CASE STUDY: How Hank's Stream Plan Saved His Retirement & Business Sale
A New Way to Protect the Present. A New Way to Secure the Future.
Client Background:
Hank spent decades building a successful propane distribution business. As he neared retirement, he decided to sell his company and enjoy the fruits of his hard work. However, the transaction didn’t go as smoothly as planned, unexpected challenges arose, jeopardizing both the sale of the business and his future retirement.
Fortunately, years earlier, Hank had secured a fully funded Stream Plan, designed to provide him with tax free income in retirement. This strategic decision proved invaluable, offering him financial flexibility when he needed it most.
In this case study, we’ll explore how Hank’s Stream Plan could have helped him navigate these obstacles with confidence and ease.
The Transaction:
After months of searching and negotiating, Hank found a buyer, Matt, who was eager to take over the business. Matt was excited about the opportunity but needed a bank loan to finance the purchase of the propane business. He approached his local bank for funding, and the bank agreed to approve the loan, contingent on several factors:
1. A formal, certified evaluation of the business.
2. A full listing of all equipment with disclosure of their age and condition.
3. Any state inspection reports completed within the last 5 years.
4. A breakdown of operating costs and liabilities and expenditures.
Matt presented the bank requirements to Hank, who agreed to cooperate. However, the results of the bank’s investigations revealed several significant issues.
The Bank's Findings
1. Business Valuation: The formal business evaluation came in 12% lower than Hank had expected. This lower valuation created a gap between Hank’s initial asking price and the perceived value of the business.
2. Equipment Conditions: Most of the equipment was older than initially disclosed, most with a high probability of needing replacement within the next 3 to 5 years.
3. Propane Tanks: During a state inspection of the propane holding tanks, it was discovered that all three propane tanks needed to be replaced at a cost of $150,000 per tank. This finding was a significant blow to the transaction, as these tanks were vital to the operations of the business.
4. Hazardous Materials Disposal: The operating costs provided by Hank did not include the proper disposal of hazardous materials. This oversight could lead to substantial regulatory fines during future inspections, further complicating the business’s financial outlook.
Both Hank and Matt were taken back by these revelations. Hank, in particular, felt caught in a difficult position. Not only did the sale price fall short of his expectations, but the discovery of the propane tank replacement was an urgent and expensive issue that he would have to address regardless of the business sale.
Hank’s Solution Using His Stream Plan:
Despite the setbacks, Hank had a solution using his Stream Plan, which was built using an (IUL) Indexed Universal Life policy. This policy allowed Hank to tap into a tax-free loan from his IUL to address the immediate financial challenges.
1. IUL Loan for Tank Replacement: Hank borrowed $450,000 from his IUL to cover the cost of replacing all three propane tanks. This move was essential, as the tanks’ replacement not only kept the business operational but also brought the company’s valuation closer to Hanks’s intended selling price.
2. Regulatory Fees and Equipment Updates: Hank also borrowed an additional $50,000 from his Stream Plan to catch up on regulatory fees and update some of the business’s aging equipment. This ensured that the business was fully compliant with regulations and improved the overall operational capability of the company.
3. Business Sale: With the new propane tanks in place and the regulatory issues resolved, the business valuation was now much closer to what Hank had originally intended. Hank successfully sold his business to Matt, and both parties were satisfied with the outcome.
4. Retirement Transition: After the sale, Hank had the option to pay back the loans he took from his Stream Plan or keep the borrowed cash and still retire comfortably. As a result, he was able to enjoy tax-free income from his Stream plan as part of his retirement plan, securing his financial future and achieving the peace of mind he had planned for.
Outcome and Impact:
The successful sale of Hank’s business to Matt was a win-win for both parties, but it wouldn’t have been possible without Hanks’s careful retirement planning with Stream. By leveraging his Stream Plan, Hank was able to navigate a series of financial obstacles that threatened to derail the business transaction. The strategic use of his Stream loan allowed him to replace the propane tanks, update the equipment, and cover regulatory fees. Ultimately ensuring that the business was sold at a fair price so Hank could retire comfortably.
Hank's Benefits:
1. Sale Price Closer to Expectations: By addressing the necessary propane tank replacements, regulatory issues and equipment repairs, Hank was able to sell his business for a price that met his retirement goals.
2. Tax-Free Retirement Income: Thanks to his Stream Plan, Hank enjoyed tax-free income in retirement, with the added security of knowing he was prepared for future financial needs.
3. Hank’s Loan Repay Options: As a note, Hank had two options regarding the $500,000 loan from his Stream Plan. Here are the options that he had after the sale of his business.
• Pay back the $500,000 loan after the sale of his business and receive $442,823 in tax free annual income.
• Keep the $500,000 in cash and receive $398,752 in tax free annual income.
What option would you pick?
Matt's Benefits:
1. A Viable Business: Matt purchased an up to date and fully operational business, which included the replacement of vital infrastructure (propane tanks) and the resolution of regulatory issues.
2. A Smooth Transition: Matt was able to take over the business without worrying about immediate capital expenditures, as Hank had taken care of the necessary upgrades.
Key Takeaways:
1. Planning is Essential: Hank’s use of the Stream Plan demonstrated the importance of proactive financial planning. Even though he had not planned on taking a loan against his stream plan prior to retirement. It provided Hank with an opportunity he wouldn’t have had without his Stream Plan in place. By utilizing Streams tax-free loan capabilities, Hank was able to address urgent issues and maintain control over his retirement timeline.
2. Business Transactions Can Be Complex: Business sales, particularly those involving significant assets like equipment and infrastructure, can come with unexpected challenges. By having a contingency plan in place, it ensured a smoother business transition.
3. Tax-Free Retirement: The benefits of an IUL policy extend beyond just life insurance. Hanks’s use of the policy to borrow money for business upgrades not only helped him sell his business but also ensured that he would be able to retire with tax-free income.
In the end, Hank’s careful planning with the Stream plan allowed him to overcome challenges and transition into a well-funded retirement, while Matt took over a viable business with a brighter future ahead.
