Succession Planning: Ways to Transfer Ownership of Your Small Business

The past few years have brought unique issues to us in the home healthcare marketplace. If you could say anything positive about the COVID-19 pandemic and the associated tough operational obstacles—such as finding sufficient staffing, an upward price spiral for our products, and supply chain issues—it might be that it required a lot of businesses to get better at accepting and acting upon the need for change.

You did just that. And overall, you fared pretty well. Demand for your products and services has never been higher. Valuations of your businesses improved. Forecasts for continued growth and strength in the home healthcare market are more than positive.

VGM is proud to have assisted many dedicated and hardworking individuals within the array of companies we represent.

We recognize your challenges that this industry brings—but also have noted a renewed optimism from you with regard to continued operations in the future. And the future requires planning, including the eventual conveying of your ownership to another. Hence the rationale to assemble this guide “Succession Planning: Identifying What Is Next for Your Business and How to Make It Happen.” Developed from input, questions, and concerns our team has received from you, the purpose of the manual is to offer a practical and straightforward “toolkit” to assist you in the initial planning steps and procedures to transfer ownership.

The guide is made up of four parts. They include:

• Part 1 - Identifying What Is Best for Your Business

• Part 2 - Succession Planning Template & Steps to Write a Succession Plan

• Part 3 - Suggested Steps to Take to Purchase a Home Healthcare Supplier

• Part 4 - Is an ESOP Right for Your Home Healthcare Business?

We hope you find this guide useful and relatively easy to use. However, we must emphasize the necessity to secure appropriate professional guidance and counsel as you move forward in your venture.

Succession Planning – Part I: Identifying What Is Best for Your Business

Business succession planning is a series of logistical and financial decisions about who will take over your business upon retirement, death, or disability. The first step is to identify the ideal successor to take over your business, then determine the best selling arrangement.

There are 4 common ways to transfer ownership of your business:

1 Co-owner — Selling your shares or ownership interests to a co-owner(s).

2 Next Generation — Passing ownership interests to a family member.

3 Key Employee — Selling your business to a key employee.

4 Outside Party — Selling your business to an entrepreneur outside your organization.

The “Succession Plan”

Succession plans are commonly associated with retirement, although they also serve an important function earlier in the business lifespan. If anything unexpected happens to you or a co-owner, a succession plan can help reduce headaches, drama, and monetary loss as your business grapples with a transition.

A succession plan makes it clear who will take over the business, reducing any potential disputes between parties. If a purchase is involved, the sale price and purchase terms are also clearly outlined, relieving some of the stress for the departing owner’s family.

In other words, a well-crafted succession plan aims to benefit everybody—the departing owner, their family, the business, and the successor.

Here are the 4 most common types of small business succession plans in detail:

1 Selling Your Business to a Co-Owner

If you founded your business with a partner, you may be considering your co-owner(s) as a potential successor(s). Many partnerships draft a mutual agreement that, in the event of one owner’s untimely death or disability, the remaining owner(s) will agree to purchase their business interest from their next of kin.

This type of agreement can help ease the burden of an unexpected transition—for the business and family members alike. A spouse might be interested in keeping their shares but may not have the time investment or experience to help it blossom. A buy-sell agreement ensures they’re given fair compensation and allows the remaining co-owner(s) to maintain control of the business.

Potential Drawbacks

A buy-sell agreement with a co-owner requires a lot of cash kept on-hand. Your co-owner needs to be prepared to buy-out your shares, theoretically, at any moment.

Since not everyone keeps liquid cash around in this magnitude, many businesses will fund their plan with life insurance. Term life insurance is relatively inexpensive and can offset a lot of costs in the event of an owner’s death. Permanent life insurance is a bit more expensive but can likewise payout in the event of retirement or disability.

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2 Preparing the Next Generation

This means you need a solid family business transition plan for the next generation to take the helm. Drafting this crucial plan can be a tricky and complicated process if you do not have a succession strategy in place. Your succession strategy should address leadership development for the next generation leaders as well as financial issues.

Unfortunately, only 34% of family businesses have “a robust, documented, and communicated succession plan in place” in the U.S., according to a 2021 PWC® Family Business Survey.

Without a clear business transition plan, the company you and your family have spent so many years building can quickly fall into disarray or bankruptcy, or even be forced to close. An unrealized or muddied business succession plan can also place an incredible amount of stress on a family’s relationships, leading to disagreements and fractures.

Wealth transfers involving a family business are not something that should be taken lightly. These involve a great deal of careful planning with family members, current company leadership, business consultancy advisors, attorneys and your banking partner.

When to start the family business succession planning process

One of the more pressing concerns for this process involves when to bring your young adult children into the family business transition plan, as well as how to incorporate them into the plan.

There are many factors to consider, and your decisions may be dependent upon the company’s legal structure, its size, and how you want it to continue once you have stepped away from daily operations.

It can never be too soon to start the family business succession planning process, and in most instances, the earlier the better. Unexpected familial, financial, or other unfortunate events can happen at any time, so having a plan in place is one of the best ways to prepare for the risks that accompany these kinds of unforeseen incidents.

If you do not already have a family business succession plan in place, you should try to establish one at least several years before the earliest point you envision exiting your current role. This should provide you enough time to strategize a plan and take the necessary steps to fully implement it, all of which can take considerable time to execute.

Before your children are old enough to take on larger responsibilities, you can consider putting a spouse or other trusted business associate in the succession line. However, when your children become adults, there is a good chance you will want them to carry on your legacy.

What to consider when choosing a successor

Even if you already have a particular family member in mind, you should consider spending some time on choosing the right successor. Identify the person(s) that has all the right traits for taking on this big responsibility.

Start paying closer attention to their words and actions. You can also consider conducting private meetings to gauge not only their interest but their thoughts on what it takes to run the business.

Keep

an eye out for family members who

possess the skills and traits they will need to succeed in this role, such as leadership qualities, technical expertise, a strong drive, and the right temperament to connect with employees and partners. Similarly, consider opting for someone who is a unifying agent rather than a divisive individual.

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Once you have whittled down some candidates, assess their readiness level by using objective measurements. There are many third-party business advisory companies that can help with these unbiased assessments. This way you can find out which candidate is most decisive, articulate and best able to handle the complex decision-making involved as a business owner. These steps should help provide you with the information you need to choose your successor.

After making a choice, consider communicating with family members early and often about your plans and the role you wish for them to play. This may involve holding family meetings with all members who have a say or a stake in the business. As the business owner, you will have final say, but having all family members on board early on will help with a smooth business transition.

How to structure the business for transition

The kind of structures the family business needs for ownership and management transitions can play a key role in determining the family’s wealth preservation for years to come.

Several different types of financial vehicles and legal structures exist for transitioning business ownership. However, one of the more common methods used in succession planning for family businesses includes a lifetime gift to family members.

A lifetime gift involves gifting interests in the company over a period of time, or conducting a onetime total gift upon your retirement. The gift may be outright to the recipient or into a trust for the benefit of one or more members of your family. This provides a host of benefits for a succession plan.

It should be noted that as you gift away portions of the business, you also need to relinquish parts of your ownership control. You might find yourself in a situation where you still have interest in the company, but you no longer have majority shares or final authority on all matters, and some of the decisions made might not be what you would do.

Remember, the business succession plan is all about handing off these decisions to your successor and this is all part of the plan.

What happens when the next generation cannot financially purchase the business…at least not in a relatively timely manner?

Part of succession planning of ownership, many business owners have the majority of their net worth invested in the business. If you can’t afford to give it to the next generation, and they can’t afford to purchase it, consider these options:

• Leveraged Buyout. The next generation borrows funds to buy the business. The seller receives money immediately, while the next generation uses business profits to pay the loan.

• Installment Sale. Payments are made over a term of years with interest. Unlike a leveraged buyout, the seller will not receive all the money at once.

• Self-Canceling Installment Note (SCIN). A version of the installment sale, the note terminates upon death of the seller, regardless of whether it has been paid in full or not.

• Non-Qualified Deferred Compensation. The current business owner must pay a certain amount to the seller after retirement.

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Although these payments are deductible for the buyer, they are taxed as ordinary income for the seller.

• Charitable Bailout. Ownership interest is sold to a charitable trust instead of directly to the next generation. They then purchase that interest from the trust. Not available to subchapter S corporations.

• Sale to an Intentionally Defective Trust. Instead of selling the business directly to children, all or a portion is sold to a trust with the children designated as beneficiaries.

These options must contain specific terms and be structured in a specific way to reach preferred tax consequences to both the seller and buyer. Consultation with professional advisors is essential to achieve desired results.

Involve the adult child in business planning

You can use your business plan as the key document to assist in putting the transition plan into action.

The business plan defines where the company is currently. It also represents a roadmap for plotting out where to take the business into the future. This may include, for example, covering topics such as what new technology to invest in, how much capital to invest, where to obtain financing for that investment, and how to implement it. In addition, this may include which new local markets the company plans to enter for a proposed expansion.

But having a business plan and a vision shared with key stakeholders is not always the case for every company. In the 2021 PWC® Family Business Survey, nearly half of family members engaged in the business say they are not on the same page with the rest of the family about the company’s direction.

Not only can a business plan help ensure successful implementation of your transition plan, but it can also potentially provide you with additional insight into which adult child might be best suited to take over business leadership. Having your children involved in the process, or simply having them review the plan, gives them the opportunity to demonstrate their business acumen, use their decision-making skills, and propose solutions to potential problems.

Instill skills the next generation will need to succeed as responsible owners

In addition to drafting a business transition plan, you should also consider investing time into instilling skills and teaching the “ins and outs” of the business to the next generation. This will help prepare them for the moment when they take over for you.

In some instances, you may have brought your children around the company for years, or have hired them for various low-level positions already. This can be a good starting point to getting your children invested early in the longterm success of the family business.

Upon reaching adulthood, you might consider slowly increasing their responsibilities and giving them additional duties. As they learn more about the company and the market, you can further bring them under your wing for a more hands-on approach to running the business. After all, having them learn the trade and the industry early can help immerse them in the experience needed to successfully manage the company. A leadership coach may also be a valuable resource for helping your successor develop the skills to take over the management of the family business.

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How often should you update a business succession plan?

A business succession plan is also an evolving document that needs to be reviewed about every five years or following any major familial and business changes. Regular revisions help ensure that your company meets its goals and sets new ones as well as accounts for big changes. Yet only 9% of family business leaders in the U.S. updated their near-term business continuity plan and long-term succession plan in response to the pandemic, according to PWC’s® survey.

What if your children do not want to run the business?

While it might seem like the opportunity of a lifetime, there are still children who do not want to follow in their parents’ footsteps and take the reins of the business.

In this situation, depending on where the business is in its generational transition—be it first generation, second, third, or longer—there may be other family members already involved that can serve instead.

If this route does not prevail, then transferring leadership or ownership to a trusted employee can also be an option. You might also consider a sale of the business. Sales to non-family members have increased substantially in the last few years.

Final Thoughts

Strategic thinking. Both the current and next generation should create longer-term plans, such as modernizing the business while keeping with tradition, and hiring in areas of weakness.

Development plans and performance evaluations. Current owners should develop a hands-on experience and mentor the current management team. As a check-and-balance system, try having a family member report to a non-family member.

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Managing finances. Current owners should make sure their successors understand everyday financial practices and how to separate personal and business expenses.

Education. The next generation should complete higher education and gain experience outside of the family business to bring new skills back that the business needs.

A vital element of a smooth transition is retention and continued dedication of key employees. Bringing family members on as owners also has the potential to cause discord.

Potential Drawbacks

Making business decisions within a family can get messy. Emotions can get unhinged, especially after an untimely death or disability. This is compounded by the fact that secondgeneration businesses are risky; only 30% stay afloat after an inheritance.

Altogether, this should beg the question: Is inheritance even the best idea? If your successor is skilled and business savvy, then perhaps the answer is “yes.” If not, you may consider selling your business to a co-owner, key employee, or outside buyer instead.

3 Selling Your Business to a Key Employee

When you don’t have a co-owner or family member to entrust with your business, you might consider selling it to a key employee instead.

Look at your organizational chart. Choosing an employee who is experienced, businesssavvy, and respected by your staff can ease the transition. You can train them and get them on board with essential procedures and relationships. If you’re concerned about maintaining quality after your departure, a key employee is generally more reliable than an outside buyer.

Just like selling to a co-owner, a key employee succession plan requires a buy-sell agreement. Your employee will agree to purchase your business at a predetermined retirement date, or in the event of death, disability, or other circumstance that renders you unable to manage the business.

Potential Drawbacks

A common drawback to key employee succession is money. Most employees aren’t in the financial position to buy the business they work for, and even if they are, having enough liquid cash on hand is another challenge.

One solution is seller financing, in which your employee pays you (or your family) back over time. There’s typically a down payment of 10% or higher, then monthly or quarterly payments with interest until the purchase is paid for in full. The exact terms of the loan will need to be negotiated, then clearly laid out in your succession plan.

The downside to seller financing is the amount of time it can take for you, or your loved ones, to get paid in full. If you’re looking for a faster transaction, a more appropriate option might be an acquisition loan. This is a loan acquired by your buyer from the SBA or a bank for up to 70%-80% of the purchase price.

4 Selling Your Business to an Outside Party

When there isn’t an obvious successor to take over, business owners may look to the community—is there another entrepreneur, or even a competitor, that would purchase your business?

This solution is easier for some types of businesses than others. If you own a more turnkey operation, like a restaurant with a good general manager, your task is simply to

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demonstrate that it’s a good investment. They won’t have to get their hands dirty (unless they want to) and will ideally still have time to focus on their other business interests.

On the other hand, if you own a company that’s branded under your own name, selling could potentially be more challenging. Buyers will recognize the need to rebrand and remarket, and as a result, may not be willing to pay full price.

Instead, you should prepare your business for sale well in advance. Hire and train a great general manager, formalize your operating procedures, and get all your finances in check. Make your business as stable and turnkey as possible, so it’s more attractive and valuable to outside buyers.

Potential Drawbacks

The main drawback to an outside sale succession plan is the unexpected—you can’t predict exactly what a new owner will have in store. The business’s mission could pivot, staff could change, and customer relationships could dwindle. If you’re selling your business in order to retire, you’ll generally be much more detached from the business with an outside buyer, as opposed to a family member or key employee who may still seek your advice.

Also, as with the other types of arrangements, you’ll need to draft a buy-sell agreement. Depending on the buyer’s capacity, you may need to back up the agreement with seller financing or an acquisition loan.

Update Your Succession Plan Regularly

Because it is a legal document, a business or business owner should enlist professional legal help to craft the best agreement and ensure that it is properly executed. The agreement should also be updated periodically to reflect

changes to business valuation, such as possible increases to life insurance coverage funding the buy-sell agreement to reflect increased value of company.

The Bottom Line

While some experts recommend starting your business succession planning three years ahead of retirement, it’s truly never too early to begin. Many decisions you make throughout your business lifespan, like who you hire and promote, can greatly affect your transition options later. It’s better to be cognizant of your eventual succession options than be taken by surprise.

It’s truly never too early to begin.

That’s not to mention the other key function of a succession plan, which is to prepare for the unexpected. Especially when you have family members or co-owners to consider, a succession plan greatly reduces headaches and stress in the event of an owner’s sudden departure, for example, by ensuring you and your loved ones get the full value out of your business.

Finally, to start writing a business succession plan, we recommend you speak with an expert who can help you find an ideal financial arrangement. For questions, please contact your VGM Account Manager.

Succession Planning – Part II: Template & Steps to Write a Succession Plan

A business succession plan includes step-by-step instructions that establish procedures in the event a business owner or key employee leaves the business. Our succession planning template helps business owners as they answer questions like who will take over the business, how long will it take, and what standard operating procedures need to be passed on.

There are 5 common steps involved in succession planning:

1 Establish the timeline of succession

2 Determine your successor

3 Formalize your standard operating procedures (SOPs)

4 Value your business

5 Fund your succession plan

Download Succession Planning Template

How Succession Planning Works

Succession planning is the set of events, timelines, and standard operating procedures that are established ahead of a change of ownership in a business. Business owners can create a succession plan in a number of ways, including following this succession planning template, as well as engaging a professional who’s well-versed in the process.

A properly constructed succession plan acts like a will for your business, ensuring the best interests of the business are carried out.

Who Should Create a Succession Plan?

Any business owner with a successful, thriving business should consider creating a succession plan. Often thought about in the context of retirement or sale of a business, a succession plan is also a critical tool in the event of untimely death or illness. A properly constructed succession plan acts like a will for your business, ensuring the best interests of the business are carried out.

When to Create a Succession Plan

Business owners looking to use this succession planning template to create a plan might wonder when they should get started. Much like a personal will, the answer depends on a variety of factors but generally comes down to as soon as possible.

Creating a succession plan takes time and effort, and answering the questions accurately is not easy. For this reason, many business owners start planning for succession at least five to six years before a transition. Creating a succession plan should be considered as a contingency in case of death, illness, or other circumstance that creates an unexpected need for transition.

Succession Planning Resources

Finding help with succession planning may mean working with your current accounting firm (provided they have experience with helping to develop succession plans). The amount of help you need will likely scale up with the urgency of your succession planning needs, as well as the size and complexity of the business. Consider whether to bring in a temporary accounting and finance professional or hire an accounting firm to assist you.

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Some resources to help you with succession planning are:

PwC

As one of the accounting industry’s “Big Four,” PricewaterhouseCoopers (now doing business as PwC) is a firm with extensive experience in succession planning. The company’s selfdescribed focus on small, privately held businesses minimizes the risk of becoming just another number and means it commonly deals with the sort of obstacles that you’ll encounter.

SCORE

SCORE, the nation’s largest network providing small business mentoring, has developed a quick guide to succession planning. The real value is that small business owners can apply to be matched with mentors who offer their assistance on a volunteer basis. For business owners in need of simple succession planning help, this option is worth consideration.

Local Accountant

Small business owners may wish to consider working with a local accountant (if the accountant is well-versed in succession planning). Entrepreneurs who choose this route can ask around in their personal network, tap into their local Chamber of Commerce or other local business support groups, or search for a certified public accountant in the directory provided by the American Institute of Certified Public Accountants.

The 5 Steps to Writing a Succession Plan

Writing a succession plan can be a daunting task. Indeed, many business owners put it off because they’re not ready to tackle the complexities. We’ve narrowed the process down to five simple steps to direct you along the way, including choosing your successor and determining

whether to sell your business using life insurance, an acquisition loan, or other methods.

The five common steps to preparing a business succession plan template are:

1 Establish the Timeline of Succession

There are two key types of succession plans: an exit succession plan and a death-or-accident succession plan. You may wish to write a deathor-accident succession plan well in advance of when you think you’ll need it to protect your business and successors in the event of unanticipated events. An exit succession plan should be written when you have a specific plan to transfer ownership of your small business. The two most common types of succession plans are:

• Exit succession plan: A plan to transfer ownership on a specific date, e.g., at retirement.

• Death-or-accident succession plan: A plan for one’s business in the event of their death or disability.

While an accident plan should be considered at any age, an exit succession plan should be written when you are within several years of retirement or wish to otherwise exit the business. When writing an exit succession plan, you should have a specific date that you would like to transfer the business and indicate whether you will remain involved in the business postsuccession or prefer a clean separation.

Template Tip

On the succession planning template, answer all the questions in section one. If you’re writing this succession plan to exit your business on a known date, fill out any remaining details, including how long you expect the transition to last.

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2 Determine Your Successor (See Part I)

A highly important aspect of writing a succession plan is choosing who will take over the business. Many business owners plan to have a family member, such as a child, take over the business. Other common choices include a business partner or key employee in the business. And of course, an outside buyer is always a possibility.

Common successors business owners choose are:

• Co-owners

• Family members

• Key employees

• Outside buyers

Choosing a successor may be difficult and requires considering what is in everyone’s— including the business’s—best interest. While keeping the business in the family may seem like a clear choice, keep in mind that secondgeneration businesses have a high failure rate. For this reason, many business owners choose instead to sell the business and provide a cash inheritance for their family.

Template Tip

Consider filling out profiles for at least three potential candidates. This will give you a good preliminary comparison of everybody’s skill and experience. Even if you’re already set on a candidate, you may wish to have a backup plan in the event the person leaves your business or doesn’t want to become an owner.

3 Formalize Your Standard Operating Procedures (SOPs)

As a small business owner, you should understand the importance of recording and formalizing day-to-day functions. SOPs should be documented for your managers and employees to reference, as well as any future owners of the business. Important items to document may include a daily checklist of opening and closing procedures, training for new employees, and a performance management system.

SOPs vary from business to business, but often include the following items:

Common Standard Operating Procedures

• Org Chart: A flowchart of your employee structure, including roles, departments, and who reports to whom

• Operations Manual: A rundown of daily functions—e.g., open and close checklist, a project management flowchart

• IT Manual: An overview of any computer, tech, or software systems used by your business

• Employee Handbook: A handbook that covers company policies, procedures, culture, benefits, safety, and more

• Training Programs: A set of training and onboarding procedures, sometimes called talent management systems

• Skill Retention Strategies: Plans for ongoing training—e.g., quarterly meetings, changes to employee handbook

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• Performance Management: An explanation of how employee performance is measured and reviewed

• Meeting Agendas: An overview of any other regularly held meetings, such as staff meetings and sales meetings

While not required, many businesses include SOPs when writing their initial business plan, and update these regularly as procedures change and the business grows more complex. It is a good idea to have these SOPs in place prior to succession planning, as they will help your business grapple with growth and change.

Template Tip

In our succession plan template, we’ve provided a checklist for these items—feel free to add or remove any, if necessary. Once you have completed an up-to-date document, attach it to your succession plan and check it off the list.

4 Value Your Business

Figuring out the value of your business should happen early—and regularly. It’s an unfortunate fact that many business owners tend to overvalue their enterprise, and these misjudgments can snowball into financial errors when planning for retirement.

There are several ways you can determine the value of your business, from using a simple business valuation calculator to provide a rough estimate, to following more advanced methods for how to value a business, as well as hiring a professional appraiser. You may also consider working with a company that offers business valuation services, such as BizEquity or Guidant Financial

Template Tip

A good practice is to consider the lowest price the business should sell for. When the business is eventually listed for sale, it may take a long time to find a buyer who is willing to pay your asking price. The succession plan should provide stipulations regarding how long to wait before dropping the price, how much to lower the price, and the lowest acceptable offer.

5 Fund Your Succession Plan

Few buyers out there have enough liquid cash to pay for your business upfront. Therefore, every succession plan needs a specific plan for how the buyer will make the purchase, whether it’s a loan, installment payments, or other option. The last thing you want is to reach your retirement date, or triggering event, and find that your chosen successor has no way to afford your business.

This is also why your funding plan will often need a buy-sell agreement. This is a legal document in which your buyer agrees to a specific course of action (like taking out a loan or life insurance policy) in order to afford the purchase. Once you’ve settled on a specific method of funding, make sure you meet with a legal professional to draft your buy-sell contract.

Every succession plan needs a specific plan for how the buyer will make the purchase.

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Common Succession Plan Funding Options

Best For:

• Life Insurance - Family member or partner takeovers

• Acquisition Loan - Outside buyer or key employee takeovers

• Seller Financing - Owners comfortable with taking payments over time

Here are the most common ways succession plans are funded:

Life Insurance

Most commonly used when a family member or co-owner is taking over the business, a life insurance policy can help your successor purchase the business from you or your heirs. Contrary to how it sounds, life insurance isn’t only used in the event of one’s untimely death. Permanent life insurance builds cash value that can be taken out at any time, so it can also be used in the event of retirement, disability, or any other triggering event.

Life insurance arrangements are common in family successions, especially when you may have multiple children, but only one is taking over the business. With your chosen successor as the beneficiary, a life insurance payout can enable them to purchase shares from your other children, thus leaving everyone with some compensation and financial security.

Acquisition Loan

An acquisition loan is money borrowed by the buyer in order to purchase the business. This is common when a key employee or outside party

is taking over and they need some funding to afford the purchase. Buyers can typically get 70%-80% of the purchase price financed from a bank or the Small Business Administration (SBA)—which is great news for sellers who want to be paid in full upfront.

Acquisition loans are secured against future profits of the business. While this makes them a generally reliable option, it also means a bit of work for the seller. Prior to the purchase, you’ll need to provide a lot of details about your business for the bank’s due diligence. Even then, however, the loan is not guaranteed. Pre-approval can provide some security, but it would need to be undergone regularly (every 6-12 months) up until the transfer date or triggering event.

Seller Financing

Seller financing is when the buyer pays you back gradually over time. This is one of the easiest and most flexible arrangements, as the business owner and buyer can set whatever terms they like. Most agreements involve a down payment of 10% or higher, followed by monthly or quarterly payments with interest until the purchase is paid for in full. Again, however, the exact terms can vary widely.

The key downside to seller financing is the time it takes to get paid back. Especially if you’re relying on the sale to fund your retirement, a 20-year term may be less than ideal. However, given the flexibility of seller financing, it can be possible to find an arrangement that works for everyone.

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Click here to download the the full template.

Succession Planning Template

Business Name:

Written By:

Date:

Note: This document was written to provide an organizational framework for business succession. It is not a legal document. Any specific terms or agreements presented in this document will require separate legal documents (such as a buy- sell agreement) drafted by a legal professional and signed by all parties.

P art 1: Timeline

Are you writing this to plan for retirement, to plan for the unexpected (death/injury), or both?

If you have a retirement date in mind, when will this be?

How long will the transition period last?

Additional Notes:

If you're planning for the unexpected, what events should trigger this succession plan?

P art 2: The Successo r

Do you have co- owner(s) who will want to purchase your business shares?

Do you have a spouse or children who are good candidates to run the business?

Do you have key employees who might be interested in purchasing the business?

Are there any outside buyers who are good candidates to run the business?

Are you willing to list your business on the marketplace?

Succession Planning – Part III: Suggested Steps to Take to Purchase a Home Healthcare Supplier

There are several suggested steps that a buyer must take in order to purchase a home healthcare supplier. These are:

Mutual Nondisclosure Agreement (MNDA): At the outset, the buyer and seller will sign an MNDA. Essentially, this states that the parties will disclose confidential information to each other, and they will keep the information confidential.

Disclosure of Financial Information: The seller will disclose financial statements, tax returns, and related documents to the buyer.

Letter of Intent (LOI): The parties will sign a (mostly) non-binding, but detailed, LOI. This will set out the “terms of the deal.” Among other provisions, the LOI will contain (i) the purchase price; (ii) how the purchase price will be paid; (iii) when closing will occur; (iv) whether the former owner will work at the business for a while after closing; and (v) whether the former owner will be bound by a noncompete agreement after closing.

Due Diligence: See the discussion below.

Closing: If the acquisition is an asset purchase, then an Asset Purchase Agreement, a Bill of

Sale, and related documents will be signed. If the acquisition is a stock purchase, then a Stock Purchase Agreement, a Stock Transfer, and related documents will be signed.

Due Diligence

Let us focus on due diligence. This is the most important component of an acquisition. This is where the buyer “kicks the tires” of the seller’s business so that the buyer knows what it is that they are purchasing.

For example, with an asset purchase, assume that ABC Medical Equipment, Inc. purchases the assets (inventory, computers, delivery vans, patient files, etc.) of XYZ Medical Equipment, Inc. Assume that John Smith owns XYZ. Assume that closing is on Nov. 1, 2020. After closing, Smith will continue to own XYZ. However, XYZ will essentially be a shell corporation. Generally speaking, in an asset purchase, ABC does not assume any of XYZ’s liabilities. And so, if on April 1, 2021, XYZ is subjected to an audit or investigation for its preclosing actions, then ABC should not be liable for the results of the audit/investigation.

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The story is somewhat different with a stock purchase. Assume that ABC purchases the stock, not the assets, of XYZ. In this scenario, Smith (not XYZ) is the seller, Smith will sell his stock certificate to ABC. After closing, XYZ will be a wholly owned subsidiary corporation of ABC. XYZ will continue as an operating entity: same Tax ID#, same PTAN, same third-party payer (TPP) contracts, etc. The only difference is that Smith is “out” as the owner of XYZ and ABC is “in” as the owner of XYZ. Assume that closing occurs on Nov. 1, 2020. Assume that on April 1, 2021, XYZ is hit with an audit/investigation for its preclosing actions. XYZ’s parent (ABC) should not be liable for XYZ’s pre-closing actions. However, if ABC wants to protect its investment in XYZ, ABC will need to direct XYZ to resolve the audit/ investigation.

And so, while due diligence is important with an asset purchase, it is even more important with a stock purchase. In conducting due diligence, ABC should obtain the following information:

Organizational Structure

• Name of each shareholder, director, and officer of XYZ.

• A copy of the formation and governance documents, including but not limited to, Articles of Incorporation, Bylaws, Shareholders’ Agreement, stock certificates, stock transfer ledger, and minute book.

• Has any shareholder, member, former owner, officer, director, manager, or employee of XYZ ever been convicted of a felony, or been excluded from any private healthcare benefit program or any state or federal healthcare benefit program including the Medicare or Medicaid programs? If yes, please explain.

• List of all states (and counties therein) in which XYZ has physically operated.

• Copies of Certificates of Good Standing from the secretary of state of _______ and from all states in which XYZ is registered as a foreign corporation.

• Assumed Names/Trademarks/Websites

• A list of all website addresses, phone numbers, fax numbers, email addresses, social media accounts, etc. owned or controlled by XYZ.

• A list of all trademarks, patents and copyrights owned, controlled, or used by XYZ and copies of all filings.

• A list of all assumed names, trade names or d/b/as (doing business as) utilized by XYZ and/ or filed with the secretary of state.

Financials/Assets/Liabilities

• XYZ’s audited and/or unaudited consolidated financial statements for the last three years.

• A list of all tangible and intangible assets owned and/or controlled by XYZ. Include copies of vehicle registration and title, if applicable. Please note if any assets will be retained by the seller after XYZ or otherwise excluded from the sale.

• Copies of all agreements and indentures relating to the borrowing of money or mortgaging, pledging, or otherwise placing a lien on any of XYZ’s assets and letter of credit arrangements and any guaranties of any obligation for borrowed money or otherwise.

• Provide a separate schedule of current inventory.

• Provide copies of all tax returns for calendar years ____, ____, and ____.

• Provide the balance sheets and income statements for ____, ____, and ____.

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• Provide a schedule of outstanding accounts receivable with aging information.

• Provide a schedule of outstanding accounts payable with aging information.

• A list of all outstanding liabilities, if any. This includes all open lines of credit or other open or outstanding debt obligations. Include all lender and all vendor account agreements and details.

• A list of the names and addresses of all wholesalers in which XYZ uses to purchase inventory for its business.

• A list of all bank accounts, checking accounts, and other deposit accounts in the name of XYZ. Please include the type of account, bank name and address, and a list of all authorized signatories to each account. Employees

• List of all employees of XYZ, including, name, title, current salary, and years of service.

• Copies of XYZ employment agreements, independent contractor agreements, confidentiality/nondisclosure agreements, and/or non-compete agreements with past and present employees.

• Data related to all claims or complaints filed by past and present employees, including (without limitation) workers’ compensation claims, discrimination or harassment claims, unemployment claims, and disability claims.

• Does XYZ provide health insurance and other insurance coverage for employees? If yes, please provide summary of same.

• Does XYZ provide retirement or other benefits for employees? If yes, please provide summary of same.

• Does XYZ have any issues regarding compliance with the Americans with Disabilities Act, age discrimination laws, or any other non-discrimination laws?

Contracts/Arrangements

• Please provide copies of all written contracts signed by XYZ. These include promissory notes; loan agreements; contracts with vendors; loan closet agreements; security agreements; equipment leases; real estate leases; indemnity agreements; professional services agreements; consulting agreements; managed care agreements, insurance agreements, TPP agreements; financing agreements; guaranty agreements; transfer tax agreements; franchise agreements; and agreements pertaining to computers, copiers, IT services, and phones.

• Please provide a list and description of all verbal contracts or arrangements related to XYZ or its business.

• Please provide a list of hospitals or other healthcare entities that XYZ provides services to/for. Include contact information for a representative of each such entity.

• Provide proof of general liability and professional liability insurance coverage.

• Litigation

» Details of all past, pending, and threatened litigation.

» Details of all past and pending arbitration and/or mediation proceedings.

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Regulatory

• Copies of all state home healthcare licenses, accreditations, Medicare Part B supplier numbers, Medicaid provider numbers, and all numbers issued by federal, state, county, or local governmental entities required for XYZ (or its officers/employees) to operate its business.

• Copies of surety bonds.

• Copies of findings/outcomes of the last two accrediting organization surveys.

• Copies of all documents and correspondence pertaining to past, pending, and threatened investigations, audits and claims reviews by governmental agencies, government contractors, and/or by TPPs, and the results of such investigations, audits, and claims reviews.

• Does XYZ have any written or verbal relationships or arrangements with any referral sources including (but not limited to) physicians, physician employees, hospitals, hospital employees, home health agencies, home health agency employees, or with any other individual or entity (regardless of whether he/she/it is engaged in the healthcare space)?

• Does XYZ have any marketing representatives? If yes, list their names, designate whether they are W2 employees or 1099 independent contractors, describe their duties and compensation, and attach copies of any contracts with the marketing representatives.

• Has XYZ ever been involved in any litigation, audit, overpayment request/demand, review or dispute with any TPP, governmental agency, governmental contractor, or accrediting organization? If yes, please explain.

• Provide a copy of XYZ’s most recent Medicare 855S enrollment and re-enrollment applications and subsequent changes of information for each location, including all attachments to same. Provide a print-off from PECOS of the current information related to XYZ’s enrollment.

• Is XYZ compliant with all the home healthcare supplier standards? If not, please explain.

• Does XYZ pay any money to, or otherwise provide anything of value to, physicians, physician employees, hospitals, hospital employees, home health agencies, home health agency employees, or to any other referral sources? If yes, please provide details of same.

• Does XYZ have an arrangement with a marketing company, lead generation company, call center, or telehealth company? If yes, please provide details of same (including any contracts with any of such companies).

• Describe XYZ’s policy toward collecting, reducing, or waiving customer copayment obligations. If yes, what is the policy? Does XYZ have a written copayment policy? If yes, please provide it.

• Does XYZ have a written compliance program? If yes, please provide it.

• Does XYZ have a written HIPAA policy? If yes, please provide it.

• Has XYZ ever incurred a HIPAA breach? If so, please provide details of same.

• Provide all correspondence to and from the Office for Civil Rights.

Succession Planning – Part IV: Is an ESOP Right for Your Home Healthcare Business?

How much of your net worth is tied up in your healthcare business? If it represents a large percentage of your total net worth, you may have wondered how you can transfer this wealth to the next generation of entrepreneurs, while also attracting, rewarding, and retaining valuable employees.

Ownership of your home healthcare company’s stock can happen in a number of different ways:

• You can give shares to them as a bonus.

• They can receive stock options.

• They can get stock through a profit-sharing plan.

• Employees can buy your company’s stock directly, through employee stock ownership plans (ESOPs).

Let’s start with the basics of all ESOP plans. We will narrow the discussion down to “smaller” home healthcare companies and get into more detail below.

ESOP Basics

While ownership of your company’s stock can happen in a number of different ways, ESOPs are a relative growing option for a number of (generally) mid-sized to larger home healthcare companies that can provide you and your employees with special tax benefits. (As readers may be aware, VGM is an ESOP entity. Read more here: vgmgroup.com/esop)

ESOPs let you implement a plan for employees to acquire some or all of your company’s stock.

ESOPs let you implement a plan for employees to acquire some or all of your company’s stock. Because an ESOP is a retirement plan, you and

your employees will get tax benefits that are not available with other buy or sell strategies.

For example, discretionary, corporate annual cash contributions to the ESOP are deductible on up to 25% of the pay of plan participants.

An ESOP can be appealing if you want to reward employees who have helped you build your business, and it can also be used to supplement your company’s 401(k) or another retirement plan.

Tax Incentives

Your home healthcare company can reap some federal income tax breaks with ESOPs, including:

• Deductible ESOP contributions: Discretionary, corporate annual cash contributions to the ESOP are deductible for up to 25% of the qualifying pay of plan participants.

• Deductible principal and interest payments: Whenever the ESOP borrows money to buy your shares, your business can make tax-deductible contributions to the plan, to repay the loan. Contributions to repay principal are deductible on up to 25% of the plan participants’ payroll; however, interest is always deductible. (Note: The 25% limit also includes employer contributions to other defined contribution plans.)

• Tax-free earnings: An S-Corporation 100% owned by an ESOP generally doesn’t pay federal income tax and most state income taxes. In addition, your employees won’t pay income tax on contributions put into their ESOP accounts, until they take distributions. If they take distributions prior to age 59.5, they’ll have to pay a 10% penalty in addition to the income tax, but they can roll the money into an IRA or another qualified plan and continue the tax deferral.

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Furthermore, if you own a C-corporation and sell 30% or more of your stock to the ESOP, you can defer—or maybe even avoid—the capital gains tax.

However, you must reinvest the sales proceeds into stocks, bonds, or other securities of U.S. operating companies. Government bonds and mutual funds do not qualify.

• Is your company profitable? If so, an ESOP will be advantageous from a tax perspective, because you’re currently paying taxes on earnings. If your company does not have a history of profitability, the trustee might object to the ESOP buying the stock.

• Which employees are you willing to include? Although there are some exceptions, generally all full-time employees over 21 must be able to participate in the plan.

How Do You Start an ESOP?

To set up an ESOP, you’ll have to establish a trust to buy your stock. Then, each year you’ll make tax-deductible contributions of company shares, cash for the ESOP to buy company shares, or both.

Is an ESOP Right for Home Healthcare Companies?

An ESOP can be appealing if you want to reward employees who have helped you build your healthcare business, and it can also be used to supplement your firm’s 401(k) or another retirement plan.

You can ask yourself these questions:

• Do you worry about someone else running your company? An ESOP only makes the rank-and-file employees the beneficiaries of a plan that holds stock in their names. Yes, they’ll have voting rights, but a board of directors will still exist, and managers will still manage.

The ESOP trust will own the stock and allocate shares to individual employee’s accounts. Allocations are based on the employee’s pay or some more equal formula. As employees accumulate seniority with your company, they acquire an increasing right to the shares in their account—a process known as vesting.

Employees must be 100% vested within three to six years, depending on whether vesting is all at once (cliff vesting) or gradually.

Employees get the stock after they leave your company. At that point, the company must offer to buy the shares back (unless there is a public market for them, which generally is an unlikely scenario with the majority of home healthcare businesses).

Frequently, companies must obtain financing to buy the owner’s shares. In such cases, the ESOP borrows money based on the company’s credit.

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The company then makes contributions to the plan to repay the loan.

You can only use an ESOP in C- or S-corporations, not partnerships or most professional corporations.

Drawbacks

ESOPs do have a few drawbacks. For one, you can only use an ESOP in C- or S-corporations, not partnerships or most professional corporations. Also, because private companies must repurchase a departing employee’s shares, you could face a major expense in the future if a large number of workers quit or retire at the same time.

Furthermore, the cost of setting up an ESOP is substantial. Accounting firm sources suggest perhaps $40,000 for the simplest of plans in small companies.

The important point to remember is that ESOPs can help you establish a transition plan for your business by creating a market for your company’s stock, allowing you to sell your business gradually instead of exiting suddenly and providing an ownership culture within your company.

Is My Home Healthcare Company Too Small for an ESOP?

As noted above, ESOPs offer several advantages for business owners, employees, and the company overall. However, some small businesses may consider themselves too small to justify the costs of transitioning to an ESOP company. A direct sale to key employees may be a way for some small companies to gain some ESOP-like advantages without using a formal ESOP.

Again, an ESOP is a qualified retirement plan that invests primarily in employer securities. Eligible employees are provided a stock ownership interest as a benefit of working for the company. Advantages of an ESOP include the ability to maintain corporate culture while providing employer-funded retirement benefits.

Smaller companies may find it difficult to transition their company to an ESOP. There may simply not be enough employees to fund a purchase of the company. In a recent article, selling a small company to one or more select employees has been termed “ESOP Light.” However, selling your company to employees directly is not an ESOP. Even without the specific tax advantages of a formal ESOP, selling a company to employees directly does offer some of the benefits that a small business is looking for when considering a true ESOP.

Benefits and Drawbacks

Selling to employees carries a number of benefits. This includes maintaining a level of confidentiality in the business, passing the business to experienced employees who are already familiar with the business, and promoting a sense of continuity, which is a sign of stability for customers and vendors.

However, selling a small company to employees also has some drawbacks. In a small company, employees may not have enough money to pay fair market value for the company. Without experience in business transfers and finance matters, employees may be hesitant to put their financial resources into the company. It may also take longer to transition a small company to employee ownership.

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Considerations

Before transferring equity in a company to a single or small group of employees, owners must consider how transferring ownership interest can impact the business, owner, and employees. Shares of a company that are given to employees or sold at a reduced cost may be taxable compensation to the employee at the difference between the price paid and the stock’s fair market value. The employer may also be required to pay payroll taxes on the compensation. However, with proper business counseling, costs and taxes can be minimized.

If the employees do not have enough cash or credit to finance the sale, the employer may have to set up a fund that will be able to purchase the company after a defined period of time. In order to avoid additional FICA and income taxes, contributions to the fund may be made through bonuses, raises, or other compensation the employee would have otherwise received. This fund can be used to purchase the company from the owner.

How Small Is Too Small for an ESOP?

“Is my company too small to have an ESOP?”

There is no simple answer to this, and certainly there are no upper or lower limits per se on the size of a company sponsoring an ESOP. There are, however, some basic guidelines that can help determine when an ESOP is worthwhile. There are a handful of ESOPs with under

10 employees, and a larger number between 10 and 20, but in most cases at least 15 employees is a reasonable starting point.

The key issues to consider are the costs of the plan relative to the benefits, whether there is successor management, if the company is profitable enough to pay for the costs of buying shares, and whether the company has personnel willing to spend the time to learn about and manage ESOPs.

Calculating the Cost

First, of course, you need to know how much an ESOP will cost. Unfortunately, cost estimates vary widely from one case to another and one consultant to another. There are several components of cost:

• Preparing plan documents and government filings

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• Obtaining a valuation

• Administration

• In a leveraged ESOP, loan commitment fees, legal fees for the lender’s counsel and loan documents

• Possibility of financial consulting for structuring the transaction

To set up a plan, you need an attorney and an independent appraisal in all cases. You may want to have a financial advisor help assess feasibility as well. The plan must have a trustee to protect the interests of plan participants. This can be an internal person (but not the seller or people related to the seller). For the most basic services (attorney and appraisal firm), in a non-leveraged transaction (one where you do not have the plan borrow money to buy shares), costs can be as low as $60,000 (in 2017); leveraging will add another $20,000$30,000 and up. An outside trustee, which is recommended for the initial transaction but not required, could add another $20,000-$50,000.

Leveraging adds costs for several reasons. The lender usually wants legal opinions from its counsel, charges loan commitment fees, and needs loan documents prepared, not unlike the fees involved in a mortgage transaction. Even in a transaction of several hundred thousand dollars, this could add another $10,000-$30,000 or more to the costs. If a loan cannot easily be obtained, or if the transaction involves multiple sources of financing, it may be necessary to hire a financial adviser to help structure the deal. These experts often charge a percentage of the transaction costs, typically 1%-3%, with the percentage a function of the size of the transaction.

Plan administration costs—keeping

records, filing reports, sending plan account statements, etc.—depend on the number of employees. There are certain fixed costs, however, so there are some economies of scale for larger firms. A firm of 20 employees might reasonably expect to pay around $2,000$4,000 per year as a base cost, plus $30-$60 per employee.

All of these estimates should be viewed cautiously. Invariably, when we report costs, we receive at least a few calls from people who say we misled people. Some say our estimates are too high; some too low. The truth is that costs vary considerably depending on the nature of the transaction. The costs listed here are “ballpark” numbers for simple transactions. This article is aimed at very small companies; larger companies may involve more costs, but costs are usually well outweighed by other benefits if the company is otherwise a good ESOP candidate.

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Assessing Costs vs. Benefits

There are several things to consider when trying to figure out if these costs can be justified:

Do You Have Successor Management? Many small companies have an owner who is essential to the business. Unless you have successor management in place, an ESOP is not likely to work or to get financing.

Is There Someone Willing and Able to Deal With ESOP Complexities on Staff? ESOPs are complicated. Even if you have an external trustee, you need someone on the staff who will develop sufficient expertise on the topic to make sure that the right information is being provided to employees, appraisers, the trustee, and plan administrators. If someone internally acts as a trustee, that requires even more knowledge and more time (a few weeks per year).

What Are the Alternatives? Accounting sources suggest it will likely cost at least $60,000$80,000 to buy out part or all of an owner’s interest. That may seem exorbitant in, say, a $500,000 sale. But what are the choices? If the company is sold by a business broker, a percentage of the fee will be charged that will at least match that. If a partial interest is for sale, it may be difficult or impossible to find another buyer willing to offer a reasonable price, adequate security, or a satisfactory continuing employment relationship if the seller wants to stay with the company. Employers also may have a strong preference to have employees own the company.

What Is Our Tax Bracket? If you are not paying taxes or are in a low tax bracket, some tax advantages may have little application, although the rollover benefits may still be worthwhile to the seller.

How Will Annual Costs Compare to Annual Contributions? The annual fees you pay, including an amortized amount for start-up costs, should be less than the amount of annual contributions you make multiplied by your tax rate (if your costs are $20,000 per year, and your combined federal-state tax rate is 30%, you should be able to contribute at least about $70,000 a year to offset the cost). Otherwise, you might consider a non-tax qualified plan.

Is Our Payroll Adequate? Figure out what the eligible payroll of the people in your plan will be. Then multiply by 25%. In a leveraged plan, multiply this number times the number of years of the loan, and this will give you an estimate of the maximum amount you can borrow. Is this going to be enough of an annual contribution to buy as much stock as you want to make available? Note that the “internal” ESOP loan used for this calculation can be extended for a very long time (well over 10 years), so this is usually not an issue.

All of this is not meant to discourage companies from doing ESOPs. The benefits of ESOPs to all parties can be substantial, but you need to go into the transaction knowing what is required. As a rule of thumb, ESOPs work best for companies with over 20 employees, but a little back-of-the-envelope calculating can give you a much better idea if this is worth pursuing further

VGM urges home healthcare owners to secure appropriate legal and financial counsel, which VGM does not offer. The information above should not be interpreted as legal advice.

For questions, please contact your VGM Account Manager.

www.vgm.com/services/government-relations