This true story will protect the confidentiality of Beacon’s client to describe a long process and communicate the power of a plan.

In 2011, this contractor attended a two-day Beacon Workshop in Chicago. We gave him a proposal, and later he informed us he was going with a local planner. Thank you, and we moved on. 

In the summer of 2016, after five years of absence, he re-contacted us. He simply said the local adviser gave him cookie-cutter advice and a canned report without addressing the major elephant in the room: reducing the tax burden and financial risk. 

Two years ago, he got the call to sell the business to a consolidator. I cannot share the details because of confidentiality, but a “generic” offer in the contracting world would look a lot like this:

• A very low multiple offer 
• Basically, a distress offer and pay “good will”
• Taxes that reached close to 50 percent or more
• A two-year employment agreement with a lower salary
• 60 percent cash up front with the remaining 40 percent in a claw-back tied to the adjusted forecasted earnings of which a portion is forfeited if the financial goals are not achieved

In the end, the client was unable to meet his financial goals (because of the tax bite) with the consolidator’s offer or protect the associates’ careers who had helped him build his very profitable business. He walked away from the deal.

This past summer, he concluded that his present goal was to sell to his management team and work part time for five years. His second goal during this time was to get his team to the next level, then into leadership and train the next CEO to replace himself. 

He was concerned about whether the growing company’s value and after-tax net would be enough for him to retire.

The great news is the company’s revenues had more than doubled since 2011, with a very strong profit margin. This man is a grinder who won’t be outworked by anyone and the culture of the company and management team reflects that work ethic.

We then began the Beacon proprietary DAD exit process, which contains three successive parts of Discovery, Analysis and Design, as follows: 

1. Discovery: The first step was to set up a series of conference calls where we interview the owner about his business, personal and financial situation. The execution and integrity of our plan must support the owner’s goals in the exit strategy.

We requested a series of legal and financial documents for review to decide whether the structure of these documents accurately reflects the owner’s intentions and goals as reflected during our interviews. 

Upon completion of the discovery phase, we prepared a preliminary outline presentation of our findings and suggested solutions for the owner’s review. 

2. Analysis: Once we obtained a thorough understanding of the owner’s goals and objectives, a second step determined whether he could afford his goal of a management buyout. 

Valuation and taxation issues related to his business and personal situations are a key factor in making this determination. Our report included a “calculation of range of values” prepared by our COO, Joe Bazzano, a credentialed business appraiser. This method is a cost-effective way to estimate the business values associated with the exit strategy selected for planning purposes. 

Our client was dependent on his business to support his lifestyle. He had been a good saver but was still very dependent on the trapped wealth inside the illiquid business to retire without changing his present lifestyle.  

To reach that conclusion, we gathered pertinent information relative to his current financial, estate and business planning. The analysis in the report focused on the coordination of these three planning areas. It is important to understand that coordinating the financial with the personal goals will achieve the best outcome for our exiting owner. 

The report illustrated various bottom-line exit options (before and after taxes) and tools used to reduce or eliminate taxes for a bottom-line understanding of his financial future. We made suggestions and diagramed recommendations for protecting his wealth until the liquidation event occurs. 

3. Design: Upon completion of the Discovery and Analysis stages, we began the process of designing and illustrating the exit options in our 70-page report.                

The report illustrated several options for the management buyout. Each option had its own characteristics and costs related to taxes and fees. It further identified both short-term and long-term goals for the execution of planning. 

The blueprint lays out the short- and long-term goals that vary for each business owner. We had to update his estate planning, purchase additional insurance, implement risk management tools and begin the formal succession process and draft legal agreement. We also assisted him in finding specialists in each area. 

He chose to meet to review the Exit Plan in my winter home in Naples, Fla., rather than the frozen north for the plan delivery. We always explain the delivery of the plan is not the end but just the beginning of an extended process that can last for three months or three years, depending on having all the details lined up and aligned for the best outcome. 

This client always had a serious business-like manner and was always in the zone during the entire process. At the end of our four-hour meeting, his manner changed, as the bottom-line results of the plan unfolded and harvesting of the business investment. After all the years of work, he finally could visualize and clarifying his financial future.

Bottom line: The number he needed from the company for financial independence was $7 million net. Beacon found a savings of nearly $3 million in taxes and a net of close to $10 million for his retirement. 

Good planning always pays for itself. Now the works begins to getting his seasoned management team to the next level.

One of the owner’s passions is automobiles. After a typical 60- to 70-hour workweek, he goes into his garage and rebuilds cars. He drives a truck and a Corvette on weekends. Naples is a car lover’s paradise, as exotic cars are everywhere. 

His demeanor was now relaxed, and he revealed his great sense of humor that night at dinner and charmed my wife. We made plans the next morning to tour around the Naples dealerships to see up close the many Maserati, Ferrari, Aston-Martin, Spyker, McLaren and Lamborghini automobiles. His mouth was watering!

It was like a boy in a candy shop for this unselfish man who never splurged on himself, only on his family. Now one of these toys was easily in his reach as he negotiated on a Ferrari California Convertible. 

It’s safe to say he has gained clarity and can visualize his future and retirement. Now he just needs to explain the Ferrari—and how his grandson’s car seat will fit in the back—to his wife!

The information provided is not intended to be legal, accounting, insurance or tax advice. Beacon is a process consultant that provides written plans, consulting, and support programs to private owners for succession and exiting their businesses.

U.S. Treasury Circular 230 requires that this firm advise you that any tax advice provided was not intended or written to be used, and cannot be used by you, for the purpose of avoiding penalties that the IRS could impose upon you.