Family Business Center of Pioneer Valley

Family Business Center of Pioneer Valley

Only Read This if You Require Workfree-Stressfree Financial Independence

by Charles Epstein, CLU, ChFC

Two events find me putting pen to paper for this quarters article:

  1. April's outstanding forum on selling your business to an outside
  2. The sale of 5 of our client's businesses since January 1, 1999 to either
    an outside consolidator or inside employee buyout.

All five of these client's businesses have similar characteristics.

  1. They were all family owned.
  2. The husband and spouse were both working in the business.
  3. There were children in the business.
  4. All the owners have a desire to retire from the business but remain active in some other pursuit
  5. All needed to know that they would have enough money to maintain their current lifestyle if they chose never to work again.

What I call: Workfree-Stressfree Financial Independence; the kind where you have:

  1. Enough money working at a reasonable rate of return above inflation.
  2. You are living off the interest allowing the principle to grow.
  3. You're able to sleep soundly at night without worrying about what the S&P 500 did yesterday, today, or tomorrow!

While I was able to assist all 5 businesses in calculating and negotiating the sale of the business that met their needs of financial independence, one business' story stands as a prescription for success. The company, which I will call the Aladdin Lamp Construction Company, had over the last 10 years strategically capitalized their business in such a fashion that the actual sale of their business represented merely a windfall of additional capital over and above what they had already set aside for their dream of retiring at age 50.

It's my experience that entrepreneur/founders in family business' work hard at growing or capitalizing their business. They are forever looking for new opportunities to increase market share, reduce expenses, improve technology, etc. All of these require capital on an ongoing basis. All too often the business owner is focused on reinvesting profits back into the business, and never answers the question "when is enough, enough?" When it comes to the entrepreneur's retirement plans there are 4 family retirement myths.

  1. My business is my retirement plan.
  2. My kids are my retirement plan.
  3. I love my business and can't imagine I'll ever stop working.
  4. I have a great management team and someday they will buy me out.

Ten years ago John and Judy Gennie, the sole stockholders of the Aladdin Lamp Construction Company, and I sat down to look realistically at these 4 retirement myths. At that time John was 41 and Judy was 37. They had 2 children. They decided to focus on one simple financial plan; to retire at age 50 with the following criteria:

  1. To set aside enough money so that they could live off of the interest for the rest of their lives generating an income that would grow at a 3% rate over and above inflation and taxes.
  2. To be 100% debt free.
  3. To never be dependent upon the sale of their business as a source of their retirement funds.

Using what we call the family capital CFOsm process, I calculated how much money they would need at age 50 in order to maintain their lifestyle till age 90 without working another day of their lives. We generated a cash flow, income statement, and balance sheet for each of these years ( just like your chief financial officer would in operating your business). What we did that worked:


This means they took money out of their company on a tax favorable basis and invested it ongoingly. Prior to our meeting John and Judy had established a regular profit sharing plan for their company. A qualified retirement plan is still one of the best means for a family business owner in accumulating wealth on a tax favorable basis. This type of plan is also creditor free. We changed their existing profit sharing plan to a Target Benefit plan which allowed them to legally redirect almost 70% of the plans contributions(pre-tax) for the owners benefit. By doing so, John and Judy were able to set aside a maximum of $30,000 a year each or $60,000 total tax deferred in the plan. That's triple the amount an individual can set aside in a 401(k) plan. We assumed a reasonable rate of growth of 8% over 10
years which would generate an excess of 1.3 Million dollars at John's age 60. (We actually earned significantly more than this because of the stock markets returns over the last 10 years). It's important to note that a Target Benefit plan requires a real commitment on the part of the owners. Regardless of the economy you have to make this contribution. In 1987 John and Judy were well aware how sensitive their construction business was to economic conditions. But because they understood the value of capitalizing money outside their business, John and Judy were committed to making these contributions.

Because of the next two steps in their planning process John and Judy will not need the money from their retirement plan until age 60 at which point this tidy sum will have grown to over 2.8 Million dollars (assuming an 8% compounded annual return).

If however they needed an income stream from their retirement account prior to age 591/2 we determined that under Revenue Code Section 72t, they could begin taking equal annual withdrawals from their retirement plan during this 10 year period without incurring the 10% early withdrawal penalty.


The second part of our plan was to payoff all debt over the next 10 years. To do this, we refinanced their home mortgage to a lower rate but kept a 30 year mortgage in order to take advantage of the largest possible mortgage interest deductions over the next 10 years. We then calculated what they would have to pay additional over these 10 years to pay off their home mortgage. Today they not only own their personal residence outright but a second home in Florida which we paid from ongoing corporate profits.


Our last objective was to make sure that John and Judy had sufficient capital set outside the business to live on from John's age 50 to age 60. At age 60 they would then be able to tap into their retirement plan assets for their income. With this in mind, we began investing the majority of Judy's salary each year into tax exempt bonds. Our goal was to invest enough each year so that in 1999 the interest earnings alone would generate $50,000 a year. Five years into the program we began to diversify their investment portfolio into equity mutual funds and again have benefited from a stronger than average market. The net result; that John and Judy receive
$100,000 a year net after taxes based on an assumed rate of 7% (which is not guaranteed and subject to market fluctuations) for the rest of their lives from their investment portfolio. With absolutely no debt this income is more than adequate to meet their lifestyle expenses.


The final good news; John and Judy were able to sell their business this year to a key employee. The buyout called for 1/3 cash down and a monthly payout over 8 years. This provided John and Judy with a certain amount of tax advantage. Their key employee also has an 8 year triple net lease with the option to buy their building generating additional income to John and Judy. The important thing to note is that all of the money from the sale of their business and the rental of their building is an additional windfall. Had they been unable to sell their business they would have simply liquidated and either rented or sold their building. In either case because they systematically invested money outside the business the sale proceeds just sweetened the pot. As an added testimony to our success, the new owners of Aladdin Construction Company have asked us to create a 10 year plan for them as well.In retrospect it all seems so simple:

  1. Develop a well thought out plan early.
  2. Commit to capitalizing the plan on a regular basis, i.e.. evaluate all options for creating a second economy of capital outside your business on a tax favorable basis.
  3. Have a strong commitment to staying focused on your goal of financial
  4. Review the program periodically to make adjustments based on business and personal economic and/or tax law changes.
  5. Develop good habits for saving and investing on a systematic basis.
  6. Be sure to understand the power of compound interest.
  7. Work with a competent financial team including your lawyer, CPA, and financial services professional.

John and Judy's real success, they were convinced early on that they could not depend on the sale of their business for their retirement plan. They now have enough capital outside the business to live comfortably financially stress free for the rest of their lives. In spite of the money, John will start another business in the not too distant future. After all; how much golf can a 50 year old entrepreneur play!

about Charles D. Epstein When not performing as a professional actor at regional New England Theatre's, roller blading through the Connecticut countryside, or assisting in community fundraisers, Charles D. Epstein, CLU, ChFC assist his clients in a wide range of financial and estate planning, and life insurance matters as principal of Epstein Financial Services and as a career agent for the MassMutual Life Insurance Company.

He quickly established himself as an industry leader in the life insurance field and has gone on to achieve numerous industry honors including MassMutual Life Insurance Company's Agent of the Year in 1993 and 1994, for the Springfield, Massachusetts, DeValle Agency. His company, Epstein Financial Services of Springfield, Massachusetts, specializes in estate preservation techniques and takes the unique approach to serving the customers by providing important information dealing with tax concepts and issues utilizing the tax code system as it relates to the free enterprise economic environment.

With a deep commitment to the unique issues facing the success and continuity of family business, Charlie founded and is the Chair of the Family Business Center of the University of Massachusetts, Amherst. He serves as Treasurer and is on the Board of Directors of The Summer Theatre at Mount Holyoke College; he is on the Advisory Board of the Entrepreneurship Institute of Hartford, Connecticut; and is an Incorporator of the Bank of Western Massachusetts; he is also a member of the Jewish Federation of Greater Springfield Board of Trustees.

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