Case Study: Professional Retirement Plan
David & Kelly
Age: 67 & 59
Motivate and retain key employees, transfer their business to key employees, receive full value for their business.
David and Kelly were owners of an Environmental Engineering company. They had 45 employees and revenue of $6 million. David planned to stay with the company for at least five more years. They want to ensure that their retirement plan not only enables the lifestyle they have envisioned in retirement but that they have a plan to make sure they never run out of money.
David and Kelly employed six experienced senior managers and salespeople. They were interested in both handcuffing these employees to the company (making it economically rewarding for them to stay with the company) and, at the same time, exploring an exit strategy for David.
With their children grown, David and Kelly were looking forward to traveling, golfing, and giving back to their community. They hoped they could achieve both goals by beginning to sell the company to their employees.
We wanted to help make David and Kelly's retirement planning process as easy as possible. The last thing we wanted was to add stress to what should be a carefree time in their life, so we made sure to identify any potential tax challenges they may soon face.
Working together with David and Kelly's CPA and Estate Attorney, we helped them in the following ways:
- Establish a plan for the eventual buyout of all of David's ownership in the company.
- Begin the buyout portion of his interest in the company by selling to two existing employees.
- Have the plan in place and effective as of March 1 of the following year.
Being able to see and understand all of their options removed a lot of worries. They were able to move forward with their plans, confident in knowing that they would be well looked after.
The solution we developed for David and Kelly helped them in many ways:
- Sale of an initial minority interest of 40% in cash.
- Discounted valuation of 50% to make the purchase affordable for the employees and to provide them an incentive to remain with the company.
- Funds were borrowed from a bank and the company guaranteed the note.
- Sale of balance of ownership interest in 3 - 7 years. David and Kelly could choose one of three options.
- Sell the balance to the key employees at true fair market value by requiring employees to finance an all-cash purchase. Or,
- Finance the buyout themselves by means of a long term installment sale to the employees at true fair market value. Or,
- Sell to an outside third party.
In either a sale to employees or to an outside third party, David and Kelly's intention was to retire from the company or continue to maintain ownership in the company and continue David's management and operational involvement.
Today, David and Kelly are having the time of their lives. They travel between their home in South Carolina and their lake house in New Hampshire, visit new golf courses, and spend time with their grandchildren every chance they get.