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Steve Parrish (Photo: The American College)

Financial Planning > Trusts and Estates > Estate Planning

COVID-19 Reminded Business Owners About Exit Planning: Steve Parrish

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Steve Parrish has been been helping clients manage, and sell, businesses for decades. He’s also been helping advisors, designing the courses for those who advise business-owner clients.

Parrish is an independent consultant, an adjunct professor at Drake University and The American College of Financial Services, and co-director of the American College Center for Retirement Income.

Prior to his current post, he was vice president, marketing services, at AmerUs Life Insurance Company, and spent more than 18 years as national advanced solutions director at Principal Financial Group.

He has a bachelor’s degree from Saint Olaf College; a law degree from the William Mitchell College of the Law; and the Retirement Income Certified Professional, Chartered Life Underwriter, Chartered Financial Consultant and Accredited Estate Planner professional designations.

He’s helped a lot of clients through the sale of their business and planning for retirement during his years. Here are some of his thoughts about the process basics, and about how things have changed.

THINKADVISOR: How, actually, do you help a client sell a business?

STEVE PARRISH: There are many steps involved, but two I would emphasize are business valuation and retirement liquidity.

Contrary to popular belief, business owners rarely know the sale value of their businesses, so the rest of their plan can be based on a false assumption. Start by valuing the business.

Relatedly, there is the issue of whether their exit plan will have a “liquidity event.” If they sell the business, that helps convert illiquid business equity into retirement income.

If they’re passing the business to the kids or otherwise holding on to the business, they need to have some other source for retirement. Examples include qualified retirement plans, deferred compensation, and consulting agreements.

What makes exit planning for a business owner client so complicated?

The challenge for many of these owners is that their business is their retirement plan, and it’s not easy converting business equity into retirement income.

If they sell to an outside buyer for a lump sum, they pay taxes upfront on the gain.

If, instead, they sell to a buyer for, say, a 10-year installment note, then their biggest retirement asset is a now a note from a buyer who they don’t control.

While it’s great to own a business, these are examples of the challenges faced in crafting an exit plan.

How has the Tax Cuts and Jobs Act of 2017 changed things?

The TCJA has caused many small business owners to consider retaining their businesses when they retire.

First, because of the 20% QBI [qualified business income] deduction that so many of them currently enjoy, they want to continue to reap the tax benefits associated with business ownership.

Second, since fewer of them are threatened with the prospect of an estate tax, they may hold onto the business in order to get a step-up in the business’s income tax basis for their heirs.

Has the COVID-19 pandemic had much of an effect?

Estate planning has taken on increased importance.

Business owners are human, and they’ve not only seen loved ones disrupted by COVID-19; they’ve also seen how lack of planning has made things worse.

Estate planners are swamped right now, not just because of their client’s tax issues, but also because of the demand for powers of attorney, wills and other estate planning docs, cleaned-up beneficiary designations, a plan for what happens if something goes wrong with their health, etc.

What kinds of products or arrangements are you typically using to help business owner clients with business sale issues?

There has been an increased interest in products that facilitate future business sales.

Examples are life insurance to fund buy-sell agreements and key-person insurance to cover the loss of a rainmaker.

The combination of the pandemic and disrupted markets has caused business owners to pay more attention to business risk, and this includes the risks involved in having an exit plan.

Steve Parrish (Photo: The American College)