proms and other fundraising events. If those business owners don’t have a plan for their future, the business may fold and have a negative effect on its employees, as well as the greater

“It’s truly important to the sustainability of the community,” Shimkat says. “There’s a lot of secondary effects that go beyond what we see.”

Creating an exit strategy also will help the business owner ensure he or she has enough money to retire and during retirement. It will also help prevent potential strife within the family after the business owner has died, Herbold-Swalwell says.

2. What steps do I need to take?

On the day the business opens, the owner should have an exit strategy, Shimkat says.

“You don’t know what tomorrow will bring,” she says. “You need to be prepared, and you need to prepare those around you.”

Gather input from numerous parties that include the business owner, their family members/heirs, accountants, attorneys and other estate planners.

It’s important that business owners know whether their family members or heirs have any interest in taking over the business rather than make assumptions. There is a shift in the ownership of the family business in Iowa,
Shimkat says. More and more individuals in the “next generation” aren’t following in the previous generation’s footsteps; they’re taking jobs in other industries.

“The No. 1 step is communication,” Shimkat says. “You can’t assume anything. You can have an employee who has been working there for 20 years and assume they want to buy in, but that might not be their plan. A family member might want to step in, but you don’t know this unless you communicate.”

Enlist the help of experts. No plan should be created without advice. There are firms that specialize in family business and business succession planning. These individuals can guide the business owner through the entire process and mediate any issues that may occur within the family or from involved parties.

More than 70 percent of family-owned businesses do not survive the transition from their founder to the next generation, mostly because of family discord or taxes — more on the second, later — according to The Balance, a website that provides financial advice to business owners.

A succession plan will manage any potential transitional issues that could occur among family members. It will also take an honest look at family members and whether they even have the skillset to run a business.

A lawyer can ensure the plan has the proper legal structure to stand up to possible dispute. An accountant will provide factual numbers from which to base the value of the business or the amount of money the business
owner needs for retirement.

Business owners can contact the Iowa SBDC to receive help, Shimkat says. The organization has a checklist of things for business owners to consider as part of their succession planning in order to prepare their business for the future. This includes monitoring industry trends to prepare the business for the new owner, updating pricing
information for products and services, phasing out and removing obsolete inventory, updating all employee records and client accounts, and leaving complete records of vendors.

Finally, business owners need to make sure the final succession plan is communicated to all parties who will be affected by the sale or transition of ownership.

3. What does the plan include?

Lisa Shimkat, the state director of the
Iowa Small Business Development
Centers, says business owners should
create a succession plan from the day
they open their doors.

The first step in creating the plan is to set a future goal for the business: Does the owner want to have more money for retirement? Does he or she want to leave the business to their children?

The plan will cover all details of the transfer of the business to its new owners from human resources to the financial details. It will take into consideration who will oversee the business. The business owner should consider
the strengths of all possible successors in order to determine what will be best for his or her business. The management of the business may be different from the ownership, and the plan will spell out the details.

The sooner a succession plan can be written, the better, Shimkat says.

“Just because you talk about succession planning doesn’t mean it has to happen tomorrow or that you’re giving up on the business,” she says.

Some business advisers recommend an exit strategy be built into the business plan, according to The Balance. At least five to 10 years in advance can give enough time to put all parts in place and to ease the transition. A plan should definitely be in place by the time the business owner is in her or his late 40s or early 50s, Herbold-Swalwell says.

Any transition of the business should allow for time to train the new owners and ensure it is as smooth as possible for all employees. If the company has investors or other stakeholders, they will need to be notified of the change in ownership before it occurs. Clients will also need to be informed of the change, and the business  owner will have to devise a strategy to make that happen.

The Parrishes used a CPA and other professionals to help them put together their purchases for the funeral homes. When it comes to their own future planning, Mark says they haven’t created a full succession plan yet
because neither one of them has children, and they want to expand their business. They do have a plan in place should something happen to either one of them.

“We’ve got a succession plan in place for death or disability,” he says. “That’s more likely to be the case for one of us now than retiring.”

The brothers have life insurance policies in place that would cover a buy-out of the other’s share of the business. They also have an agreement with a clause in place that should either want out of business, the other has a set
period of time in which to have first right to purchase his brother’s share.

“We have a formula in place with how we value the business, so we don’t have him saying it’s worth one thing, and me it’s worth another,” Mark says.

What are my options?

Any plan will take into consideration who the successor of the business will be and when the owner wants to leave the business — whether this is through retirement or death, experts say. Wilon Wealth Management in Urbandale has a general planning outline on its website ( that includes several options:

• Transfer ownership to a family member either while still living or through an estate.

• Sell the business outright. This can leave a business owner with cash for living expenses or paying taxes that could be associated with the sale, such as transfer or capital gains taxes.

• Transfer the business with a buy-sell agreement, which prearranges the sale of the business with the owner and a willing buyer. This allows the business owner to keep control of his or her interest until an event the contract stipulates such as death, disability or retirement. The price and sale terms are prearranged.

• Create a private annuity with an interested buyer in which he or she receives ownership and agrees to pay the business owner periodic payments for a set period of time. Experts say other options exist, including self-canceling installment notes or the creation of family-limited partnerships, which is why a business owner needs to make a plan that includes all of those who are involved and make sure the plan is recorded.

The Parrish brothers bought the funeral homes — John was 23 and Mark was 27 — through financing and with the previous owners carrying some of the debt. They didn’t have enough cash to make the acquisitions, but the former owners worked with them to make the sale happen.

“We always had a vision of he and I owning a business together and a funeral home together,” Mark says of his brother.

Part of the Parrishes’ plan includes finding a managing partner from one of their satellite locations who will own minority shares in the company and be part of their long-term succession plan for future ownership, Mark says.

“In a lot of business successions, seller financing is something that the seller really needs to look at strongly,” Shimkat says.

Iowa SBDC worked with one business in which the father was going to transfer ownership to his daughter. The daughter was a recent college graduate and didn’t have the cash or credit to finance the loan. The business owner worked with SBDC to set up a graduated succession play to transfer ownership to the man’s daughter. By year three, she owned 30 percent of the company and had the collateral she needed to purchase the business
from her father.

SBDC also connects business owners to aspiring entrepreneurs — similar to what the Parrish brothers did for themselves — who are graduating from college and want to own and/or operate a business.

“We’re trying to encourage them to approach business owners and encourage business owners to do the same — to reach out to college programs,” Shimkat says.

4. Are there any implications to consider?

A financial adviser, certified public accountant and an estate planning attorney can help a business owner work through any potentially adverse details that may occur with the sale or transfer of business ownership. If the business is going to family members or children, the owner will want to transfer it at its fullest value while limiting any potential income, gift or estate taxes, according to Wilon’s outline.

Most family members will be safe from the estate tax under the new federal tax plan which makes gifts up to $10 million per individual tax exempt. These amounts will increase each year to account for inflation. In Iowa, the gifting of property to a spouse or children is tax exempt. The Iowa Department of Revenue also reports that no taxes are due if all of the property of the estate has a value of less than $25,000, nor is there a tax on annual gifts
in the amount of $13,000 or less. Transferring portions of the business over time may keep a significant portion of
it free from tax, according to Wilon. The disadvantage is that it takes more time to transfer the business to the next owner.

Finally, Herbold-Swalwell says the family needs to keep in mind any legal fees it may have to pay in light of an agreement about the business or its assets.

“I do see an increasing amount of family feuds happening when the plan isn’t communicated clearly or there is not a plan. It’s a sad situation when your heirs have spent money fighting and paying legal fees,” she says. ♦

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