A weathered AMC Pacer with a flat tire and a “For Sale” sign sits on the lot of Morris Young Co. in Greensburg—a fragment of the legacy left by Ivan Young, the now-deceased former owner of the food service equipment supplier. Young loved collectible cars—he owned about 60 when he died in January of last year—and had a special fondness for the anomalous.
In some ways, the discontinued Pacer, made by now-defunct AMC, is not unlike the estate that Young left. Its full value won’t be realized until there is significant work done to it, and the investment required to accomplish that is likely to come at a considerable cost. To the car fancier with an affectionate eye for the Pacer’s mixing bowl proportions, however, it could be a find.
But while Ivan Young may have admired the details that made the autos in his collection distinctive, this son of a Czech immigrant left all too many particulars untended when it came to his estate. His neglect nearly meant the demise of the business that his father founded 74 years ago and nearly wrecked his plan to turn the enterprise over to his son, Phil.
The road to hell
Ivan Young had always made it crystal clear to his children how he planned to distribute his estate. His sons, involved in the business with him for years, would take over the company. His real estate holdings would go to his two daughters.
“It was understood that the boys would get the business and the girls would get the property,” says Barbara Young, Phil’s sister.
Young was a widower, and when his youngest son, Mark, died in an accident six years ago, the business, it was acknowledged by all, would go to his eldest son, Phil. The rest of the estate, essentially commercial and residential real estate, including homes in Greensburg and Florida, and Mr. Big, a men’s clothing store in Greensburg, would be divided between Ivan Young’s two daughters.
As Phil Young has learned, the road to hell is paved with good intentions.
“We never expected that there wouldn’t be some kind of trust in place,” says Phil Young.
Phil speculates that a lingering despondency over the deaths of his wife and son may have left his father reluctant to deal with the issues of his estate and inheritance. But the bottom line is that a $3 million estate came to be worth about half that amount after state and federal inheritance taxes took their bite.
The Youngs’ situation, unfortunately, isn’t all that unusual. In too many cases, it turns out, there isn’t much dialogue when it comes to estate planning.
“It often becomes one of those things that the family doesn’t talk about, or when it is brought up, the son or daughter gets shut down,” says Jim Dugan, managing partner of accounting firm Markovitz Dugan & Associates, and an expert in estate planning for family businesses.
Whether Ivan Young realized it or not, his holdings were prepared for anything but a seamless transfer to his children. He did leave instructions in his will to distribute his estate as he had always described to his offspring, but his holdings were in such a balkanized state at the time of his death that it was impossible to neatly pare off his business from his personal assets and distribute them smoothly.
Something of an old-schooler who inherited the business from his own father who founded it in 1924, Ivan Young disliked lawyers and, not unlike any business owner, probably disdained the thought of confronting his own mortality. So he made no provision to pay off the debts of the business or the estate taxes in the event of his death—leaving a heavy burden for his heirs to bear. The three surviving children found themselves selling off many of the estate’s assets to pay off inheritance taxes and keep the business viable.
Ivan Young’s personal and business assets were extensively intermingled, with business assets, for instance, put up as collateral for real estate purchases, including warehouses for his collection of several dozen classic and antique automobiles. Personal assets, on the other hand, provided guarantees for business loans. Resources of the business were used in some of his other holdings. He personally held titles to the main buildings in Greensburg where the business operates, which means that his son must purchase them from the estate.
Phil Young believes that with proper planning, his father could have passed on a good chunk of his estate to his children. Instead, he finds himself scrambling to save the business that his grandfather launched as a tobacco and confections distributor, and from which he has derived his livelihood for the last two decades.
Ivan Young’s will stipulated that the business was to remain in the estate, with Phil Young in control of the business. But Phil’s hands were tied when it came to borrowing money for the business, since his sisters were required to co-sign for any loans the company took out during the first year, and they judged it too risky to do so. To get the capital he needed to keep the business running, Young says he put up his home and other personal assets as collateral.
And finances are still an ongoing hurdle for the business that he says does about $3 million a year in revenue. “It’s been tough getting banks to look at a business that’s already in debt,” Young says.
A sadly common story
The Morris Young story is all too common, unfortunately. A myriad of factors can get in the way of a family owned business, not the least of which is simply the reluctance of most to face their mortality. And making preparations to hand over a business is not simply a legal or accounting matter.
“Succession planning is more than just having the legal documents signed and in order,” says Chuck Vater, managing partner of law firm Cohen & Grigsby.
Plan—or else
For the business owner, planning for the handoff of a business means giving up some control or, at the least acknowledging that someone will eventually be taking the reins. It also means trusting the heir or heirs who will assume control and preparing them for that step. And it means taking time out to plan, something that many business owners loathe anyway.
“Planning is the hardest thing in business,” says Dugan. “They would rather go into the plant and load the truck than go into their office in the morning and plan for the future.”
But those who fail to plan are, in effect, planning to fail. Estate taxes start at 37 percent and can go as high as 53 percent, rates that can gobble up assets in a hurry.
There are ways to lessen the bite. Transferring assets to heirs over a number of years is one way to ease the burden of estate taxes, Vader points out. In a growing business, for instance, assets transferred to a child can increase substantially in value over the years. The first $650,000 of an estate is exempt from inheritance taxes, and that exemption can be taken at any time before the estate owner’s death. The advantage is that those assets, if transferred early, can avoid taxation and can grow significantly in value by the time the estate is settled. Additionally a tax-free gift of $10,000 can be made to any individual during a given calendar year, an amount that will be indexed for inflation beginning next year.
The rescue effort
One of Phil Young’s first actions after his father died was to assure his customers that the company was going to continue, an important move, say the experts.
“Your customers deserve to know what is happening with the business and how their needs will be met,” says Dan Grealish, president of Henderson Brothers Inc. The firm, an insurance agency, survived not only the death of Grealish’s father, the firm’s owner, but the loss of other key people and Grealish’s own bout with a serious, life-threatening illness.
But simply telling them that you intend to cont
inue the business isn’t enough. You will have to back it up with results.
“Emotion and sympathy will only last a short period of time, and will be replaced with realities of how you will handle their accounts,” Grealish continues. “You can bet that your competitors will use a death of a principal as an opportunity to try to ‘help your customer.’”
To raise cash and free up resources, Young sold off slow-moving, unprofitable inventory. He looked at every detail of the business and conferred with his accountant to put together an aggressive business plan.
A cooperative supplier
A saving grace for Phil Young was a strong relationship with the Taylor Co., a major supplier of restaurant equipment and of which Morris Young is its oldest dealer. Realizing that Morris Young’s roots were deep in its territory—the company sells Taylor’s products to more than 300 McDonald’s franchises alone—Taylor was willing to work with Phil Young to pay off the $200,000 balance the company was carrying at the time of Ivan Young’s death.
New ventures
There have been some bright spots among Morris Young Co.’s difficulties. Outdated management information systems that Ivan Young had resisted replacing have been revamped with the help of Taylor, and he has plans to implement a modern system to control the company’s $1 million inventory. Morris Young has opened a storefront at its Greensburg location—something Ivan Young resisted vigorously—where it sells mostly commercial-grade food preparation products. It isn’t always buzzing with customers, and sales to date have been modest, but Phil Young believes the store, on a busy street in town, will attract the better-heeled customer who is looking for high-quality utensils, cookware and appliances. An amateur wine maker, Young is pondering adding of beer- and wine-making supplies to his stock.
Young has opened a showroom for some of his food preparation machinery in the Strip District, a venture that started out opening one day a week and by appointment. Now, the showroom is open five days, and Young is considering similar outlets in other parts of his distribution area, which includes Western Pennsylvania, Maryland and the West Virginia panhandle.
Beyond the additional sales opportunities that the showroom provides, Young says, it offers something not as tangible but no less important to his business. “It strengthens the confidence in the customer that we’re not going anywhere,” Young says.
Phil Young says he still works a lot of 16-hour days, rising at 5:30 a.m. and spending time in the Greensburg headquarters, the Pittsburgh showroom and working at home in the evenings.
Barbara Young acknowledges that the time since her father’s death has been a struggle. “We went into this very gung-ho after Dad died,” she says. “I know my father and my grandfather worked so hard to keep this business going.” Even so, she seems to regret that she and her siblings were left with a mess to unscramble. “It should have been a smoother transition,” she says.
After losing his 25 year-old brother suddenly, his mother at 53 and his father unexpectedly last year, Phil Young is painfully aware of the disruption that a sudden death can cause, and so he has put his own business and personal affairs into order with a two-inch thick plan that sits on the desk in his cramped office. He offers other business owners some hard-earned advice on handling their estate planning and their heirs:
“Give it to them now or put together a plan.”
