Wealth Planning Primer: A Case Study with Tom, Business Owner & CEO

January 2019 | Article

Tom came to me in the midst of a crisis.[i] He had lost his mother when she was only 77, causing him to reflect on his own life. He was 52, running his business like a well-oiled machine, driving his sports car on weekends and proud of what he’d accomplished. However, his kids were either out of college or in their final years of school, and he didn’t see them nearly as often as he’d like. His wife was a star in her own right at her job that had been critical to supporting the family during the business’s infancy, but her income was no longer as significant as it had been to their lifestyle, and she was tiring of the grind. He knew what he wanted—to spend more time with his family—but he had no idea how to get there. “No one knows this business like I do,” he’d repeat to me, “so how could I possibly walk away?”

Seeing the Complete Picture
Tom wanted an answer right away despite knowing this was the question of a lifetime. I started by standing on the shoulders of his and his CPA’s work, using their carefully constructed personal financial statement and profit and loss documents to enter his data into our planning software. By looking at his tax return, I was able to determine he had about six different IRAs of varying types and at least nine bank accounts as well as a minimum of two 529 accounts. Tom was able to track down statements or login information for the accounts, and we quickly linked the accounts into our software and manually entered the rest. Within about a month, Tom had one place where he could see all his financial information.

After building Tom’s cash flow, we worked together to determine how much he spent on his lifestyle and calculated how much additional he’d like to spend in retirement. The effort was big, but the outcome was simple. Tom needed to sell his business for at least $8 million to have enough to retire on. If the markets were favorable, he could have enough to last until he or his wife lived until age 95 and still leave a good inheritance to his children. The outcome is easier said than done.

From Plan to Action
“What do we do next?” Tom asked. He could see the end zone now, but he had no idea how to get there. We connected Tom with our business succession professionals who interviewed his management team and determined that Tom’s chief operating officer and chief financial officer were ready and eager for more decision-making authority, while the chief technology officer was happy to keep managing the bulk of the production without wanting additional responsibility. The truth was his team knew the business even better than Tom did, though they lacked the risk-taking spirit to buy the business themselves.

“I know this is your baby, Tom, but would you consider an outside buyer if your team could stay in place?” I suggested. We introduced Tom to our acquisitions experts who could connect him to a source of private equity, as well as our business valuation group to provide the starting price for negotiations. A buyer was found and a price was settled on—$9.2 million. Not surprisingly, Tom needed a bit more than the $8 million to actually walk away.

Tom and I spoke often and at length about the deal. It wasn’t about the numbers. It wasn’t about whether he knew what he wanted. It was about preparing himself emotionally to hand it over. I answered the questions I could and I listened to his concerns when I couldn’t. We modeled and remodeled his retirement, answering many “what-ifs,” until he ran out of questions and was left with only the decisions. The day came, and we were ready.

The money was wired into an account opened for the specific purposes. From the day it was transferred, the funds were held in diversified, insurance-backed bank accounts earning interest until he was ready to take the next steps.

Investing for the Future
Using our investment specialist, we built Tom a portfolio of investments customized to both his willingness to take on risks (which is inherent to many business owners) balanced against his concerns over lack of control and his relative insecurity with “the market.” We set aside cash sufficient to cover three years’ worth of spending. A second bucket held our expected needs for years four through seven, which were placed in directly held, highly rated municipal bonds. We built an investment pool for his later years that would have sufficient exposure to risk to grow at an amount needed to last him the rest of a long life.

Lastly, we reviewed how his assets would transfer at his death, both in the event of a hopefully long life, but also at younger ages. During the sales process, we had engaged our wealth transition tax experts to build a transfer of the proceeds above what Tom needed for retirement into trusts for his children. We demonstrated the estate tax savings and the cash flow impact of the strategy to make sure he knew how the trusts would function so that he was comfortable with the complexity.

I now meet with Tom less, though he still asks me to model ideas he has. He’s considering going back to work, though he knows it’s not because he needs to. Tom is often tan when I meet with him, even in the winter. I believe Tom will be working again in a few years, though I doubt it will be with the ferocity he once had. For now, he’s enjoying his time in a way his age and health allows him to. I didn’t make Tom wealthy; he did that on his own. What I did was make Tom confident and comfortable, and that is the best part of wealth planning.



[i]“Tom” isn’t real, for security’s sake, but the work I did for him is. This story is a mix of just some of the ways I’ve helped business owners reach their financial independence.

Financial Advisor offers Investment Advisory Services through Eide Bailly Advisors LLC, a Registered Investment Advisor. Securities offered through United Planners Financial Services, Member of FINRA and SIPC. Eide Bailly Financial Services, LLC is the holding company for Eide Bailly Advisors, LLC. Eide Bailly Financial Services and its subsidiaries are not affiliated with United Planners.

Stay current on your favorite topics

SUBSCRIBE

Applicable Services

Take a deeper dive into this Insight’s subject matter.

Financial Services

Webinar
Join us for to learn about strategies that may benefit you and potential legislation that could affect your ability to plan in the future.

Check the background of this firm on FINRA's BrokerCheck.
Financial Advisor offers Investment Advisory Services through Eide Bailly Advisors LLC, a Registered Investment Advisor. Securities offered through United Planners Financial Services, Member of FINRA and SIPC. Eide Bailly Financial Services, LLC is the holding company for Eide Bailly Advisors, LLC. Eide Bailly Financial Services and its subsidiaries are not affiliated with United Planners. 
Securities Licensed in: AK, AR, AZ, CA, CO, DC, DE, FL, GA, IA, ID, IL, IN, KS, KY, LA, MD, MI, MN, MO, MS, MT, NC, ND, NE, NM,  NV, NY, OH, OK, OR, SD, TN, TX, UT, VA, WA, WI, WV, WY
ADV Part 2A

Find A Location