If I have two identical answers to the same problem, but one of them is wrong, should I think a little deeper?
Let us suppose you have a business worth $3,000,000 and other assets worth $1,000,000. Everything is looking good. I approach you about life insurance. You suggest that the business is your estate. The wife and children will have $4,000,000 in the event of your death.
Call this estate #1.
Now consider Estate #2 which is eventually identical to Estate #1.
Suppose I have a client who is a young widow with children. She has no experience running a business. She has $3,000,000 cash and another $1,000,000 of other assets. She comes to me for investment advice. I tell her that I have an opportunity. I know a business that is growing and prosperous and worth $3,000,000.
While the business was worth $3,000,000 the last time it was valued, the founder, general manager, principal decision maker, customer relations person, inventor, and the person the employees, the bank and suppliers trust will not be available for the transition, but maybe she and the remaining employees can look after that shortfall. I recommend that she buy and she does.
When the business eventually fails, or at best is sold under pressure for a low price, do you think I will be found guilty of malpractice and should be held financially responsible?
You will probably answer yes and you will almost certainly be right.
Why then does it make sense for the vulnerable business owner to force his hypothetical, young widow into the exact same situation? A $3,000,000 business that she cannot operate and $1,000,000 of other assets.
The situation as business owner with Estate #1 aspirations is identical to the case in estate #2, except for how it came to be and the ability to sue me for advising it.
Business people often choose estate #1 without much thought. Their knowledge of the $3,000,000 business is unconnected to the meaning it has in estate #2. Despite the identity of outcome, they will still believe estate #2 arose from my malpractice, while estate #1 is acceptable.
When identical facts yield different meaning depending on perspective, people must examine their perceptions. Meaning is higher level condition than knowledge and it can provide new and important insights.
Most owner managed businesses lose half or more of their value in circumstances like these. Would not estate #3, the business worth half, $1,000,000 of other assets plus $1.5 to $2 million of life insurance, work more efficiently? She could sell the business, not under pressure, maybe to the employees, for less than its previous value and likely have everyone make a go of it.
Merely organized common sense in this case.
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Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. Contact: firstname.lastname@example.org