Thursday, July 9, 2009

Business Continuity, Part 3

Paving the Way for a Smooth Business Transition

Dan owned a paving company. He started it 35 years ago with a used dump truck, a used paver, and an old steamroller he bought at an auction. Now, he has 15 dump trucks, four pavers, six flat beds, three graders, a couple front-end loaders and a half a dozen pick ups, and some other miscellaneous equipment. His three sons in their 20’s work in the business. His wife died of a heart attack three years ago. Dan is 56 and is making plans to pass on the business to his sons.

His attorney and accountant valued the business at $9,500,000—assets minus liabilities. Dan was shocked to learn that the estate tax bill would be something like $5,500,000 if he were to die before his sons owned it. He and his attorney put together a plan so that the three sons would be equal 30% owners in 10 more years. Dan wanted to keep 10%. His concern was “What if he died prematurely like his wife did?” The son’s would be hit with a huge tax liability. Maybe they could borrow the money and pay it back over 10 or 15 years. If so, the total cost would be around $8,000,000, maybe more. Maybe the IRS would let them pay it back over time, at 6% interest. Again, we’re talking millions of dollars.

If they couldn’t do either, they would have to sell the business. In such a time, they would have to get out of it what they could, and it wouldn’t be close to the full retail figure. Again, millions of dollars lost.

That’s when he called me. We put together a 10-year term policy for $6,000,000. Why the extra $500,000? The sons weren’t in a position to run the company themselves at the present. So Dan wanted extra money to hire a COO while his sons made the transition to business owner. It was all spelled out in the transfer documents drawn up by the attorney.

What did such a huge policy cost Dan? Would you believe $19,900 a year? That may sound like a lot, but remember we’re talking millions of dollars that are at risk as an alternative. As Dan said, “That’s not even the cost of a pick up truck.”

So, in 10 years, Dan will pay out a total of $199,000 in premium to protect his business from more than $5,000,000 in estate taxes. He is paying that to protect his legacy, and provide a lifetime of income for his children, and he hopes his children’s children. As he said, “That’s not even the cost of a couple dump trucks. That's well worth the cost of making sure I can pass intact what took me my whole like to build to my three sons and their children.”

To his credit, he paved the way for a smooth business transition.

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