Steve Ciepiela - Will Your Buy-Sell Planning Work? (C0218)

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Securities and Investment Advisory Services offered through NFP Advisor Services LLC member of FINRA SIPC. NFP Advisory Services LLC is not affiliated with Stage 2 Planning Partners. You're listening to the Exit Coach Radio Network. Welcome to the Business sustainability Radio show where you'll not only Learn how to create a sustainable business, but you'll also learn the secrets of creating extraordinary value within your business and within your life. It's all about creating great outcomes. Now here's your host, certified financial planner, entrepreneur, and writer, reader, and thinker Josh Patrick. Good afternoon. Welcome to our show today. Our first guest is Steve Coppella. 10 years ago, Steve received a phone call that none of us ever want to get. He was called and told that his partner was critically ill. It would likely not be with us for a long time. The journey that Steve went on to keep his firm alive and thrive was one that we can all learn from. So let's get right to it and talk to Steve about that. Hey. Hi Steve, how are you today? I'm great, Josh. How are you? I'm well, thank you. Thanks for being on the show. So why don't we start off by what happened when they got the phone call and what were you going through right after you received it? Well, at the time, uh, Chuck was 48 years old. Um, Chuck and I had started Charles Steven together in 1983. He was 48 years old. He was on vacation in Seattle, and he suffered a cerebral aneurysm. And I got a call. I was actually, uh, in my garage, got a call from the office that said, uh, Chuck had a cerebral aneurysm. He's in critical condition. I had a Seattle hospital and they're not sure he's going to make it. So obviously there's initial shock and you know, you're scared and you're worried about Chuck and you're worried about his family and you know there's all kinds of things that go through your mind. It's, it's probably a pretty terrifying. 20 or 30 minutes, which, you know, all the way to the office, I was thinking about. I knew I had to get to the office, so that's really sort of, sort of what happened. So when you got to the office, what happened there? What I did, the first thing I did was I sat everybody down, you know, because your, your employees are as scared about it as you are, and explained to them that just what I knew and I knew as much as them, but you know, that Chuck and I had had made plans for this day. We would wait and see what happened, but I thought everything would be OK and there was nothing they needed to worry about. So, uh, let's talk about the planning you had done before, uh, Chuck has aneurysm. What did you guys do? Well, we had a, uh, we have a subchapters corporation, so we had a stock redemption agreement and it was in writing, and the stock redemption agreement covered disability and it covered death and it covered the buyout. So, you know, we were both young, so, you know, obviously the part of the, um, agreement that was talking about things that were terrible and also things that could happen if we stayed alive, not only if You know, something terrible happened to us. So we had done all of that planning. We had valued the business, um, based on industry standards and we had kept our minutes, and I think this is an important thing for people. We had kept our minutes up to date because as you know, every year you have to sit down and say the valuation is good or bad. Um, we had the formulas in there and so we had what we thought the cost was. We were 50/50 partners. We, we had what we thought the value would be and, you know, we had funded it, especially with life insurance to make sure that if anything happened, that the money was there. So how much of the funding did you do with life insurance and what sort of life insurance did you buy? We did all of the funding and what we did is we had a we had a valuation for the company, but we also knew the company was going to grow. So we actually bought more life insurance and made some of the keyman with the idea that down the road, more and more of it would go towards the purchase and less and less toward Keyman, but we bought more. It was a combination of permanent and term. But mostly a lot more of term because we were trying to get as much insurance as we could for the least amount of money. Um, the other thing we had was we had a disability provision in there and we did have disability insurance, but again, especially when you're a subchapter S corporation, it's pretty hard to replace all of the income with disability insurance and frankly that was really what I was more concerned with because Uh, when I finally did what hear what happened with Chuck, he was, he was on life support, um, you know, they didn't know if he would live through the night, and if he did, they felt like he would have permanent brain damage. So I was just as concerned about, gee, what if Chuck is totally disabled, which he would have been, and couldn't function at all. And again, you know, because Chuck and I were good friends, there's all kinds of other things that go with that. Um, so we had done, we had done all of that and so we had that in place. But really I was more concerned about the disability part than I was at the death when I first heard about it. And then they called and said Chuck wouldn't live through the night. He did live through the night, but they took him off life support, the next day, and he died within 25 minutes. So it was a good, good decision, especially if you knew Chuck. Mhm, yes, that's for sure. So the, uh, term insurance that you bought, what was the length of the term insurance? Uh, we did a 20 year term. We did a 20 year, um, term insurance. What we found was, you know, annual renewable and 5 year. I mean, you might as well do 10 year because really when you look at the, the cost over 10 years, the 10 year term is probably cheaper than either annual renewable or 5 year. And at the age we bought it, the 20 year wasn't really that much more expensive than the 10 year. So we got 20 year term. Which took us through somewhere around age, well, at the time, it was all the way to age 65 actually. So that's the way we did it. We sort of work backwards. So what kind of advice do you have about buy sell planning and what should you do if you're, if you don't have a buy sell plan in place? What, how should you put one in place? You know, I think, I think people, if you're an entrepreneur, you have a tendency to work, uh, you know, in your business instead on your business. So I think the number one thing is to strategically think and set up time and make time and make it like an appointment to sit down and figure out what you want to happen if the business survives, if you want to sell it down the road, if you want to do anything down the road, how to protect the valuation, how to get a valuation, that's all very important. You got to make sure you're on the same page. The other thing is to make sure and one of the things you can do is There's somebody called a CVA or a certified valuation analyst, and these guys do valuations on businesses. The problem a lot of times is if you use a CVA or a CPA, it'll cost you, you know, $150 to $20,000 but a lot of these guys will do what I call a 10,000 ft snapshot where they'll come back for maybe $3000 and say, Based on your industry, based where you are, based on your business, we would say your business is worth about 10 amount of dollars. That's really sort of where we started and we had that valuation. And so we got the valuation. We started talking about what we wanted to happen, and then I would get an attorney who knew about buy-sell agreements, you know, I have business owners sometimes tell me, well, I have this attorney who did a divorce for me or, or helped me sue somebody, you know. Attorneys are just like doctors. They specialize in different things, and you need to find somebody who's an estate planning attorney or a tax attorney. That can help you to put the agreements together. The other thing that I would say is one of the mistakes I made was you got to make sure the spouses know what's going on. I mean, we had, we had a meeting with our wives and told them what we were doing and they signed off on it, but, you know, uh, when, when my partner passed away, his wife said, well, I guess I'm your partner now. And I said, not really. I mean, the estate's my partner now, but You know, they're no longer part of the health insurance. They're no longer part of the retirement plan. They're no longer part of a lot of things and spouses sometimes don't understand that. So we did a good job of sitting down with them initially, but we didn't do a good job of updating them as we went along, which I think is important. OK, we're gonna circle back to that in a second. So I want to go back to your evaluation. So you guys had an annual evaluation done or you updated your evaluation every year? Well, what we did is we were, we were advised that if you do a valuation, one of the things you need to do is at least on an annual basis, have something in your minutes that said you talked about it, discussed it, and put a valuation on it, which is what we did. So we didn't get it valued every year. We started in a place and then. You know you can use sort of the same metrics the next year. And sort of adjust it as to how much it's worth and things like that. If you have a building involved or mortgages or loans or things like that, that's a lot easier, but we made sure that we were OK with what the value was every year, and if, if one of us had a problem with it, we just adjust it. I don't really think you need to do uh. You know, a CVA kind of valuation, except maybe every 55 years or so. That's what I would do. OK, so what you're saying is that you do a formal evaluation every 5 years and then and every year in between that you sort of say, does this make sense and is it fair? Right? And that's the key. Does everybody seem that it's fair? Yeah. That that seems to make sense to me. So let's go back to mistakes. I mean one of the mistakes that you made, you said was. You didn't have regular conversations with your spouses about what was in the bio arrangement. Why is that important? Because, uh, again, especially with a lot of, uh, entrepreneurs, your business is your largest asset, and unfortunately, a lot of entrepreneurs use their business as their checkbook. So, you know, if you need $10,000 you go in and get $10,000 out of your business. Um, but all the spouses understand and, you know, when Chuck and I started this business, we both had $600 in the bank. And, um, hired a part-time assistant. They didn't have things like computers really, so we had an IBM Select typewriter, and that's how we started and then we just built it. But while the spouses knew generally what we were doing, they didn't know the particulars. And so all the spouses know is, look, we've got this, for lack of a better term, cash cow here, and, you know, if we ever need anything, if the refrigerator breaks or the car gets in an accident, I mean, it's pretty easy to go. And access that And they don't understand when you can't do that anymore. They also don't understand that, you know, for instance, health insurance, once Chuck passed away, he's no longer an employee, so he's no longer covered by the health insurance. Once Chuck passed away, he's no longer working, so he's no longer participating in a retirement plan as of that date. Those are the things that They don't understand. That makes sense. Any other mistakes you thought you made in the the planning with this? Yeah, you know, I got to tell you, Josh, I think in a lot of ways we were, when I look back, we, we were smart by accident. Um, but one of the things we did is we, we marketed Charles Steven as a company, and we put processes in so that whether you were meeting with Chuck or whether you were meeting with me, you had the same process. Everything you saw looked the same. The way we went about it is the same. The tools we used were the same, you know, our little toolbox, everything was the same. So when Chuck passed away, it was a lot easier for his assistants to bring me up to speed on clients, and they didn't have to retrain me. I didn't have to retrain them. They had a lot of information on the various clients. And what the clients saw, what Chuck's client saw after he passed, were the same thing that my client saw. So I knew about it. I knew how we presented it. They saw the same thing, and I think they had a lot more comfort in it. And therefore we, we didn't lose very many people in the process. We really did. So the client, the clients felt really comfortable with you taking over the relationship where Chuck was before. That's right. And that's so important because You can run a business, but you can't, you know, the relationship part of it is really what's important, especially in your business, that's for sure. So it's been 10 years. What's happened in that period since Chuck died? Well, what happened was when, when Chuck passed away that first year, um, I'll just talk, I'll talk dollars, but when Chuck passed away, We would have a meeting every day with the staff and the other part of this is we didn't let any staff go on, you know, we, we reorganized staff and we reorganized clients. I sold off part of the company because we really we could outsource that, but other than that everything sort of, you know, went the way that it had gone before. So we met every day, we got everything going, and when we reorganized everything, we were able to service all of the clients that Chuck and I, I could do that individually and where Chuck and I used to do it together. So it allowed us to keep the volume going during that adjustment. I mean, in the first year we actually Made more money in the year before, but the second year, our revenue went down, and I think that was just part of the reorganization and everything we did was, you know, selling off part of it and doing what we did. And from that point forward, we've experienced pretty good growth. In fact, over the last 5 years anyway, I've averaged in excess of 10% growth. I'm now 61 years old, so I don't want to make the same mistake that some of my friends make where they wait until they're 66 and then say, OK, I'm gonna, I'm gonna sell this company. So I have some younger people. One of them's been with me 18 years. Another one is my son who, even though he's my son, I mean, he gets it. I think one of the mistakes people make is they think because somebody is their child that they can just take over their company when really they can't, but But in Adam's case, he gets it. They just bought into the company and we have a 10-year plan where essentially, by the time I'm 70, I will no longer own the company. That doesn't mean I'll stop doing what I'm doing. I, I like what I do. I think I provide a great service for my clients, but in 10 years I don't want to own the company. And so we've put that into place and we project that this year our gross profit is probably double where it was back 10 years ago. So we've, we've experienced pretty good growth considering the kind of company we are in the market we're in. So, um, Now, the next phase is to move forward. One of the thing I should mention is, you know, the life insurance we got, it was sort of amazing what happened there because I received the life insurance tax-free. I owned the policy on Chuck. Chuck owned the policy on me. So I got 7 figures of life insurance income tax-free. His wife through the estate got a step up in cost basis on his stock. So she paid no tax on his part of the company. So all of that was a tax-free transaction. And then as a result, I also have a seven-fi cost basis in my company because I bought his half of the company. So now when I'm selling the company, we have to design it in a way where I can take advantage of the money in the cost basis, which, which I get tax free. So. There's not really very many things out there that allow you to do something like that. It was, it's, it's just, it was a great tool for us. And it was, you know, it, it really did what it was supposed to do. It turned a very bad situation into a very good situation. Well, I think we might have to circle back for another segment with you sometime on that particular topic because it's a good one. So we got about a minute left. How can people find you if they have more questions? Well, they should go to our website, uh, www.charlesSteven, C H A R L E S S T E P H E N dot com or we have an 800 number 1-888884-0451. Cool, so I'm assuming you don't mind if people give you a call if they have a question or two about how to do appropriate buy sell planning. That's, that's fine. I'd be happy to answer any questions for anybody. Great, Steve, thanks so much for your time today. This has been really enlightening and very useful for our listeners, and we'll talk soon, I hope. Thanks so much. Thank you, Josh. See you later. You're listening to one of many shows on Exitoachradio.com. We're interviewing advisors, authors, and thought leaders for their best tips, ideas, and precautions so you can be well planned. If you'd like to be a guest on any of our shows, go to guest.exitcoachradio.com. Exitcoachradio.com. Come listen for a minute. Yeah. Thanks for listening to the Business Sustainability Radio show with Josh Patrick. Join us again next time and let's explore some really interesting ways to make your business and your life even better on the Exit Coach Radio Network. Securities and investment advisory services offered through NFP Advisor Services LLC member of FINRA SIPC. NFP Advisory Services LLC is not affiliated with Stage 2 Planning Partners. This podcast is sponsored by TalkSpace. May is mental health awareness. Month in TalkSpace, the leading virtual therapy provider is telling everyone, let's face it, in therapy by talking or texting with a supportive licensed therapist at TalkSpace, you can face whatever is holding you back, whether it's mental health symptoms, relationship drama, past trauma, bad habits, or another challenge that you need support to work through. 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