Eversprint Interview with Carolyn & Malcolm

Malcolm: Welcome to the Build Grow Exit Show. I’m Malcolm Lui and our guest today is Carolyn Smith, the Senior Partner at C3 Financial Partners. Welcome to the show Carolyn.

Carolyn: Malcolm, thank you for inviting me.

Malcolm: To kick it off Carolyn, can you introduce yourself, your company, and share a little bit about what you do and what your company does?

Carolyn: Sure, I began my professional career as a CPA in public accounting. I worked a lot with family-owned businesses and especially spent time with families after a death occurred. It was during those times of exiting a family business that I got to really experience those families that had prepared for it, and those that had not. So, 11 years ago, I transitioned into being an independent life insurance broker associated with Todd Healy (Founding Partner of C3 Financial Partners). Today I get to do what I enjoy most – working with family-owned businesses every day on planning for their unanticipated risk.

Malcolm: In regards to those family businesses that are planning for the unanticipated risk, is there any particular client you’ve helped that stands out, that had an interesting challenge, or a big challenge that you helped them resolve?

Carolyn: I think what comes as a surprise to many family-owned businesses as they transition into the second and third generation is that with shared ownership comes shared risk. A cousin may not realize that their cousins, who are not attending to their planning matters, are going to impact the family enterprise. So, I think it’s that awareness that we’ve been able to bring. We advise our clients to look at what are some of the risks that they haven’t anticipated that perhaps could be managed. Oftentimes, it is liquidity that helps a family build in some financial resources. That is what helps them navigate during those turbulent times that are going to come for all of us.

Malcolm: Can you give some examples of those risks that you help the families with?

Carolyn: As we’re helping families look at their liquidity planning, part of our discussion is what documents do they have in place, or do not have in place, that would help determine how a business would be valued. Or how the price would be paid for an exiting partner or an exiting shareholder. Very often, Malcolm, it’s interesting.

People say, “Hey, yeah we’ve got those documents!”

We say, “Great, let’s take a review of them!”

Then later they say, “Oh we have some documents, but they’re not signed – I wonder who has a signed copy or if we have a signed copy?” Or, “We have a signed copy with a bunch of markings all over.”

I think one of the first things we help people do is get clarity on what it is they currently have in place. Because, sometimes, it’s just been a while since that file has been dusted off. Also, we find that what has changed is who is in the business, what the name of the business is, and even what the business does. Sometimes, it’s just some really very basic, routine things helping to identify what someone would be looking for if that business partner had unexpectedly exited the business.

Malcolm: When you talk about the document, what kind of document are you talking about exactly? A napkin that someone scribbled on [laughter] or a formal document that an attorney had written, signed off on, and all parties said, “yeah let’s do it this way!”

Carolyn: In a perfect world, yes, you’d have that! Recently dated legal documents that have everyone’s signature, including any partners and spouses of the partners. But very often it’s kind of a messy folder. And you’re right, it’s probably got some napkins in there! It’s probably got drafts of corporate minutes, drafts of what somebody was going to do or take care of. But very often it references that the company’s going to have life insurance policies or reference the company’s going to carry this much life insurance. So then that kind of gives us a roadmap to see what a reader would be expecting to find. We look to see how those policies are owned today, because perhaps the ownership and beneficiary of the policies, Malcolm, don’t match what the documents were anticipating. I think that’s one of the biggest hiccups we often find – we don’t have the parallel structures running. Perhaps they did some planning over here with this advisor, and then a little bit over here, and in the middle some life insurance was bought, but it was never tied up with any kind of bow. We’re coming in to see what are some loose ends that could easily be corrected now, and then start with a fresh review of where the business is at today.

Malcolm: In terms of the life insurance side of things, why should a business require the owner to have life insurance?

Carolyn: Well in family-owned businesses, there are a couple of really key people that have a lot of the information – have a lot of their relationships. If that person was to become disabled, or when they die, if they’re still active in that business, that business is going to suffer a loss. It’s actually a financial loss and insurance carriers have developed a formula to help quantify the risk to the business. They look to find that person to replace them. Or, for example, perhaps I am selling my business to you, Malcolm. I want to have security. Security that you are going to be around to pay me off. I don’t want to have to step back into the business in five or ten years. It’s those reasons where you can quantify the risk that really helps start the conversation.

Malcolm: Right. Is this a straight-up, plain vanilla life insurance policy, for an individual that’s being purchased or is it more of a commercial sort of thing?

Carolyn: That’s a very good question. Individual policies can be used for multiple purposes, so the same type of individual policy that you would buy yourself, your business can also own. Sometimes people think a “key person policy” is a separate kind of product, but really it’s the same product used for a different purpose.

Now, if you get into group coverage of 10 or more individuals, then sometimes there are corporate-owned policies that can cover a bigger class of people at one time.

But traditionally, we’re looking at what is the best product that’s going to fit your underwriting profile. This includes your medical, your lifestyle, and of course, the financial risks that we’ve been talking about.

Malcolm: Who would be the beneficiary of these policies? Is it the company entity that’s the beneficiary?

Carolyn: That is often a part that’s overlooked. Matching up the ownership and beneficiary properly, with the documents, so that you don’t create any tax surprises or mishaps when benefits are paid. And also so you preserve the income tax-free feature of a death benefit. It is really important that the beneficiary be properly aligned with who the owner is. It really gets to be case specific, depending upon how the corporate entity is styled.

Malcolm: So the policies must be well designed.

Carolyn: Absolutely

Malcolm: If a key person passes away or is unable to work, then there will be an economic impact on the company and they may need to replace them somehow. So I can imagine how the life insurance company could say, “yeah it’s going to cost $500,000 to replace this executive, and this benefit will be paid out to the company to cover those costs.”

Carolyn: That’s correct. The cash that comes in is income-tax-free, and it gives the business time to take a deep breath, sit back, reassess what talent is most available in the market, and how they can research and find the right person. It just gives them some breathing room.

Malcolm: Right. Now does your firm, and yourself, have the expertise to figure out the most tax effective way to structure it? Or do you bring in someone from the outside to help with that?

Carolyn: You know, Malcolm, our best experiences are collaborating with the clients’ other advisors. Ideally on the team, you need the CPA, the attorney, you need the facilitator for the business that perhaps is helping to coordinate all of these services, or is helping to determine what the value is for the business. So it is a multi-disciplinary approach, in a very collaborative environment, that gives the best results for the family and the business.”

Malcolm: Right. Okay, before we go deeper into that, I’d like to go back to life insurance and the risks that you help address with it. What other types of risks are out there that you are able to address through life insurance?

Carolyn: Today’s life insurance policies offer different riders that can be added to help cover some of those hardships that people aren’t anticipating. The most common one is some type of assistance with long-term care. We often think about long-term care as nursing home insurance; but in reality, the individual may need assistance with activities of daily living because of a bad car accident, or a knee replacement, or fell while jogging, etc. So those policies can be built with riders that you can tap into for those additional services.

And then also we talk to clients about disability insurance. The odds are that one in five of us will become disabled at some point, for some period of time, during our working careers. So we look at helping them assess all those different risks and how you can build a portfolio of products to help provide the resources. Again, going back to that liquidity for the business.

Malcolm: Right. And again it may involve figuring out the impact to the business under all those scenarios you talked about, and how that policy – in addition to meeting whatever medical needs you may have – can also help address the impact you would have on your business.

Carolyn: Right. And that really gets back to a lot of discovery and working with the other advisors on the value of the business. And what cycle the business is in, as far as growth and expansion, as well as what their personal economy is doing in the type of products or services they provide.

Malcolm: Right, so going back to the team sport aspect of risk reduction. You mentioned before that you work with a variety of different advisors for the business. Say for myself, we help business owners with restructuring their business, so it’s easier to manage, easier to grow, and ultimately, easier to exit. Where would you fit into this? How would you work with an advisor like myself? At the very end when they’re looking to exit, or at the very beginning when we’re trying to transform their business into something that’s more saleable?

Carolyn: Traditionally, we usually get invited when an advisor is sitting at the table and realizes that there are policies that the company has purchased, but they have not been reviewed in a long time. Or nobody really knows for sure how the policy is performing. Most often that is when we are asked to come sit at the table, to help provide clarity about what is currently owned, and to identify any gaps in the coverage that is needed today, compared to what they have.

Malcolm: Right. Just just thinking about what we do for our clients, and one of them is reducing operational risk. You don’t want to have too much weighting of your business on one customer or one supplier, or even one employee, right? But now that we’ve had this conversation, the risk of that one employee – whether it be an owner or someone else – that’s something I definitely would need to consider a bit more. It makes sense to bring in an expert like yourself even earlier into the process, as opposed to down the line, when all of a sudden you realize, “wow we never went ahead with this idea we had.”

Carolyn: It gives a business the opportunity to evaluate what risks they want to keep, and which ones they want to outsource to an insurance company.

Going back to my earlier example of shared ownership = shared risk, if I’m your cousin and you’re running the business, and I’m really enjoying the dividends I’m getting from the business, or the rental income, maybe I have never have slowed down enough to think, “oh my goodness, what if Malcolm isn’t there to do that? How is that going to impact me and my family?” Understanding that, if I’m part of a family-owned business, there’s risk that is being shared around all of us. And if we extracted just one person from the puzzle, it affects the logistics.

Malcolm: You mentioned just now there is some risk you’re willing to take, and others that you should perhaps outsource, or have someone else bear the risk. Which are the risks that your clients have, that you say “I think it’s better off that you just kind of take that risk because the probability of it happening is very low and the impact is quite low,” as opposed to spending money?

Carolyn: Sure. It really gets down to looking at their cash flow and working with their advisors to see how it would affect the current business strategies if they did not have insurance. In case they had to pay someone, or provide benefits, or cash someone out. Then compare that to how it is going to affect their current cash flow and what products are available in the market.

We have to look at what product may, or may not, be available in the market. Sometimes, someone may want insurance, but there isn’t a product that really fits their underwriting profile to make it possible. Sometimes just because you want something, it may not be available in the market.

Malcolm:  Right. What is the most unusual risk that you have insured among your clients?

Carolyn: You know, financial justification in today’s world has become more and more complicated. I don’t know if it was unusual, but we had investors who put quite a bit of money into a startup company. They wanted to make sure they had their investment secured with life insurance on that key person, but the insurance companies are wary of someone perhaps trying to acquire insurance to protect their business risk to the point of over-insuring. So, it’s been hard to explain to people that just because you can write the check, doesn’t mean you can buy the insurance. I don’t know that it was unusual, but it was the fact that someone really wanted to buy more insurance on this key person than we could financially justify.

Malcolm:  I mean the insurance company would have been more than happy to write the policy though right? So it wasn’t them that said, ‘’no we wouldn’t do it’?

Carolyn: They did say no, there’s only so much insurance on quantified risk if this person were to die while this policy was in place. So, no it was the insurance company that said, “here is our maximum amount of insurance that we will offer.”

Malcolm:  Yeah, I guess I don’t fully understand their angles. I have car insurance right now. If I wanted to insure it for $100,000 for my $30,000 car, I’d think the insurance company would think, “sure it’s free money to me because we’re never going to pay out $100,000 because their car is only worth $30,000.” So, there must be another angle that I’m not seeing.

Carolyn: They don’t want to turn it into a gambling contract. They want to make sure that it’s based on a solid business model of what the loss is that would actually happen, then make sure there is enough insurance in place to complete the loss.

Malcolm: Right, got it. Carolyn, for the folks out there who have heard the ideas today that I haven’t considered before – about reducing the risk and the exposures they may have that they are not even thinking of, or aware of – what’s the best way for them to contact you and your firm?

Carolyn: Most often people contact us through email or an old-fashioned call. I’ll be glad to provide you that information for you to add to the screen Malcolm or would you like for me just to provide it right now?

Malcolm: Yeah, you can provide it right now on the video, and then when I summarize our interview, I’ll pop it in the text as well.

Carolyn: My email address is csmith@c3fp.com. I’m happy for folks to reach out to me at 210-630-9385.

Malcolm: All right and can they also contact you via your website?

Carolyn: Yes, absolutely! I’d love for them to go to our website at C3FP.com. They can see members of our entire team, our business practices, and several of the articles that we published, as well as webinars that we’ve produced!

Malcolm: All right Carolyn, it’s been fantastic having you on my show today. I’ve really enjoyed our conversation and learning more about how life insurance can alleviate the risk that a business owner may have.”

Carolyn: Thank you, Malcolm, and thank you to your audience for listening today.

Malcolm: All right, talk again really soon. See ya, bye-bye!

Carolyn: Bye-bye!