When I founded ATX Portfolio Advisors, there was a fairly straightforward concept that I had in mind. ATX would be an independent, fee based investment advisor, that specializes in managing unplanned wealth. I am often asked what is the definition of “unplanned wealth”. The short answer is that you have accumulated some money, but now don’t really know what to do with it.

That’s not to say that I’m not very happy to help someone that has been diligently planning their savings and investments for specific goals since they graduated high school, it’s just that I believe I add the most value when someone really needs help creating a plan to manage their wealth, as well as the actual implementation of the plan.

For most financial firms, the ideal client is someone with a retirement account that is ready to change jobs or retire, and needs to convert savings to income. When you are dealing with a 401(k) or IRA, rolling over a balance and/or making changes to the investment allocation are fairly straightforward and efficient processes. Simplicity and straightforwardness equals scale and profit for the financial firm.

A much more challenging situation is presented by small business owners. Business owners, including doctors, lawyers, accountants, veterinarians, etc., frequently have large portions of their net worth tied up in their businesses. Yes, they may have set up a retirement account (usually a SEP IRA, SIMPLE IRA, or maybe a 401(k)) to help reduce taxes or provide a benefit to employees, but it is the exception when business owners have accumulated a large nest egg in their retirement accounts. Typically, their businesses are their nest eggs.

Take for example an attorney I recently worked with in his early 60’s that has a successful practice. His share of partnership revenues are around $1,250,000. He takes an income of over $250,000 per year, but only started contributing to a SIMPLE IRA about 10 years ago. He has accumulated a respectable $300,000 in the SIMPLE IRA, but estimates needing $150,000 a year to live on in retirement. He still enjoys working but is starting to consider his retirement options.

The 5% rule of thumb would dictate that he needs about $3,000,000 in investment assets to give himself a good probability of producing an inflation adjusted $150,000 over his lifetime. How can he get there? We reviewed a couple of possible avenues.

Option 1 – He can keep saving, the more the better. His $300,000 starting balance in his SIMPLE IRA, with max annual contributions of $12,500 + a catch up contribution for > age 50 of $3,000 + the max employer match of 3%, $7,500, would allow him to add $23,000 per year.

At that rate, assuming a hypothetical growth rate of 8%, he could accumulate $3,000,000 in a little over 22 years. Now there are many other variables (alternative income sources, extra savings, etc) that may allow him to retire earlier than that, but for the sake of illustration you can see that this may not be the ideal plan.

Option 2 – Sell his partnership interest to his partners. No problem, if your partner(s) have the funds to buy you out, right? But what if they don’t?

To get an idea of how his partner(s) could structure a buyout, PlainsCapital Bank Vice President, Rick Lindley, of Austin, TX was kind enough to share some thoughts.

“Many business owners aren’t familiar, or may be intimidated by the perceived hassle, of structuring a business sale to an employee through financing backed by the US Small Business Administration (SBA). The SBA will let the employee purchase the business with little or no money down as long as they meet some qualifying credit requirements and aren’t a convicted felon.

If a business has assets like buildings, land, or equipment, it is fairly straightforward to arrange financing. The assets will serve as collateral and loans can be structured with as little as 10% down. When there aren’t many assets, there is another program known as 7(a) that is more attractive.

Under 7(a), SBA makes loans for acquisition of a business by guaranteeing 75% of the bank’s loan to the buyer. The buyer needs to come up with the other 25%, but it can come from family or a separate loan from the seller.”

In this option, let’s say the lawyer could sell his partnership interests for approximately one year of revenues to his other partners. The buyers could use an SBA 7(a) loan to finance the purchase.

$937,500 of the purchase would be financed by the bank, the seller could finance a portion, say 10%, or $125,000, leaving the buyers to come up with the other $187,500 as a down payment. If he were to net $1,000,000 in the sale, he could reduce the amount of time it would take him to reach his accumulation goal by 10 years assuming he maintained the same savings rates presented in Option 1 if as a salaried employee. Another option would be to reduce his work schedule and augment his salary with earnings from the business sale.

There are other planning considerations that also come into play that could involve life insurance to create liquidity in the event of an owner's premature death to allow for buying out heirs or replacing a key employee. We'll cover some of those considerations in a future Accountable Update.

Of course, he could just continue on as a partner with the knowledge that if he decides to cash out at some point down the road, he knows how he may do it. That’s the value of planning, and why we believe that no wealth should go “unplanned”. If you would like to discuss your plans, get in touch for a complimentary consultation.

Savings rate targets are hypothetical illustrations, do not reflect actual investment results or actual lifetime income, and are not guarantees of future results. Targets do not take into consideration the specific situation of any particular investor, the composition of any particular account, or any particular investment or investment strategy. Individual investors may need to save more or less than the savings target displayed depending on their inputs for retirement age, life expectancy, market conditions, desired retirement lifestyle, and other factors.