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The Man Who Bought His Business For Free

14 November 2010 No Comment

By Helen Kaiao Chang

This story is a myth. It may not have happened. But it might have.

It is a story about an older man who doubled his profit on selling his business; the younger man who basically got the business for nothing; the investors who will more than triple their profits; and the CPA who got creamed.

This story is about a killer deal. And the dealmakers who did it.

It is one of those stories that San Diego businesspeople tell, that go around at lunch and dinner meetings – because that’s where business really takes place. It’s a story that perhaps grows bigger with each telling, and it makes your jaw drop because you wonder how someone could think of making money that way. And it’s totally legal. And it could totally happen to any businessperson.

In this case, the storyteller is Marty Mead, a national account manager working out of the Oceanside office of Lifestyle Settlements, Inc, an insurance brokerage firm. Mead heard the story from his associate Bill, who heard it from someone attending an insurance industry conference in Missouri two years ago. Bill does not remember who exactly he heard the story from; he does not know the people involved; or the business industry. But since then, the story has been told and re-told hundreds of times in San Diego.

Mead, like many salespeople telling stories, puts a cautionary spin on this tale.

“This is a concept that business owners need to know about, especially if they happen to work in the CPA arena, elder law, estate planning, senior planning, retirement planning,” he said. “If they don’t know, …they may be walking away from an opportunity; they also may be in for potential liability.”

But others like the story because it is about dealmakers. And that is the essence of business: making deals, buying and selling. Seeing something that no one valued before and selling it. Even if the profit is contingent on someone’s death.

This story begins with a man who was selling a business. The man was in his late 70s, and his ailing health was affecting his ability to do the job. He sold the business to a younger man for $300,000. (“I don’t know how old he was,” said Mead, but since the new owner had that amount of capital, “we can say 40s.”)

The younger man took over the business and went through the company’s assets with his certified public accountant (CPA). In it, he found that the business owned an insurance policy on the previous business owner. The “key-person” policy would reimburse the business in case something unfortunate happened to the previous business owner. But since the business itself pays the premiums, the business owns the policy. In this case, the policy coverage was $1 million.

In many instances, such a policy lapses or the company no longer pays the premiums, and the insurance policy is worth nothing. However, in this case, the new business-owner decided to sell the policy. The policy was actually a term policy, meaning that it expired at a certain age limit of the person insured. So the new business owner converted it to a permanent policy, extending it for the life of the previous business owner, thus making it marketable. The younger businessman hawked the new policy to several institutional investors who specialize in these types of policies. Such “life settlement” investors cash out the policy-holders at a discounted rate, continue to pay the premiums, and then collect the insurance check when the person dies. “It’s morbid,” said Mead, but “it’s a multi-billion-dollar industry!”

In this case, the new business owner was able to sell the $1 million insurance policy for $300,000 — exactly what he paid for the business.

So basically, the younger man got the business for free.

When such a sale takes place, the law requires that all parties sign off. When the older man found out about the sale, which he agreed to, he called the younger man and asked the price. “$300,000,” said the younger man.

The older man was miffed. His CPA had undervalued the company. So the older man turned around and sued the CPA for $300,000. And won. So basically, instead of getting $300,000 for the business, he got $600,000. He doubled his profit.

What happened to the CPA who got sued?  “Hopefully he had Errors and Omissions insurance (which covers professional liabilities),” said Mead.

As for the institutional investors, they are sitting pretty, happily paying those monthly premiums on the older man’s insurance, until the ailing senior cashes in with the big register in the sky. That’s when the investors will collect their $1 million, on their original $300,000 investment. They will more than triple their money.

Well, that’s assuming they have not done so already, since the story has been told for at least two years now.

Why You Should Not Believe This Story:

  • We cannot confirm any names, other than the person who told us the story.
  • We have no dates.
  • We don’t know when or where it really took place.
  • We have no proof that it actually happened.
  • It was told by an associate of an associate.
  • Each associate probably added their own twist.
  • We could be making this whole thing up.

Why You Should Read It Anyway:

  • It demonstrates the essence of business – finding something of value and selling it.
  • Everything in the story is legal.
  • Everything in the story could happen in real life.
  • You learn about finding hidden assets in your company.
  • You learn about life settlements on insurance.
  • It’s fun to read.

Why This Story Really Could Have Happened:

  • “The story elements are reasonable,” said Doug Head, president of the Life Insurance Settlement Association, the largest such industry group in the US.
  • Life settlements is a $10-$15 billion industry
  • Institutional investors, including Warren Buffet’s Berkshire Hathaway Group, American General Life Insurance, Dredsner Bank, Bank of New York and Maple Bank of Canada invest in this industry.
  • Some Hedge Funds are based on life settlement policies alone.
  • Many people cash out on life and business insurance policies, getting anywhere from 10% – 25% of the face value.
  • People want to sell, because they cannot keep up with insurance premiums; need the money to pay estate taxes; or have enough other assets. (However, many financial experts advise clients to keep their policies and sell only if they absolutely need the money and can find other insurance.)
  • The insurance policy has no cash value otherwise.
  • Many businesses own “key-person” policies or “buy-sell agreements,” on their key personnel or business partners, regardless of whether the person is still with the business or not. These can be either term or permanent policies.

How to Find Hidden Assets in Your Company:

  • Have a CPA review your books
  • Have a business broker evaluate your company
  • Check with a business lawyer
  • Get second opinions


  • Lifestyle Settlements, lifestyleinsurance.com
  • Life Settlement Solutions, lss-corp.com
  • Life Insurance Settlement Association, lisassociation.org

Follow Helen on Twitter @HelenChang

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