Case Study: Business Owners

Case Study: Business Owners


Creating a Family Legacy

Case Study: Mike is a 44-year old owner of a digital marketing agency that employs ten individuals.

His Goals

Mike started his business 15 years ago and hopes to transition the business to his daughter, who recently started working at the firm. Mike hopes to retire in 10-15 years. He would like to determine when he can retire, transition his business to his daughter, whether or not to downsize his home, and reduce his debt as much as possible before retirement.

Case Study: Business Owners

Resources & Facts

  • His primary residence is worth $2.3MM with a $1.1M mortgage.
  • He has an investment property that is currently generating $1,300 per month.
  • He has a 401(k) account with a balance of $970K and various brokerage accounts worth $1.2MM.
  • His Social Security benefit at full retirement age is estimated to be $2700 per month.
  • He does not have a life insurance policy, he has an estate plan that was created last year, and he files his taxes through a local enrolled agent.

Our Recommendation

After creating multiple scenarios and having several conversations with Mike and his daughter, we recommended that he slowly transition his business to his daughter for over 15 years. During this timeframe, Mike will be given a salary that will gradually decline as he hands over more responsibilities to his daughter. Mike’s daughter will acquire equity from her father via the firms’ free-cash-flow during these 15 years. This way, neither Mike nor his daughter will have to use debt to facilitate this transaction. 

We introduced Mike to a well-qualified CPA to begin tax planning and a well-qualified estate attorney to organize his estate. We also discussed the buy-sell plan with his corporate attorney to facilitate a more formal agreement with his daughter.

We recommended that Mike downsize his primary home using the homes’ equity to fund a new, more affordable home. By doing so, he will enter retirement debt-free with a lower budget expense need. Due to the passive income stream via his business transaction, he will not need to file for Social Security until the age of 70. In all scenarios we created, the ones where Mike files as late as possible provided a higher probability of success. Of course, financial plans are living documents, and we will update the plan, and its recommendations as Mike approaches retirement.

Mike should:

  • slowly transition his business to his daughter using the firms’ free-cash-flow to acquire equity
  • partner with a CPA and estate attorney to organize his assets
  • downsize his primary home
  • file for Social Security at 70