A saying I live by is “We’re all only one phone call from disaster.”  Today’s guest, Steve Ciepella had the unfortunate experience of getting one of those phone calls several years ago.

He received a call letting him know that his business partner had just had a critical brain hemorrhage.  Fortunately, for both Steve and his partner’s family they had thought about and more importantly taken action to make sure that if the worse was to happen they would be prepared.

Today’s podcast covers the lessons that Steve learned.  These are lessons you need to pay attention to.  Here are some of the things we talked about:

  • Why you need a buy/sell agreement in place, especially if you have partners.
  • How insurance can help you get through the worse and protect your finances.
  • Why term insurance is a great deal to protect your business.
  • Why a valuation can save you hours of headaches if the worst happens.


Narrator:         Welcome to the Sustainable Business Radio Show on podcast where you’ll learn not only how to create a sustainable business but you’ll also learn the secrets of creating extraordinary value within your business and your life. The Sustainable Business is all about creating great outcomes.

Here’s your host, certified financial planner, student, entrepreneur and private business expert, Josh Patrick.

Josh:                Today’s podcast features Steve Ciepiella from Charles Stephen, a wealth management firm based in Albuquerque, New Mexico. Several years ago, Steve got one of those phone calls that we all wish we never get. He was informed that his partner had just had a very serious brain hemorrhage, on vacation, and he was probably not going to make it. This phone call triggered a series of events that Steve and his partner had put together years ago just in case something like this happened. Let’s get right to it and hear what you can do to protect your family and business if the worst happens.

Hi Steve, how are you today?

Steve:              I’m great, Josh. How are you?

Josh:                I’m well, thank you. Thanks for being on the show. Why don’t we start off by what happened when you got the phone call and what were you going through right after you received it?

Steve:              Well, at the time Chuck was 48 years old. Chuck and I had started Charles Stephen together in 1983. He was 48 years old. He was on vacation in Seattle and he suffered a cerebral aneurysm.

I got a call. I was actually in my garage. I got a call from the office that said, “Chuck had a cerebral aneurysm. He’s in critical condition at a Seattle Hospital and they’re not sure he’s going to make it.” Obviously, there’s initial shock. You’re scared. You’re worried about Chuck and you worried about his family. There’s all kinds of things that go through your mind. It’s probably a pretty terrifying 20 or 30 minutes which, all the way to the office, I was thinking about it. I knew I had to get to the office. That’s really sort of what happened.

Josh:                So, when you got to the office, what happened there?

Steve:              The first thing I did was I sat everybody down because your employees are as scared about it as you are and explained to them just what I knew, and I knew as much as them, but that Chuck and I had made plans for this day. We would wait and see what happened but I thought everything would be okay and there was nothing they needed to worry about.

Josh:                Let’s talk about the planning you had done before Chuck has aneurysm. What did you guys do?

Steve:              Well, we have a subchapter S Corporation. We had a stock redemption agreement. It was in writing. The stock redemption agreement covered disability. It covered death. It covered the buyout.

We were both young so obviously the part of agreement that was talking about things that were terrible and also things that could happen if we stayed alive and not only if something terrible happened to us. We had done all of that planning. We had valued the business based on industry standards. We had kept our minutes and I think this an important thing for people. We had kept our minutes up-to-date because as you know every year you have to sit down and say the valuation is good or bad. We had the formulas in there. And so, we had what we thought the cost was. We were 50/50 partners. We had what we thought the value would be and we had funded it especially with life insurance to make sure that if anything happened that the money was there.

Josh:                How much of the funding did you do with life insurance? What sort of life insurance did you buy?

Steve:              We did all of the funding. What we did is, we had valuation for the company but we also knew the company was going to grow so we actually bought more life insurance and made some of the keyman with the idea that, down the road, more and more of it would go towards the purchase and less and less towards keyman but we bought more. It was a combination of permanent and term but mostly a lot more of term because we were trying to get as much insurance as we could for the least amount of money.

The other thing we had was we had a disability provision in there and we did have disability insurance. But again, especially when you’re a subchapter S corporation, it’s pretty hard to replace all of the income with disability insurance. Frankly, that was really what I was more concerned with because when I finally did hear what happened with Chuck, he was on life support. They didn’t know if he would live through the night. And if he did, they felt like he would have permanent brain damage so I was just as concerned about – “Gee, what if Chuck is totally disabled, which he would have been, and couldn’t function at all?” And again, because Chuck and I were good friends there’s all kinds of other things that go with that.

We had done all of that and so we had that in place. But, really, I was more concerned about the disability part than I was at the death when I first heard about it. And then they called and said, Chuck wouldn’t live through the night. He did live through the night but they took him off life support the next day and he died within 25 minutes. It was a good decision, especially if you knew Chuck.

Josh:                Yes, that’s for sure. So the term insurance that you bought, what was the length of the term insurance?

Steve:              We did a 20-year term insurance. What we found was annual renewable and five-year. I mean, you might as well do 10-year because really when you look at the cost over 10 years, the 10-year term is probably cheaper than either annual renewable or five-year. And at the age we bought it, the 20-year wasn’t really that much more expensive than the 10-year so we got 20-year term which took us through somewhere around age—well, at the time it was all the way to age 65 actually. So, that’s the way we did it. We sort of worked backwards.

Josh:                Cool. What kind of advice do you have about buy-sell planning? What should you do if you don’t have a buy-sell plan in place? How should you put one in place?

Steve:              Well, I think, if you’re an entrepreneur, you have a tendency to work in your business instead of on your business. I think the number one thing is to strategically think and set up time – make time and make it like an appointment, to sit down and figure out what you want to happen if the business survives, if you want to sell it down the road, if you want to do anything down the road, how to protect the valuation, how to get a valuation. That’s all very important. You’ve got to make sure you’re on same page.

The other thing is to make sure—and one of the things you can do is, there’s somebody called a CVA (Certified Valuation Analyst). These guys do valuations on businesses. The problem a lot of times is if you use a CVA or a CPA, it’ll cost you $15,000 to $20,000. But a lot of these guys will do what I call a 10,000-foot snapshot where they’ll come back for maybe $3000 and say, “Based on your industry, based where you are, based on your business, we would say your business is worth about X amount of dollars. That’s really sort of where we started and we had that valuation.

We got the valuation, we started talking about what we wanted to happen. And then I would get an attorney who knew about buy-sell agreements. I have business owners sometimes tell me, “Well, I have this attorney who did a divorce for me or helped me sue somebody.” Attorneys are just like doctors. They specialize in different things and you need to find somebody who’s an estate planning attorney or a tax attorney that can help you to put the agreements together.

The other thing that I would say – one of the mistakes I made was, you’ve got to make sure the spouses know what’s going on. I mean, we had a meeting with our wives and told them what we were doing. They signed off on it but when my partner passed away, his wife said, “Well, I guess I’m your partner now.” I said, “Not really. I mean, the estate’s my partner now.” They are no longer part of the health insurance. They’re no longer part of the retirement plan. They’re no longer part of a lot of things and spouses sometimes don’t understand that. We did a good job of sitting down with them initially but we didn’t do a good job of updating them as we went along which I think is important.

Josh:                Okay, we’re going to circle back to that in a second. I want to go back to your valuation. You guys had an annual valuation done or you updated your valuation every year?

Steve:              Well, what did is – we were advised that if you do a valuation, one of the things you need to do is at least, on annual basis, have something in your minutes that said you talked about it, discussed it and put a valuation on it which is what we did. We didn’t get it valued every year. We started in a place and then you can use sort of the same metrics the next year and sort of adjust it as to how much it’s worth and things like that. If you have a building involved, or mortgages or loans or things like that, that’s a lot easier but we made sure that we were okay with what the value was every year. And if one of us had a problem with it, we just adjusted. I don’t really think you need to do a CVA kind of valuation except maybe every five years or so. That’s what I would do.

Josh:                So, what you’re saying is that you do a formal evaluation every five years and every year in between that you sort of say, “Does this make sense? And is it fair?”

Steve:              Right, “Does everybody see it that it’s fair?”

Josh:                Okay, that seems to makes sense to me. Let’s go back to mistakes. I mean, one of the mistakes that you made, you said, was you didn’t have regular conversations with your spouses about what was in the buy-sell arrangement. Why is that important?

Steve:              Again, especially with a lot of entrepreneurs, your business is your largest asset. Unfortunately a lot of entrepreneurs use their business as their checkbook. You know, if you need $10,000, you go in and get $10,000 out of your business but all the spouses understanding—when Chuck and I started this business, we both had $600 in the bank and hired a part-time assistant. They didn’t have things like computers really so we had an IBM Select typewriter. That’s how we started and then we just built it. But while the spouses knew generally what we were doing, they didn’t know the particulars. And so, all the spouses know is “Look, we’ve got this – for lack of a better term, cash cow here and if we ever need anything, if the refrigerator breaks or the car gets in an accident, it’s pretty easy to go and access that.” And they don’t understand when you can’t do that anymore. They also don’t understand that, for instance, health insurance – once Chuck passed away, he’s no longer an employee so he’s no longer covered by the health insurance. Once Chuck passed away, he’s no longer working so he’s no longer participating in a retirement plan as of that date. Those are the things that they don’t understand.

Josh:                That makes sense. Any other mistakes you thought you made in planning with this?

Steve:              Yeah. I’ve got to tell you, Josh. I think, in a lot of ways, when I look back, we were smart by accident but one of the things we did is we marketed Charles Stephen as a company. And we put processes in so that whether you were meeting with Chuck or whether you were meeting with me, you had the same process. Everything you saw looked the same. The way we went about it is the same. The tools we used were the same. Our little toolbox – everything was the same.

So, when Chuck passed away, it was a lot easier for his assistant to bring me up to speed on clients. And they didn’t have to re-train me. I didn’t have to re-train them. They had a lot of information on the various clients. And what Chuck’s clients saw, after he passed, were the same things that my clients saw so I knew about it. I knew how we presented it. They saw the same thing and I think they had a lot more comfort in it. Therefore, we didn’t lose very many people in the process.

Josh:                The clients felt really comfortable with you taking over the relationship where Chuck was before?

Steve:              That’s right and that’s so important because you can run a business but the relationship part of it is really what’s important.

Josh:                Especially in your business, that’s for sure. It’s been ten years, what’s happened in that period since Chuck died?

Steve:              Well, what happened was, when Chuck passed away – that first year, I’ll just talk dollars, but when Chuck passed away, we would have a meeting everyday with the staff. The other part of this is we didn’t let any staff go. We reorganized staff and we reorganized clients. I sold off part of the company because we could outsource that but other than that everything sort of went the way that it had gone before. So we met every day. We got everything going.

When we reorganized everything, we were able to service all of the clients. I could do that individually and where Chuck and I used to do it together. It allowed us to keep the volume going. During that adjustment, I mean, in the first year, we actually made more money in the year before. But the second year, our revenue went down. I think that was just part of the reorganization. And everything we did was selling off part of it and doing what we did. From that point forward, we’ve experienced pretty good growth. In fact, over the last five years anyway—I mean, 2008-2009 hit everybody the same way. But over the last five years, we’ve averaged in excess of 10% growth.

I’m now 61 years old so I don’t want to make the same mistake that some of my friends made where they wait until they’re 66 and then say, “Okay, I’m going to sell this company.” I have some younger people. One of them has been with me 18 years. Another one is my son who, even though he’s my son, I mean, he gets it. I think one of mistakes people make is they think because somebody is their child that they can just take over their company when really they can’t. But in Adam’s case, he gets it. They just bought into the company. We have a 10‑year plan where essentially by the time I’m 70, I will no longer own the company.

That doesn’t mean I’ll stop doing what I’m doing. I like what I do. I think I provide a great service for my clients. But in 10 years, I don’t want to own the company. And so, we’ve put that into place and we project that this year – I mean, it took ten years but our gross profit is probably double where it was back ten years ago. We’ve experienced pretty good growth considering the kind of company we are and the market we’re in. Now, the next phase is to move forward.

One other thing I should mention is the life insurance we got – it’s sort of amazing what happened there because I received the life insurance tax free. I own the policy on Chuck. Chuck owned the policy on me. So I got seven figures of life insurance income tax free. His wife, through the estate, got a step up in cost basis on his stock so she paid no tax on his part of the company. So, all of that was a tax-free transaction. And then, as a result, I also have a seven-figure cost basis in my company because I bought his half of the company. So now, when I’m selling the company, we have to design it in a way where I can take advantage of the money in the cost basis which I get tax free. There’s not really very many things out there that allow you to do something like that. It was a great tool for us and it really did what it was supposed to do. It turned a very bad situation into a very good situation.

Josh:                Well, I think we might have to circle back for another segment with you sometime on that particular topic because it’s a good one. We’ve got about a minute left, how can people find you if they have more questions?

Steve:              Well, they should go to our website www.charlesstephen.com or we have an 800‑number: 1-888-884-0451.

Josh:                Cool. I’m assuming you don’t mind if people give you a call if they have a question or two about how to do appropriate buy-sell planning?

Steve:              That’s fine. I’d be happy to answer any questions for anybody.

Josh:                Great. Steve, thanks so much for your time today. This has been really enlightening and very useful for our listeners. We’ll talk soon, I hope. Thanks.

Steve:              Thank you, Josh.

Josh:                You’ve been listening to the Sustainable Business Podcast where we talk about what you need to do with your business if it was to be here 100 years from now. If you like what you heard and want more information, please contact me at 802‑846‑1264 ext 2 or visit us on our website at www.stage2solution.com or you can send me an e-mail at jpatrick@stage2solution.com.

This is Josh Patrick and thanks for listening. I hope to see you soon for another edition of The Sustainable Business.


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