Suddenly, everyone is nervous! The bank is nervous, the employees are nervous, mom is nervous and Sam is close to panic. The only player not nervous is the competing funeral home down the street.
John Kilkenny died suddenly at the young age of 52. His 24-year-old son, Sam, has been working at the funeral home since graduating from mortuary school…just 2 short years. He became licensed just a few weeks before his father died. Their 220-call funeral home employs 2 other licensees as well as some full and part time funeral assistants. The other licensees have worked for John for 12 and 5 years respectively. Sam married a local girl (Margaret) last year and she is 5 months pregnant.
The father’s estate is in the process of being settled. John bequeathed the entire estate to his wife Sonya stipulating that after her death it would be divided equally between Sam and his older sister Janelle. Janelle lives a 3-hour plane flight away, has 3 school age children and has never expressed any interest in the business or funeral service. Sonya’s activity in the family business has been sporadic. More often than not John managed things without consulting her.
The firm is worth around $1,800,000 and has just a little more than $1,000,000 in debt, the result of building a second facility which has not quite reached break even.
Suddenly, Sam is in charge.
- Sam and Sonya have no idea how to run this business. One or both of them is going to have to learn to “ride this bicycle” at the same time they are riding it.
- The bank loan is up for renewal next year and the bank has called to suggest they meet as soon as possible.
- John had been a well-liked “factor” in the community. Sam and Sonya believe (mostly because he told them) that people call on the firm them because of him.
- Sam suddenly is supervising people with more experience than him. In fact, some of them knew him from when he was in grade school.
- The licensees do not have non-compete agreements. This makes the firm vulnerable to “poaching” from its competitor.
- MOST IMPORTANT…no one has any confidence in what the future will bring because Sam is too young and Sonya is not licensed and has no track record.
The bank, indeed, was nervous and the meeting was uncomfortable. However, the staff had liked John and their jobs so they were inclined to rally with Sam and Sonya if they could be assured that the firm wouldn’t go downhill.
We concluded that Sam, Sonya and Janelle were faced with two agendas:
- The need to stabilize the firm with its key stakeholders – client families, staff and lenders.
- The need to revise the estate plan so that Sonya would enjoy a good living, Janelle’s interest would be protected, and Sam would not be constrained by a passive but equal shareholder one day.
We recommended that Sam and Sonya form an advisory board comprised of the firm’s accountant, banker and Succession Planning Associates. Succession Planning Associates developed a realistic business plan for preserving the current business and controlling income and expenses so that the Debt Service Ratio would be maintained well over the bank’s minimum requirement of 1.25. Our experience and credentials in the profession quickly quieted the nervous banker as well. At the same time we were able to show that even despite the concern of a possible TEMPORARY loss of call volume, the firm would remain profitable and eventually gain more volume by implementing some of the newer innovations in the profession.
Over the next several years Sam’s confidence grew to the point where he no longer needed the advisory board. He successfully gained the respect and even the admiration of client families and staff alike.
Sonya revised her will. Sonya eventually sold the business to an intentionally defective grantor trust (“IDGT”) for the benefit of Sam. This provided Sonya with a cash flow stream to fund a life insurance policy for Janelle’s future inheritance, avoided any income taxes on the sale to the IDGT, ensured Sam that he would receive the stock on the earlier of his mother’s death or 10 years into the future, and protected the business from any creditors or predators of either Sonya or Sam. Sonya is still semi-active in the firm and receives additional income from it. She is comfortable allowing Sam to make all the business decisions. And finally, Margaret gave birth to a lively boy who they named John in honor of guess who?