THE BEAT
A quarterly publication from Tamura Insurance Services
Cheating Fate. . . Real stories from the files of The Insurance P.I.
An insurance specialist is like a private investigator. We gather facts and data to help uncover and then solve mysteries. Recently, my investigative crew and I worked on a particularly enticing mystery. What follows is a fictionalized account of our investigations...
The thrill that day was realizing our client had cheated fate with an inordinate amount of luck. My palms were sweating as I pondered what might have happened had their lucky steak ran out.
The goal . . . develop a multi-generational business succession model.
The challenge . . . how to achieve the goal even if key partner were to die or become disabled.
To protect confidentiality, our client has been disguised as ABC INC. a thriving law firm.
ABC INC. has three partners. Two are the original partners, who are now in their eighties, and the third is the lead practicing attorney who is now the controlling partner. The business is in the last year of a very expensive cash funded buy-out of the two original partners. Besides the current lead attorney, there are two new attorneys who are being offered partnerships in the firm.
WHAT COULD TOPPLE THIS FIRM?
ABC Inc. did not have a savings plan in place for the eventual buy-out of the original partners. They’d been quite fortunate that neither partner died during their active revenue-generating tenure nor during the buy-out phase (which has one year left).
What would have happened to ABC Inc. had one of the firm’s partners died or become disabled? More importantly, how would they handle these challenges in the future to ensure the goal of maintaining a multi-generational business? I knew my team had to find a way to strengthen the firm’s weak links – and fast!
JUST THE FACTS
The firm is valued at just over $4,000,000 and has 6 core employees, plus a host of independent contractors, all of whom depended on the firm’s continued growth.
All partners are married, which means their families also depended on the firm for their well-being and to maintain their standard of living.
None of the partners (retiring and new) had any business insurance in place when we met.
Are you beginning to see how lucky they were?
TIME FOR A REALITY CHECK
Our task was to find a way to help our client face the realities of their precarious situation without causing them to run away in fear. We decided the best course of action was to ask a series of questions designed to help them understand their dilemma.
#1 What happens to a controlling partners shares if he or she dies while still holding company stock?
The surviving spouse gets the shares of course!
#2 Will the surviving spouse think the value of the stock is high or low?
Odds are the spouse’s opinion on the value of the business is much higher than that of the surviving partners who now have to face replacing a trusted friend, partner and key revenue generator.
#3 How can a business survive such a devastating loss?
Without a plan in place that provides a road map for navigating the unthinkable, the odds of coming out with the firm in tact are pretty grim.
SO LET’S GET TO THE POINT
What comes next? You guessed it! The lawyers from both sides would be tasked with finding a price for the stock that both parties could agree upon. Not only is this typically a long and potentially volatile process but also very expensive. As a law firm, ABC INC. is well aware of the potential high costs of such an endeavor.
So how do they avoid this catastrophe?
ABC Inc. knows that continuing on with only a hand shake agreement is simply no way to run a business. Change was positively required!
While any change can be tedious, it’s nothing compared to the pain of not having a well thought out and executable plan.
Step one: Get a professional valuation of the business.
Step Two: Use the valuation number (agreed upon by all partners) to create a buy-sell agreement with an experienced business attorney. At the heart of that plan there must be provisions for all the possible current and future challenges of an eventual buy-out of the existing partners/shareholders. The common considerations are death, disability and retirement. All of these have the potential to take a thriving business and run it into the ground.
Step Three: Fund the plan. While this is often overlooked, it’s critical to have funding mechanisms in place to address all the common considerations listed above.
PUTTING THE CLUES TOGETHER
The hair on my neck stood on end thinking about the possibility of a partner dying: Where would the money come from to pay the spouse the pre-determined price for the shares in the company?
If a partner suffered a permanent disability and could no longer perform his daily duties, how would the firm fund the search for a replacement and buy out the partner’s shares – there just isn’t enough money in the world nor time in the day?
And, what if a partner neither died nor becomes disabled, but instead is ready retire.
We had to make sure they’d have the capital to buy-out the exiting partner at retirement without causing havoc on the firm’s capital reserves as was done with the original partners?
We assembled the clues needed to solve this case and we found there were multiple possible solutions that could work, given enough time and money. But only one would work today, tomorrow and on into the future – can you guess which?
1) Assuming you have the current capital, pay it out from the corporation’s capital accounts. Although this is an option, it is unlikely a business can sustain such a withdraw all at one time.
2) Create a sinking-fund where money is allocated on a regular basis to build toward the resources needed. While this is recommended, it does not provide all the funds required until the account matures, which may be somewhere near the retirement age of the partner.
3) Buy life and disability insurance to guard against current and future losses – this solution may also offer potential opportunities for increasing capital accounts that can be used for a variety of business scenarios.
CASE CLOSED
ABC INC. now has a buy-sell agreement in place along with the appropriate insurance to ensure their Future success. We have an agreement in place to review their plans every two years and make adjustments as needed.
We’re all sleeping like babies now!
What adventure could be more meaningful then alleviating worries of the unknown?
If any of ABC INC.’s story hits home for you and your organization, don’t waste another minute. Contact us for an investigation of your business!
Let us sweat the details so you can relax and enjoy your meaningful adventure.
Tamura Insurance: 925-335-9749 or tracy@tamurainsurance.com
Wednesday, May 23, 2012
Sunday, November 7, 2010
Building Your Referral Network
(For all my Business Owner friends - here is a good reminder of how powerful personal referrals are)
Presented By:
Monika Hengesbach, EA, ATA, ATP
Decision Financial Services, Inc.
How many of us have attended a chamber of commerce event or other networking venues and collected a handful of business cards and swore that we would contact all of these people the very next day? How many of us, weeks later, still seeing the stack of business cards on our desk, have yet to contact them? How many of us eventually just throw them away? Not a very effective way of networking, is it?
Word of mouth marketing is the best way of receiving referrals and as entrepreneurs we can spend hundreds of hours meeting fellow business owners in an attempt to get our name out. What if we could spend those hours just marketing to our sphere of influence (SOI)? Would that be more effective? You bet!
The first step is to identify the people in your SOI: power partners, people who get more business when you get more business, people you have given referrals to, anyone who has given you referrals, and other members of business referral groups.
Once you have identified the people in your SOI, the second step is to have a meeting with them to see how both of you can help each other’s business grow. For example, if you are writing a monthly newsletter or blog have your SOI contribute an article. Not only do they get their name out to all of your clients and contacts but you get your name out to their clients and contacts. Another great example is to arrange “lunches” with your SOI’s referral sources. If they are a referral source to your sphere of influence, they would be a good referral source to you too. Plus it is more powerful to have someone introduce you than you just blindly picking up the phone and making the introduction yourself.
And the last step to building your referral network is WORK it. Otherwise you are back to looking at that stack of business cards and saying “next time I will…..”
**************************************************
More about Monika and DFS
If you run your own business, you know important it is to find the right business financial partner. You know how important an accountant can be. But not all accountants are created equal!
Most accountants do a fine job recording the history you give them. They compile monthly, quarterly, and annual books and records. At tax time, they put the “right” numbers in the right boxes on the right forms. But then they call it a day.
At my firm, we’re different. We don’t just record history. We help you write it, with a proactive attitude and complete menu of tax and accounting services.
For more information about our services, visit us at http://www.decisionfinancial.com/
or give us a call 925.937.2319
Presented By:
Monika Hengesbach, EA, ATA, ATP
Decision Financial Services, Inc.
How many of us have attended a chamber of commerce event or other networking venues and collected a handful of business cards and swore that we would contact all of these people the very next day? How many of us, weeks later, still seeing the stack of business cards on our desk, have yet to contact them? How many of us eventually just throw them away? Not a very effective way of networking, is it?
Word of mouth marketing is the best way of receiving referrals and as entrepreneurs we can spend hundreds of hours meeting fellow business owners in an attempt to get our name out. What if we could spend those hours just marketing to our sphere of influence (SOI)? Would that be more effective? You bet!
The first step is to identify the people in your SOI: power partners, people who get more business when you get more business, people you have given referrals to, anyone who has given you referrals, and other members of business referral groups.
Once you have identified the people in your SOI, the second step is to have a meeting with them to see how both of you can help each other’s business grow. For example, if you are writing a monthly newsletter or blog have your SOI contribute an article. Not only do they get their name out to all of your clients and contacts but you get your name out to their clients and contacts. Another great example is to arrange “lunches” with your SOI’s referral sources. If they are a referral source to your sphere of influence, they would be a good referral source to you too. Plus it is more powerful to have someone introduce you than you just blindly picking up the phone and making the introduction yourself.
And the last step to building your referral network is WORK it. Otherwise you are back to looking at that stack of business cards and saying “next time I will…..”
**************************************************
More about Monika and DFS
If you run your own business, you know important it is to find the right business financial partner. You know how important an accountant can be. But not all accountants are created equal!
Most accountants do a fine job recording the history you give them. They compile monthly, quarterly, and annual books and records. At tax time, they put the “right” numbers in the right boxes on the right forms. But then they call it a day.
At my firm, we’re different. We don’t just record history. We help you write it, with a proactive attitude and complete menu of tax and accounting services.
For more information about our services, visit us at http://www.decisionfinancial.com/
or give us a call 925.937.2319
What Follows a Wave of Foreclosures?
(My friend and business associate, Peter Paredero, wrote this article for our local paper and I found it very informative - Tracy)
If you guessed another wave of foreclosures, you are correct! Consider how much equity you are losing in your home every time a foreclosure or short sale is sold in your neighborhood. The downward spiral of home values will not stop until we do something about it. As negative equity grows, fewer people are in a position to get out of a bad loan and more and more homeowners give up and decide on a strategic short sale or foreclosure and the cycle continues. It started with 100% financed, 2-year fixed loans given to W-2, wage earning employees who where allowed to claim more income than they actually made. As values dropped from this initial wave it put all of us in jeopardy. The ole’ “house of cards” theory…
HR6218, written by Representative Dennis Cardoza of California, is an example of a bill that seeks to stop the cycle. The bill is an attempt to refinance all Fannie Mae or Freddie Mac loans at today’s prevailing 30-year interest rates. Here’s the best part: it has zero qualifying parameters. No credit checking, no appraisal, no income requirements and you don’t even need to have reserves in the bank! Wow! Although the bill needs a major overhaul, at least we are starting to face the facts that continuing down the road of foreclosures will certainly not end without intervention.
Who’s losing their home? We are currently well past the first wave and pretty deep into the Alt-A and government (FHA) loans. In fact, it is not uncommon to hear of folks losing homes who, just a few short years ago, had never made a late payment in their life. It’s the generation that entered the housing market in the mid-90’s and later and witnessed a consistent up-tick on the value of their home. It’s anyone who took their loan-to-value up to 70 or 80% through a refinance to add the extra room, put in a pool, buy investment real estate and, yes, buy jet skis and quad runners. Irresponsible? Overly aggressive? Bad at math? You can decide for yourself, but the fact is that anyone buying or refinancing in recent years was in the wrong place at the wrong time.
How many “waves” are to come? Have you ever wondered how many 5, 7 and 10-year interest only loans where originated between 2004 and 2007? Even Alan Greenspan was telling us that short term money was the best value. How many people in our surrounding areas have these loans? How many are in the adjustment phase and why aren’t we hearing about them losing their homes? The answer is because they probably went from a 5.25% - 5.5% interest only loan that had a payment of $2,000 a month to an adjusting 25 to 30-year amortized loan with an interest rate of 3-3.5%. Due to the current incredibly low indices, they are only paying a few hundred dollars more a month. Now that they are amortizing, about $800 to $1,000 is finally paying down their principal. So, if every 6 or 12 months their loan adjusts to the index to which their note is attached, won’t we be seeing yet another wave of foreclosures once the economy picks up? I like to call it the “third wave,” but it will probably be wave number five or six.
We have spent the better part of the last three years figuring out whom to blame for this mess. We’ve pointed our fingers at the realtors, the loan officers, the banks, the consumer, the ratings agencies (who gave AAA ratings to collateralized debt obligations that they did not understand,) and finally Wall Street. I like to blame Wall Street, but that’s just how I roll… What are the benefits of a bill like HR6218? I doubt most people would disagree that it is a good idea to get every adjustable rate mortgage out of our housing market. It’s tough to get people spending again when they are in fear of their loan payment doubling in the years to come. It will also be a big help to people with 5.5% interest rates who can’t refinance due to negative equity in their home. Who would be hurt by this? I’ve heard various arguments on how it would affect the taxpayer; however it would be more of a cost to the banks. And to that I say, “Boohoo.”
For more information, visit www.cardoza.house.gov and click on "The Home Act H.R. 6218".
Peter Paredero, Senior Mortgage Consultant for Land Home Financial Services Inc. has resided in Pleasant Hill since 1994.
925 787-8746
pparedero@lhfinancial.com
If you guessed another wave of foreclosures, you are correct! Consider how much equity you are losing in your home every time a foreclosure or short sale is sold in your neighborhood. The downward spiral of home values will not stop until we do something about it. As negative equity grows, fewer people are in a position to get out of a bad loan and more and more homeowners give up and decide on a strategic short sale or foreclosure and the cycle continues. It started with 100% financed, 2-year fixed loans given to W-2, wage earning employees who where allowed to claim more income than they actually made. As values dropped from this initial wave it put all of us in jeopardy. The ole’ “house of cards” theory…
HR6218, written by Representative Dennis Cardoza of California, is an example of a bill that seeks to stop the cycle. The bill is an attempt to refinance all Fannie Mae or Freddie Mac loans at today’s prevailing 30-year interest rates. Here’s the best part: it has zero qualifying parameters. No credit checking, no appraisal, no income requirements and you don’t even need to have reserves in the bank! Wow! Although the bill needs a major overhaul, at least we are starting to face the facts that continuing down the road of foreclosures will certainly not end without intervention.
Who’s losing their home? We are currently well past the first wave and pretty deep into the Alt-A and government (FHA) loans. In fact, it is not uncommon to hear of folks losing homes who, just a few short years ago, had never made a late payment in their life. It’s the generation that entered the housing market in the mid-90’s and later and witnessed a consistent up-tick on the value of their home. It’s anyone who took their loan-to-value up to 70 or 80% through a refinance to add the extra room, put in a pool, buy investment real estate and, yes, buy jet skis and quad runners. Irresponsible? Overly aggressive? Bad at math? You can decide for yourself, but the fact is that anyone buying or refinancing in recent years was in the wrong place at the wrong time.
How many “waves” are to come? Have you ever wondered how many 5, 7 and 10-year interest only loans where originated between 2004 and 2007? Even Alan Greenspan was telling us that short term money was the best value. How many people in our surrounding areas have these loans? How many are in the adjustment phase and why aren’t we hearing about them losing their homes? The answer is because they probably went from a 5.25% - 5.5% interest only loan that had a payment of $2,000 a month to an adjusting 25 to 30-year amortized loan with an interest rate of 3-3.5%. Due to the current incredibly low indices, they are only paying a few hundred dollars more a month. Now that they are amortizing, about $800 to $1,000 is finally paying down their principal. So, if every 6 or 12 months their loan adjusts to the index to which their note is attached, won’t we be seeing yet another wave of foreclosures once the economy picks up? I like to call it the “third wave,” but it will probably be wave number five or six.
We have spent the better part of the last three years figuring out whom to blame for this mess. We’ve pointed our fingers at the realtors, the loan officers, the banks, the consumer, the ratings agencies (who gave AAA ratings to collateralized debt obligations that they did not understand,) and finally Wall Street. I like to blame Wall Street, but that’s just how I roll… What are the benefits of a bill like HR6218? I doubt most people would disagree that it is a good idea to get every adjustable rate mortgage out of our housing market. It’s tough to get people spending again when they are in fear of their loan payment doubling in the years to come. It will also be a big help to people with 5.5% interest rates who can’t refinance due to negative equity in their home. Who would be hurt by this? I’ve heard various arguments on how it would affect the taxpayer; however it would be more of a cost to the banks. And to that I say, “Boohoo.”
For more information, visit www.cardoza.house.gov and click on "The Home Act H.R. 6218".
Peter Paredero, Senior Mortgage Consultant for Land Home Financial Services Inc. has resided in Pleasant Hill since 1994.
925 787-8746
pparedero@lhfinancial.com
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