A Healthy Financial Company

Blended Family, Non-Business Active &  Business Active Children

In this case we worked with a husband and wife owned C corp company that worked in the construction industry selling Air Conditioning units.  They came to us after an estate planning attorney had instructed them to sell their company to a 3rd party.  However, that solution did not accomplish their most important objective.  They have 2 daughters who did not work in the business, and one son that did.  Their top priority was to treat all the kids "fairly" and to ensure the son was protected with continued employment with the company.  The father also wanted to work in the business and control it until he died.  The business was worth much more than the rest of their assets combined. We explored many different solutions over a few years to include: partial or full ESOP, utilizing Self Cancelling Installment Notes (SCINs), annual gifting limits, and life insurance.  In the end, we purchased a life insurance policy on the wife that paid directly to the non business active daughters 50/50.  It was agreed between the owners that the son deserved "sweat equity" in the business value as he had worked many years for the company.  So, he was to receive 60% of the business value, while the sisters split the remaining 40%.  The insurance policy paid the girls the 40% value from the company.  The policy was owned by a Irrevocable Life Insurance Trust (ILIT), so that the daughters received their benefit tax free and this was not includable in owners estate! The children would then split the non business assets 1/3 each.  In the end, the daughters received the inheritance the owners wanted them to regardless of how well their brother operates the business in the future, the son inherited the business without adding his sisters as new business partners, estate taxes were minimized, and the patriarch was able to run the business until his last breath on this earth is taken.  The client's accountant was engaged and involved in each and every step.  The original estate planning attorney who recommended a third party sale was replaced.  He did not take the time to truly understand ALL of the owners precision objectives before he made an easy recommendation that would require very little effort on his part, but that would change the lives of all involved forever.  In the end, the clients were thrilled that their most treasured objectives were addressed. 

Sole Owner Transitioning to Family Member and Key Employee

In this case, we worked with a single owner of a LLC company also in the specialty construction industry.  The owner came to us with the goals of leaving his business to his business active child (BAC) and a loyal key employee (KE).  He also had non business active children that he wanted to treat fairly.  He wanted to exit his business in 4 months.  When we asked the last time the client completed a financial needs analysis, the answer was never.  When we asked what his business was worth, the answer was unknown.  So, we helped the client to complete his financial needs analysis, and were able to provide him with a very accurate valuation estimate through our online platform offered through our website.  Understanding his current assets and financial needs in the future, we were able to determine that the owner was not ready to leave the business in 4 months.  Furthermore, it would have been difficult, if not impossible, for the BAC and the KE to secure financing to buy the owner out with.  So, we designed incentive plans for the BAC and the KE that is tied to increased revenues and net income.  The employees will receive equity as compensation for their exceptional performance, which is taxable to the employees.  The owner will stick with the company for 4 more years.  During this time, he will train the BAC and KE to operate the business successfully, and the owners day-to-day operations will diminish over time.  Eventually, the BAC and KE will either finance the buyout of the owner in 4 years, and/or pay the departing owner a salary for a period of time, even though the departing owner will not be working.  The client did not have an accountant, so we referred them to an accountant that we have confidence in, who was also very involved in the planning.  The owner also had outdated estate planning documents.  So, we were able to refer them to an estate planning attorney that we also have great confidence in.  

Sale to Third Party

In this case, we had a single owner of an S Corp specialty construction company.  This owner has children, but neither daughter works in the business.  This company had one major client that accounted for about 85% of their business.  Before contacting us, they hired a key employee (KE) away from the major client and agreed in principal with this KE to transition ownership to him.  A letter of intent (LOI) was signed before we were contacted as well.  We had major concerns with the terms agreed to between the owner and KE.  To begin, the KE had no money to pay for the company, and no assets to secure financing to help with the purchase.  The KE had no experience operating and owning a company either.  The owner had agreed to pay the KE 1/3 of profits moving forward, but none of this was tied to any incentive agreement.  So, the owner was essentially giving his profits to this new KE to then pay them for equity with.  So, the owner was using his own cash to buy himself out with.  He could just take an exorbitant salary over a few years and ride the company out as long as possible and accomplish the same objectives as this plan.  We recommended having a tough conversation with the new KE to restructure terms of the deal, since no operating agreement was ever executed.  But, the owner would not agree to that.  So, we explained that we cannot help this client and wished him the best.  

The important part of this story is that we will say no and collect no fees if we cannot tangibly affect your business and life in a positive way.