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A case study in life insurance as a succession planning tool

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Little did Steve Teper know that while he was attending a charity event in the summer of 2013, his dream of owning the company he loved would become a reality. It was there that he and I ran into each other. And, since we were former softball teammates, we naturally struck up a conversation. 

Teper, the CFO of 73-year-old Commercial Contract Corporation (CCC) in Auburn Hills, Michigan, explained to me that there was no obvious succession plan in place, and he was looking for some creative ideas. The challenge was that Teper and his three colleagues were capable of running the company long term, and were able to contribute significant capital, but they lacked the additional resources needed to pay a lump sum purchase price to the current owner, William Pettibone, Jr.

CCC offers a broad range of services, including general contracting, industrial equipment installation, and construction and facilities management. CCC was founded in 1942 as a division of Commercial Carriers Corporation. Don Beveridge and William Pettibone, Sr. purchased the division in 1946 and in 1961, Pettibone, Sr. bought out Beveridge and became sole owner. After the death of Pettibone, Sr., Pettibone, Jr. and his brother Michael Pettibone each assumed 50 percent ownership. In 2007, Pettibone, Jr. bought out his brother and became sole owner.

Teper joined the company in 1997. He and his colleagues, Stephen Fragnoli, Bradford Kimmel and Joel Lewandowski, were all fiercely loyal to Pettibone, loved their roles at CCC, and wanted to succeed to the company’s ownership if it were at all possible.

The issue faced by the team at CCC, and numerous other closely held companies was not a unique one. Succession plans (or exit strategies as the case may be) are challenging to implement for a variety of reasons. Some multi-generational companies may no longer have family members to take over. Often times, the current partners are at odds over when to sell, how to sell, the sale price, and whether to retire or continue working under new ownership. And, probably the most difficult situation of all is when an owner passes away and the heirs suddenly take over a company that had no plan in place. Fortunately, there are solutions to these complex issues.

In the case of CCC, I, along with one of my partners at Schechter Wealth, Jordan Smith, met with Teper and Fragnoli over the ensuing months to learn about their goals and objectives, as well as the legal structure of their entity, potential licensing and employee benefit issues that would arise as a result of a sale, and the sales tax implications to CCC and Pettibone Jr. 

Smith, an estate and tax planning attorney by training, and I, also an attorney, then began devising a proposal for CCC. While some may consider life insurance an expensive necessity for their family or business, life insurance, when structured appropriately, can be an incredibly powerful problem solving tool.

The key components of our proposal provided:

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1) Teper and his partners the ability to purchase CCC without borrowing from a third party lender;

2) Pettibone, Jr. with significant annual payments towards the purchase price; and

3) security for Pettibone, Jr. through a unique and inexpensively priced life insurance product that only required two premiums in the first 15 years.

Both Teper and his partners, as well as Pettibone, Jr., were all intrigued with the proposal. So discussions continued with the help of CCC’s team of tax advisors at PriceWaterhouseCoopers in Detroit, and lawyers at Couzens, Lansky, Fealk, Ellis, Roeder & Lazar, and P.C. in Farmington Hills. Multiple issues were carefully considered, researched, discussed and resolved to the satisfaction of the parties. In December 2014, the sale finally closed.

There are a few key lessons of the CCC success story. First, it is never too early to start succession planning. The new owners of CCC and Pettibone, Jr. had been in discussions with their advisors for months before Teper and I fatefully reconnected. The lack of either external or internal pressure to create CCC’s plan helped pave the way for one that was in the best interest of all involved.

Second, it is important to work with advisors that are not only trustworthy, but are experts negotiating and implementing multi-million dollar transactions. In addition, when experts in law, tax, insurance, etc. are all involved, they should have an open line of communication throughout the entire transaction so that all issues are identified and resolved in a timely manner. CCC’s advisors all stayed in close contact from start to finish.

Finally, have an open mind to creative and potentially non-traditional financial strategies. For CCC, it was a uniquely designed and competitively priced life insurance product that was presented as the game changing component to the entire transaction.