Dive into the essentials of a fruitful business exit with insights from Ellen Long and Randy D. Long. They emphasize the significance of initiating exit planning early to ensure a profitable and seamless transition, highlighting the crucial role of a skilled advisory team, including an accountant, lawyer, and business coach. Learn about the strategies that render businesses attractive to buyers, such as the importance of a robust management team and culture, alongside the advantages of proactive tax and estate planning to safeguard your profits.
Furthermore, Ellen and Randy delve into the management of wealth post-sale, stressing the need for strategic planning that aligns with your personal objectives and risk tolerance. They discuss formulating an investment policy designed for your life after the exit, balancing growth opportunities with the wisdom of wealth conservation. This episode offers valuable insights for entrepreneurs aiming for a successful exit and a thriving financial future.
To learn more about Randy and Ellen, go to: longbusinessadvisors.com, and to further explore hiring us or joining our team, go to www.markperlbergcpa.com
Dive into the essentials of a fruitful business exit with insights from Ellen Long and Randy D. Long. They emphasize the significance of initiating exit planning early to ensure a profitable and seamless transition, highlighting the crucial role of a skilled advisory team, including an accountant, lawyer, and business coach. Learn about the strategies that render businesses attractive to buyers, such as the importance of a robust management team and culture, alongside the advantages of proactive tax and estate planning to safeguard your profits.
Furthermore, Ellen and Randy delve into the management of wealth post-sale, stressing the need for strategic planning that aligns with your personal objectives and risk tolerance. They discuss formulating an investment policy designed for your life after the exit, balancing growth opportunities with the wisdom of wealth conservation. This episode offers valuable insights for entrepreneurs aiming for a successful exit and a thriving financial future.
To learn more about Randy and Ellen, go to: longbusinessadvisors.com, and to further explore hiring us or joining our team, go to www.markperlbergcpa.com
Welcome everyone. We are here to talk about exit planning today Exit planning in your business. We are joined by Ellen Long and Ray D Long and they specialize in consulting just on this topic and we've done some capital gains planning for some of our clients on exit planning and aligning that with their real estate tax strategies and general tax strategies, and we always look at all sources of income. But I'm very excited to drill down on this what can be a very complex, multi-faceted topic with many strategies and variables to consider. So we're going to riff on this. We have some live people who can answer your questions. We'll have some conversation on this topic, but let's get started. Randy and Ellen Long, can you each introduce yourselves in 60 seconds or less?
Speaker 2:60 seconds. So I was the lawyer first. I practiced law for 30 years. I own a wealth management firm, still in California, and I spend almost all of my time in my exit planning consulting company, which is the most fun that you can imagine, and I get to do it with my daughter, which makes it extremely exciting, and we love the outcomes that the people get. It's really fun.
Speaker 3:And you think Awesome.
Speaker 4:Ellen Long. I actually started an insurance so selling insurance to business owners, and then I went and got my MBA, work for a couple business consultants and down nine joint forces about nine years ago. So we've been building, proving and selling companies now for well. He's been doing it for decades, but me for about 10 years and agreed. It's been an awesome experience. The results that we've had from entrepreneurs selling their business for five times what they thought, 10 times what they thought, and the impact it can have on families and employees has been a really cool journey.
Speaker 2:Yeah.
Speaker 1:Awesome. So we're going to start off with some high level foundational questions here to get our juices flowing, and hopefully we'll keep our audience as we progress into some questions that nitty gritty stuff here. So high level here, let's talk about what are the most you know. So this is an area that we see so often that people come to us after the sale or a week before the sale or whatever we're, and you know there's a lot of playing to be done here and that sometimes I found myself having conversations that should have taken place six months or a year ago. What are some foundational things you see people missing in their exit planning or lack of exit plan.
Speaker 2:Well, I'm going to do a couple of early things here, in that, the idea of how long can, how far in advance should you plan for your exit? I think you should be planning your exit when you start the company or, if that's not possible, as soon thereafter as possible.
Speaker 1:I also think that some of the great parts, because when you do exit plan hey, sorry to interrupt, but real quick, if you or anyone you know is interested in using our services or joining our team, email info at markpearlbergcpacom. That's info at markpearlbergcpacom. All right, let's get back to the show.
Speaker 2:I'm planning on a very macro level, wider than any anybody I've ever seen, frankly. And so for business owners, if you have the size of a company or net worth that's going to end up being taxed by the estate taxes one day, and you know that's a moving target. The unified credits change incredibly over the course of my career, but I can tell you that the earlier planning you do towards that, if you're intending to have what I'll call family legacy kind of wealth, then you're behind. If you're not already in it, weigh into it already.
Speaker 1:So as a real early as what I'm saying what are the some of these early action items we can do to set us up for future success on the exits?
Speaker 4:Well one of the major ones, I would say, is your team. So having a team that, an accounting team, a legal team and some sort of business coach, exit planner that can help guide you along the way, it's the same thing as any professional athlete is going to have a coach, a general manager. There's a whole organization behind the professional athletes and we think of entrepreneurs like athletes. Right, you're the athlete getting on the field, playing the game, making the scores, making it all happen. But having a team and I think one of the reasons we love working with accountants like Marcus you have to have a really good team behind you to help you. I love I think it's Keith County and have us begin with the end in mind. But that idea of you know and don't, don't do anything stupid, you know he's got that the road less stupid, I think it says.
Speaker 4:But but, the idea is that you can make decisions along the way that can really impact the end. Because from our perspective, the end is you're selling a story. Number one you want to sell a story to multiple buyers. We always say if you have one buyer, you have no buyer, which means if you're only selling so often we see this private equity companies, competitors. I just talked to a woman who sold to her, to her competitor, and she was like oh, we had a great exit, all this stuff. And in my mind I'm thinking you had a competitor buy your company, no other buyers, and the competitor set the price. What kind of price do you think that competitor set? It wasn't the best price for her.
Speaker 4:So when you think about the end, is you're really selling the story? What we try to do is how can we build a really good story? How can we prove that? So you know we'll do quality of earnings, we'll do all sorts of things to make sure that when we get to that buyer and the buyer is going to do that due diligence on your company, aka go through everything in your company, every document, every process, every procedure we want that story to be able to be proven to the buyers that you have, not just the buyer. So I think of it.
Speaker 4:You know people. People ask oh, when should I start? And really the question is when do you want to be living? That really good story If you think about it in terms of real estate. For example, if you said I want to sell my house, well, you can sell your house as is, or you can decide to upgrade the kitchens, upgrade the bathrooms right, there are certain things that you can do to make your house more valuable. What we do is we come in and say here's the five things that would make your business more valuable, here's the resources you need to make that happen, here's the strategy, because this is what a buyer is looking for.
Speaker 1:So I imagine a lot of these things that you do to maximize the sales price of this business and the exit would be things that you also would want to do if you were never to sell it. So right Like, we want to have the processes, we want to make sure this business is not reliant on one individual. We want to eliminate, you know, tackle our bottlenecks here. We need to make this a system that can function without the owner president. So in a lot of orders, you know one of the some of the greatest downfalls that they're stuck doing all the roles.
Speaker 1:So it's me may not be a business, is just something that they knew and they're really just self employed, and so I imagine a lot of sophisticated business owners are doing you know the ones, who are a lot of them are going to be very likely to be incentivized to do these things for not only for a successful exit, but for things like that was sustainable business, so they could take time off. They can maximize profitability, grow, focus on the things that they most enjoy. Is that?
Speaker 2:Yeah, we used to do what you know years and years and years ago. Early on, I used to have kind of different processes depending on whether the people were going to sell to an insider so an employee or if we were going to transition it to the kids or if we were going to sell it to a third party. I kind of had different processes. But over the years I've come to the strong and firm conclusion that we always want to prepare for a third party sale, because once we prepare for a third party sale, everything works better, everything's worth more, the owner's peace of mind, everybody and everything is happier, and it also opens up all the options. So if you've got a company that's prepared for a third party sale, it runs easier, it's worth more and you can leave it to the kids, you can transition it to an insider, you can do all. These possibilities still exist.
Speaker 2:And on top of that, a lot of times what you see is you know the parents think the kids are going to take over or they think an employee is going to buy it, and then it just falls through and then they're stuck. Happened to prepare for third party sale again, which is a lot more prep, frankly. But you're right, mark, do it right and do it well. And a lot of I would say too, probably over the course of my career I'd say maybe 20% of the businesses that have come to us for either a sale or a transition of some sort, they decide to keep the business and the family Because they're like well, if we've done all this work and the company is running so well and it's so profitable, why would we get rid of it? Now, you know kind of a thing. So your point is well taken.
Speaker 1:Yeah, so, and there's so many things having reliable books, having a way that you're assessing KPIs and understanding the profitability in your books, having some sort of economy or scale where you can have some sort of predictability and profitability of the business All these things are going to make it. So this is more of an asset. And then on the other side of the spectrum, you have many business owners and many business owners in my profession who are just grinding their hearts out and and then one day they just give up or die and they just said I can't do this anymore. And then they try to sell off their clients, and that's probably on the other side of what you don't want to be doing here. You need to pretty much, you know, in a way hire yourself out of a job. So this thing is a fully running mechanism without you in it itself.
Speaker 4:And I would say you know, we work with a lot of investment banks and the one thing that you don't want to tell an investment bank is I'm really tired and I don't want to do this anymore.
Speaker 4:That's the worst answer right, because what does that say to a buyer? Well, I can squeeze money out of you because you're done. And if you're done, that means when I the grind of selling your company because it is a grind to sell your company, it takes a lot of extra time and energy, emotions. My goodness, it's an emotional roller coaster to sell your business. And when you get to the finish line, if the buyer knows that there's no way you're stepping away from this deal they we've had.
Speaker 4:We had this happen in a deal last year where the buyer, two days before the close of the business, came back and said actually, I decided I'm going to take $2 million off the table. It wasn't a huge sale, so $2 million is a big portion. And they felt like, oh, these are old clients, they're not going to want to do this process again. But we had multiple buyers and so we said to them we told our clients, they asked us what? What should we do? And us as a team said you should tell them. Absolutely no way we're going to find another buyer if that's what you want to do.
Speaker 4:And that's what we did. We went back to them and said absolutely no way. And actually because of that, our clients got $2 million more in cash versus the seller's note because of that. So if you do it right and they know no, we could keep this business because at that point they're working 20, you know, 25 hours a week. Their business is super profitable. It was getting better every single year and we had buyers in the back. So we said we'll go to another buyer or we'll keep the business, but there's no way you're going to shaft us at the end and so many buyers, so many sellers sorry get shafted in the end because they're not ready for that.
Speaker 2:Or they just closed their business down, like you were talking about, Mark. Some of the guys, because I talked to a guy about two years ago now.
Speaker 1:Hey, sorry to interrupt, but real quick, if you or anyone you know is interested in using our services or joining our team, email info at markpearlbergcpacom. That's info at markpearlbergcpacom. All right, let's get back to the show.
Speaker 2:I met him on a plane and he had run an electrical electrician firm, a good sized one, and he wasn't even really working hardly at all, he was 72 or something. And so I said, well, he said, yeah, I got rid of my. I said, well, I hope you did Well. He said, well, what do you mean? I said, well, I hope you got a good price. He said, well, I didn't get a good, I just closed it down.
Speaker 2:I didn't want to go through this whole mess of having to sell. I said, well, how much money did you take home? Like last year, Like, just how much did you just profit did you take home? He said a little over a quarter million dollars. I was like, well, it may not be the biggest business in the world, but even if you add a two multiple to that, it's still money that would have been really nice to have. I mean a lot of these. They just closed the companies down. It's amazing how many of these I run into. So and you do have this problem, you know where people will they'll, they'll build a business where they're kind of too big to be big and too small to be small, and then they, they kind of wring their hands, they don't know what to do, and we end up with a lot of those kind of businesses, honestly, that we pick up and we work with to grow them and then sell them. That's at least a decent part of what we do, anyway.
Speaker 1:So this is, you know? It kind of reminds me of what I've seen with our clients where, you know, real estate is a very sexy thing to do mailbox buddy, it looks really glamorous but when they realize, oh, I got this deal and I, I, I now have a million dollars in assets and another 1.5 in equity of rich. And then you realize you've really just bought yourself a job and that job may really suck. But yeah, I'm not to deal with evicting people pics and worrying about broken toilets and people stealing stuff and all of a sudden, this the sexiness of being an investor isn't so much so. And then I, more and more, as I become a business owner, I realize the most powerful thing you can do as a leader of business is to mobilize a team to do stuff, to do things as a group and empower a group of people aligned together accomplishing stuff.
Speaker 1:Now I'm wondering so how do you? Now I'm wondering, how do you get these people? So let's say they're too deep in the weeds, there's no processes or what resources are you doing to turn these businesses around? So it goes from something that's profitable and had a lot of good stuff going on to being something that could be more self-sufficient than that can be ended off to another person. What are you guys doing with these people? Do you want?
Speaker 2:me to do it, or do you want to?
Speaker 4:Yeah, go ahead, I'll add as you go.
Speaker 2:So a couple of things here. One of these is one of the value catalysts that I look in. My book talks about building a stable and motivated management team. So you've got to build a management team to extricate yourself and divide your if you will divide your workload often into other people taking more and more of your job, essentially until you're not needing anymore and you've built a great team. Also to looking at processes and things.
Speaker 2:So one of the companies that we sold last year we had worked with the family. It was kind of a small company and we worked with the family for about four years before we sold it. But one of the early things that we did the owners were both husband and wife, were both working 60, 70 hours a week and they, you know, at that point in time they were late 60s and so they're working themselves hard and they were getting tired of it. So we basically brought in a process engineer. We figured out kind of early that the owner, the guy that was running the company, was actually he was. He was the bottleneck and we couldn't grow the company because everything was stopping at him. So we basically brought in a process engineer, redesigned the front end, hired somebody to take a good part of his work and the company exploded, like, exploded so, understanding, you know, building your processes, procedures, understanding profitability like and Ellen could talk about profitability analysis, that sort of thing. I'll let you take over here, ellen, go ahead.
Speaker 4:Yeah, I would just say we think people process profit. So when you talk about people, leadership, really, one of my mentors says leadership is the product. That's what you're building. You're building leaders in your company and if your company is built by leaders for leaders, you're going to have a really efficient, amazing company, right? So one of his things is build your management team into leaders. We're not trying to make the entrepreneur you know. Oh, we don't need the entrepreneur anymore. No, what we're trying to do is a management team that runs the day to day business and the entrepreneur is focusing on strategy, on big deals, on like.
Speaker 4:Randy actually had a farming client who put a management team in place and he went around the world finding different varieties, different fruits. He created a lot of the new creations of fruits that you see in the grocery stores, of mixes of fruits. Together is his creation because he found a management team that would run the farming operations day-to-day so he could travel the world finding new varieties, new combinations. Nobody else was doing that. Our job is to try to make the entrepreneur more valuable, not less valuable, and so many of them come and they're like I don't want to be irrelevant in my company. I built this company. This is my baby, and our job is not to make you irrelevant. Our job is to make you so much more valuable than you are and to build a management team into leaders so that they're running your company and they're building leaders underneath them. Also, incentivize, so part of this is one of the things we try to do is understand the profitability of your company. Where is the profit coming from If we can maximize that and tie management incentives to that and incentives even in the whole company to that? Now, all of a sudden, we're moving in the same direction with the same team.
Speaker 4:I think entrepreneurs getting a lot of times what we see is they have one or two people in their management team that probably shouldn't be there. They should have fired them a long time ago, but there's some loyalty or there's something that's keeping that person there. Maybe they don't want to find a new person, but it's really. Do you have the right butts in the right seats for your management team? It's really important as we go through the next three years. We like to tie. We'll do either whether it's stay bonuses or some sort of incentive on the sale too. So if you decide to sell, your management team gets a huge win in the end. We just talked to a guy yesterday and he said I know you guys are representing me, but I really want to take care of my people. No, our job isn't to pit you against your employees. Our job is that your employees are so excited that we're here because their job is better, they're making more money. Everybody is winning.
Speaker 2:Yup, I get a lot bigger.
Speaker 1:So I think about and even in our, confess a lot of people. They develop all these wonderful ideas that are tax-planing and insights, but then they have this, which I think is a very fuller notion, that only they can do it. Oh yeah, I think again Tax play. I've never done it all the time, so that's all me. Why would you want to deprive your staff of learning all of these exciting things and giving them ownership and the success? So we just introduced a revenue sharing model and we do about maybe 30 hours of professional development a year. I'm hiring, by the way, and I think that when I think about my value as a person and my savings, I could put money in a 401k, which to me is boring because I'm not pretty sure but I would rather invest into my team and build them in our systems, because this is an asset that gets more favorable tax treatment capital gains treatment and then I can grow and get better ROI investing into my people and my team and my resources for the business.
Speaker 2:Yeah, the other piece about that you're right, by the way. I like that point. The other thing we were talking about in the leader is true for everybody else in the business. Really, we're also Mark, you're familiar with the unique ability work that Dan Sullivan has done a bunch of, and so we apply that unique ability piece to the leadership team.
Speaker 2:Basically, we want everybody doing what they're really built to do and that they love to do, and so part of the study it has to do with understanding what they are super good at and they're super gifted at and they really love it, and then we slice everything as much as possible away from them and then we put people in places where they love to do the parts that they do, and so it's a matter of dividing up responsibilities and taking things off of, for instance, the boss. We want to take things off of him first that he hates and that he's no good at, and a lot of bosses are no good at a good part of what they do. So there's some simple concepts like that which we apply to all the cases we work on.
Speaker 4:Yeah, and I love what you're talking about investing putting aside a certain percentage of your business revenue to reinvest back into yourself as an entrepreneur, but also into the team, because if you're going to hire a financial advisor, they might charge you 7,500 basis points to manage the money. Let's think of it the same way. Take your business, reinvest not just in the operations of the business, but in the people. I love that idea of thinking of your people as an investment instead of an expense, because the better your people, you're going to have an exponential return if your people are exponentially better. So I love that idea of reinvesting and, like you know, we work with a lot of entrepreneurs and most people don't get rich by a 401k. They get wealthy because they invest in a business and a business takes you to those levels.
Speaker 1:And when that 401k you eventually do. I mean we could do some things, but without a plan and if you're going to be like the masses, you take that money out and pay taxes at a marginal rate it could accumulate and be a ticking time bomb without the right planning. I'm not saying don't do it. There's so many variables you can share here, so I'm guessing you guys might just teach a coach.
Speaker 4:I did, I did do a couple of years.
Speaker 1:yeah, OK, because I did five years. I recommended it to him. I think he's on the fence still.
Speaker 2:Yeah, I did five or seven years of it, I can't remember which but and then I went to genius from there. You know folk, yeah because?
Speaker 1:so now. So I think I have a good. You know, obviously there's a lot of stuff you guys do, but I think I have a decent understanding of the process of building this business into something that can, that is, an organization and not dependent on the leader, which therefore makes it more profitable and appealing. Now and this is probably where, at the point where we may lose the attention span of some of the general listeners, but the eyebrows, the ears might perk up for my CPA list and there's in about half of the audience that listens to this stuff is other CPAs that he hates. But so so we got.
Speaker 1:Hey, sorry to interrupt, but real quick. If you or anyone you know is interested in using our services or joining our team, email info at markpearlbergcpacom. That's info at markpearlbergcpacom. All right, let's get back to the show. Have this, and so we have a strong valuation, we have strong systems. This thing is a self-sustaining, high-functioning, high-powered business and we're going to put it on the market. Now what I'm wondering here is tell me about some of the conversations and negotiations you're at about structuring the sale of some of these businesses.
Speaker 2:Well, let me clarify when you're, are you asking about the negotiation, as we're putting together the deal first with the M&A firm and then we are going to market? Is that you're talking about that process? Are you talking about, at the actual point of sale, some of the things that we might be asking for based on the you know the I guess based on the tax issues? Is this a tax question? That's where I'm going, the tax question. Where's the process question? It's a little bit of both.
Speaker 1:So okay, all right.
Speaker 2:And maybe, maybe, I don't know what I'll ask here, okay, well, let me I tell you what. Let's just start with sort of the M&A process, because most people have never gone through an M&A deal, Like very few actually have. So, yeah, in general for us, when we believe our clients are ready to go, then we will reach out and we will, we'll find the M&A provider we want to do business with, we'll negotiate the deal and then we will start the process through, and so the process of what I've been talking a lot, ellen, just welcome.
Speaker 4:I know I actually think go way back. If we go way back, what we actually talk about tax way before we get to you. You want to sell your company. Our goal is that you have all those structures in place before you get to that place. Like you know, we're we start talking about 12.02,. You got to do that five years before. You have to make sure.
Speaker 2:So you're a quality or not.
Speaker 4:You're either qualified or you're not. We talk about 12.02, we do. We also help in the process of estate planning we're not estate planners per se and that we draft the documents, but we're talking about estate planning issues way before. So you know, we might do some creative tax structures before we get to that point. So we've been talking about how to build your company inside the company, but we're also working on the outside, which is how can we maximize the tax savings at the time of sale?
Speaker 4:A lot of those strategies you have to do years before, and that's part of Raley's point on when should you start thinking about this In? You know there's some very complex tax and estate strategies. I can save a lot of money at time of sale, but if you wait till the moment that the sale happens and you're only you know at that point you're only negotiating asset sale versus stock sale Well now we've missed a lot of opportunities along the way to do some interesting structures and trying to save the money beforehand. So our goal is, when you get to that place, we're not just arguing with the buyer and negotiating with the buyer about what kind of deal it's going to be. We already have tax structures in place, so the business owner is going to win.
Speaker 2:Before we get to that point, yeah, and we're just to be clear, we're not the tax planners. So we you know the CPA world is doing the planning. We're not technically doing the planning just to be, but we are very large issue spotters let's put it that way because I did used to do estate planning for 25 years for my clients and I did draft the document. So I don't I have a lot more than a rudimentary knowledge of what we're talking about. But yeah, to Ellen's point, the beginning, the structure side of it, negotiating even between the various owners and allocating, you know just fix it, because a lot of times when we come into deals there's structural problems at the bottom. You know how they set it up or the deal between the parties. Maybe there's two or three shareholders and there's sometimes we're brought in at that level because there's conflict. They want to save the company but they don't know how.
Speaker 2:And sometimes that's our entry into the beginning of the sales process as we go in and we resolve the structural problems that the businesses have. So the exit planning piece, the way we do it, is not just okay, we're going to sale. Now how do we get the most money at sale? That's not what we do, it's part of what we do and it's a big, you know it's what makes the payoff good, but there's a lot of stuff that you know goes on before that to get everything clean and clear. And that's back to Ellen's point earlier about the team. We have to have a good team. The other thing that I've learned over the years, both being a lawyer and this is true of the lawyers, of the accountants and that too often the professionals you know we're silo driven you know I'm all about the tax stuff and I got my head down and do the tax, or I'm all about the estate planning.
Speaker 2:But we try to be really proactive ahead and get the team together and start working on this stuff instead of waiting for, because too often look, I was a lawyer. I had a fairly large number of clients to deal with like 2,000 of them or something and you can't think you can't spend a lot of time thinking about every client's. You know business all the time and so by necessity, unfortunately in the professions, we turn out to be transactional too often. So it's really important to get the team together and start getting everybody to focus and get the best ideas and get the issues resolved early, so that when we're going forward you know everybody is united. Let's put it that way.
Speaker 1:Oh, absolutely. So we talked about 12 or 2. You touched on the 12 or 2 exclusion, which is really cool, and now it's like, when you think about these mats of transaction on capital gains events, you know you may have an exit where you're selling in a profits in the tens of millions, but sometimes, because of the opportunities involved in favorable tax treating and flexibility of capital gains, you may find that the seller may actually pay less taxes than they have in the past when this transaction occurs and so the 12 or 2, it has to be with a C Corp. So maybe you decide to keep it as a C Corp instead of an S Corp.
Speaker 1:You know, that's a C Corp for what we call. Substantially all of the time that is a business and for at least five years and substantially all. Is it really clearly defined? But the court cases work per se. Like around 80% of the time there's no real clear definition of this. Substantially all word here. But you can exclude up to $10 million of capital gains on the transaction and per shareholder yeah, so shareholder up to five shareholders, so that's up to 50 million.
Speaker 1:Yeah, isn't that amazing? So imagine gifting some of the shares to your family. Now it's all about tax savings.
Speaker 2:Correct. Yeah, this is what I'm talking about planning getting that early work done to. And you know, for the CPAs, I know that there is some foresight that's required on the 12 or 2 side, and I know also too, looking back over my career, you know, with what the IRS does, sometimes you want to be a C Corp, sometimes you want to be an S Corp and they kind of move you through this and sometimes you know, long, long time ago it was better to have assets, real estate, owned inside of your C Corp. I mean, this was like way back in my career. And so the IRS does crazy things to planning, as we all know, because of their stupid incentive. But that's what I was going to say. I was going to make a point. Oh gosh, I hated that.
Speaker 1:And then they switched to C Corp.
Speaker 2:The 12, yeah, the right, the corp, the accountants. They have to be able to have some foresight and not just presume that all of these companies, these small companies that come to you and start and all that, that they should be S Corps, right. So if they're going to understand in the back of your mind what are the type of companies that are going to qualify for 12 or 2 anyway, what kind of companies is that? So if they don't fit into that, then of course an S Corp is a great choice and all. But just thinking ahead with your people, and the same thing for lawyers, I mean, I don't think not too many people are considering Section 1202 at the start of a company. You know what?
Speaker 1:I saw up in the news. I call this when we have these attorneys who are misadvising their clients and sometimes they show up to these fancy conferences where they already know the audience is probably not the brightest if they're overpaying for not very good information and before they review your goals, your financial, the profitability, they just say active income, s Corp. End of discussion. Well, we're just done. Maybe $5,000, go back to his entity in Las Vegas, even though you don't have any assets to protect. So I call that premature application, premature application of the entities. So some of the things like if you have a tech startup where you're an asset, you're intellectual capital, like a video game company we see a lot of these companies where they know the exit, maybe like 10, 20 times their investment, and we often see the C Corp being such a valuable way to structure things.
Speaker 4:Yeah, I would say a lot of. It is just also to the business owners to tell your accountants and your lawyers what your goals and what your plans are, because it may be income wise and S Corp is better, but you want to sell in five years, maybe in 1202. So helping your advisors help you because, again, they're only going to know what you tell them. And so we had a case where the father wanted to transition to his son and so he brought us in to help with the transition. He's been working with the CPA for 20 years. They were like, but really good friends, worked with the company for 20 years.
Speaker 4:We're in a meeting together and the father says to the CPA I want to leave in two years. And the CPA almost fell out of his chair. He's like what I've never heard you say that I had no idea that was your goal and your plan. So part of this is one, finding the right team, but two, also telling your team. This is what I want to do, this is where I want to go. How do we build that structure? How do we? And part of what we do is bring all these advisors into one space in one room and actually have these conversations where the lawyer's giving the legal advice, the accountants giving the account advice and we can create a plan and a structure with all of those people together, which often never happens for business owners, I mean, most of the clients that we work with have never had their team in the same place in the same time.
Speaker 2:Yeah, and it is nice for an owner to listen to the discussion between the lawyer and the accountant no-transcript, especially early on, because they unfortunately, it's true, they don't tend to be in the same room. Of course, some of ours we work around the country so ours aren't always in the same room, but at least on the same Zoom. Yeah, exactly.
Speaker 2:But it is wonderful early on to get everybody on the same page and then also to have, like, we have a number of experts that we use over the years that, like we have a lawyer that we do business with that is a 1202 expert, that's like his specialty. So just knowing being able to have a good network, it's a very big deal in what we do, which, of course, is super important because there's so many different types of professionals that we can use and have used over the course of the different clients that we've had. So having somebody also that you're working with somewhere on that team that has a broad vision to help you, that's and I would say, people have their specialties.
Speaker 4:One thing we see a lot as a business owner will use he really likes this one lawyer, and so that lawyer does his estate planning, his real estate work his right. And you're starting to see wait a second this guy probably isn't an expert in all those things, because each of those areas are specific, and so one of the things we try to do is make sure that whoever's speaking on that subject is truly an expert in that. So just because you like this person doesn't mean they're the best person for that particular part. They might be doing it because they think they're helping you, or you asked them to do it, so therefore they do it. But a lot of times we wanna make sure that whoever you're using is really an expert in that topic.
Speaker 2:Yeah, I have a couple of bad stories about CPA firms that we asked the business owner to fire. And sometimes, mark, we as professionals we get to this place where we work at a certain level in a certain like. We're comfortable in it. So for me, I did not like to work on companies worth north of like a hundred million. If I went above that, I just would always co-counts with other firms. Right, it was just. I always did just to protect my client. And so I would say for the CPA firms and the law firms the same way that being careful to work in the things that you're really gifted and in the space you're really good at. So one of the CPAs this was in why I won't say what it was but one of our clients, a decent company that was growing pretty good. I had asked for three years in a row and I made him put it in the minutes to get rid of the CPA firm because I could tell they were not keeping up. I could just see it in their eyes, I could feel it, I could tell by their questions. And this guy went to high school with the CPA. He was a buddy of his and so he wouldn't do it wouldn't do it.
Speaker 2:And then we ended up getting an audit notice. The billing entity wanted $4 million and so I hired a tax attorney again me, I'm on their behalf, so I hired a tax attorney on their behalf. He does the work. And then we call a meeting with the CPA firm and the tax attorney and the family, and we're all sitting around this huge table and the tax attorney.
Speaker 2:I set up the meeting, I asked him to deliver his his findings, and so he says it's extremely clear that unfortunately, your CPA firm has malpracticed you and I can prove that very easily. So would you please excuse them so we can get about finding a good firm and defending you. And that's what happened and part of it. It was a simple, relatively simple thing, but at the end of the day, it still cost my client a million and a half dollars, even after a negotiation and all the well. We ended up paying a million and a half bucks and he wouldn't get rid of it. And fortunately, like I said, I put it in the minutes every year for three years. So just know that when you're dealing with people, if you're a CPA firm yourself, be comfortable in your lane but be careful about going way outside of it because you're not doing yourself a favor, or them.
Speaker 1:Well, you could have people come to us because of the real estate strategies.
Speaker 4:That's what we know and we always do.
Speaker 1:And we've encountered instances of business sales and we've considered well, it can exit. Planning can be complex and extensive and then I considered is this in our leaner? Some of these transactions are significant. But then I realized just about every advisor has to at least have some form of plate in place if they're serving entrepreneurs. Even if you're doing the foundational basic stuff the clients lines clients are gonna eventually when a son set out of their careers. So there are at least some foundational things that most people don't know and everyone should be thinking about. With the exit plan. It was really exciting for us that we found as we've advised on more and more of these transactions and been getting into some deeper and deeper and more significant things as we expand into this area is with real estate. It creates a whole world of planning opportunities. So one of the first things we ever asked is where do you do with the cash and where do you replace after the exit?
Speaker 2:And if there's real estate involved, we could have some fun, yeah that's right, I'm trying, yeah, and again, I'm not a true real estate expert, so I would always co-counsel myself and I would say you know, same thing for you guys when you're working outside your area of co-counsel, bring somebody else in and help you work on it, and then you can keep the client that way. But yeah, real estate offers things that are unique to it. Let's put it that way opportunities and a screw up also can cost you. So I have a. I could tell a lot of stories, Mark. I've been doing this a long time, both legal screw ups and accounting screw ups.
Speaker 4:I say but I love your foresight there, because we always ask business owners too, what are you gonna do after you sell? Because we've seen this happen a lot, where their whole, their identity, their networks, their friendships, everything is tied to being a business owner. So I love your thought on that pro planning with the money after the sale. And we also like to say not only what are you doing with your money after the sale, but what are you doing after your sale, because we want them to go to something, not just from something. What's gonna keep you active and engaged and excited about life after you sell this company? Now, usually there's some sort of you know, three to six months where they stay on and help the company transition, but after that then what? Because you know, we've seen people get not our clients, because we always have this conversation but we have seen business owners who sell their companies get really depressed at about six months because they've traveled the world, they've done whatever they wanted to do and all of a sudden they-.
Speaker 4:Let a lot of golf. Let a lot of golf, and they've lost their purpose and their value. And they're wondering why? What am I doing? Why did I sell my company? And then they have all this regret. I shouldn't have sold my company. I don't have anything to go to, and the best people that we see, the ones that have the most fun, that enjoy it the most, they know what they're going to.
Speaker 2:Yeah, they do.
Speaker 4:Even if it's just charity, even if it's just being on the board of charities and helping nonprofits, and have something that you're going to.
Speaker 1:And when I think about this from a tax perspective, well, what are you gonna do with the cash? Because if that cash is gonna go to buy a beach house and just enjoy yourself and pay for your, for your living expenses, you might need to be a little more resourceful in your tax money. If you don't have the benefits of something like an ESOP or a 1202, we might need to think about how can we deploy this cash in a way to mitigate the tax burden here. And this is not just long-term cap gains we're talking about. A lot of these are asset sales and you may be surprised that you're gonna be paying taxes at your ordinary rate. Even with an installment sale, you're gonna get hit in the head with a bunch of taxes at the ordinary rate.
Speaker 1:So we then now, if you're gonna, so, if you're not, in deploying the business assets or other investment vehicles like qualified opportunities, own funds and things like that, well then we gotta figure out at least something as tax advantage. We're gonna do with this cash. And on the other side of the spectrum, some of these folks just gonna say, well, I'm gonna put it right back into other stuff and other assets and other things that are to qualify for most appreciation. And sometimes we find that with the direction they're going in we may find them, because some of the cash on the transaction is the return of their basis we may find that they're a really good stance, just with maybe making some tweaks here and there, but with their planes they're setting themselves up for a really good tax advantage situation. Yeah.
Speaker 3:Yeah.
Speaker 4:Yeah, and I would say too, one thing that we like to do is we almost do almost like a after sale investment policy statement the idea of where are we putting this money? How is it gonna be allocated? What sort of risks are we willing to take? We have seen business owners who are like oh, I'm amazing at business, so I'm gonna put a ton of money into startups and I'm gonna become an angel investor, a venture capitalist and all those things, and you can lose a lot of money.
Speaker 4:I'm sure there's people on this call who have lost a lot of money in angel investing. One out of 10 is a grand slam and you're doing really well. So just thinking through, what am I willing to risk? What's my risk appetite? And not also as entrepreneurs? Entrepreneurs are risk takers. We love taking risks. It's part of our persona. But there's a difference between taking a risk in your company where you have control you can change that outcome right Versus investing in other companies where you have a lot less control and it really is can be much higher risk. So making sure that they're not also selling their company and then losing a bunch of that money because they don't have a risk portfolio sort of idea, so really thinking through that is important.
Speaker 2:And it does come off. Sometimes, I think we get a little bit proud, we get a big exit. We're pretty thumping our chest a little bit there, and then we think to ourselves well, I did that. Well, that means that this next thing I'm gonna do over here I'm gonna do well too, even though he has no experience in that field, and so he gets fleeced over there by people that know what they're doing.
Speaker 2:That's one thing, so they can lose a lot of the capital. The other thing, too, which is a great shock to some people, which is how much it costs them to live after they sell their company. Because and this is a place that the CFPs or the accountants, whoever's helping with the tax side, needs to do some actual modeling for them, to help them understand what it's really gonna cost them to live after they lose the ability to have the car and the phones deducted and the pension plan and the insurance paid for, and on and on and on and on. And then also factoring in, what kind of numbers do they need for growth of the capital, or is so the more they have, the less risks they need to take if they're just taking care of themselves anyway? But somebody needs to do some modeling for them, to give them a sense of what the truth is gonna be after that sale's done, instead of them having to discover it.
Speaker 4:Yeah, and we always say you know, it's a totally different skill set to live out of a cash flowing company and a net worth portfolio. Right, those are two very different skills, and so helping entrepreneurs think through that is also important.
Speaker 2:Yeah, very much so.
Speaker 1:And some of these investment vehicles are gonna give you that Passport bands. Others will give you the growth and equity which is maybe good for leaving a legacy for your family. But are you gonna need to deploy these proceeds into something that you can live on or something that you just have? A wealth building vehicle, Like some qualified opportunities on funds? Or just all about the exit we we have? We know people organizing ones where then they're telling you up front we're gonna just reinvest all the proceeds back into this asset that'll sell tax for in 10 years. Well, if you're 75, you may not. Who knows it? You know you got another 10 years and and then we even know of you know.
Speaker 1:Obviously there's tons of other investment vehicles that are gonna give the clients reliable and tax-ab-bitch cash. Well, so these are the whole. There's a whole world of stuff to think about. And sometimes the clients they were not even authorized to tell them what to invest in everything. But I really think the answer is it's a total cop out. But he depends. It depends on the DNA, interest and what, what's interesting to the client. They're gonna put their money into it does.
Speaker 2:But I to Ellen's point building buckets. You know, in that investment policy statement, identifying some I'll call it the the pieces that are sort of defensive, that you can essentially fall back on if things don't go the way you hope. And Then the part where, if yours, it also depends, like you said, on on how young you are. Are you starting another company? Are you just gonna live on the money to your retired? You have so much that we need to. We need and we would have been way ahead of this but but that you need to start dealing with the fact that you're gonna have an incredible Stay tax upon your deaths, and you know there's just a lot of different. That's why the hollow investment policy statement and then working with somebody knows what the heck that they're doing on all of these big issues, because they're very complex and they're unique to each person.
Speaker 2:This is people ask us all the time do you know well what you know? Exit planning just give me your steps. Well, my steps. I have a basic book. Here's my bullet proof of your exit book. Right, it's that little thing is written for it's only like a hundred pages written for the owner to make it, to make it clear what their overview is for everybody, but that's not the same thing as every every client that we have in Every deal that we do. Every single one of them is different and has unique things to it. So you just can't plug things in and expect to, you know, to get everything to pop out right Just by following, you know, for easy steps or whatever. That's why you need a good team to work with you along the way.
Speaker 1:Yeah, and when I think about tax play, I would say that each client has their own DNA. Like a very unique day in there. What plans will resonate with every? Some liquidity, risk, tolerance, what they want to do with their cash? You know all of these things. There's. No one is not. Is there gonna be one answer? I mean, we have the time we could have just broken off into another two hour long session on life insurance and infinite baking and annuries.
Speaker 4:You know, more, more money, more problems. Now, more money, more options, though, and so the the more money there is, there more options. They have to do with it, and that just makes it's more complexity.
Speaker 2:So having a team that can help you, Often you get these things in your life Dear in the headlights. That's what it causes one. Sure it's like the guy that you know, these people that came over from Russia and and right after the fall of the wall and they came over to the US and they went into a grocery store and you know they, they just stood there looking at like they were just going to get a loaf of bread and they looked and there was a you know the whole aisle of bread. They had no idea what to do and one of the guys was talking about his wife was with him, and they went into the grocery store and they stood there looking at him, he's, and he said his wife just wept because she had no idea even how to buy bread. You know, it's like that and that happens sometimes when you get this like Because I've had that happen where we got a huge exit to people that had lived, you know, relatively simple kinds of lives, and then they have all these conflict, all these people chasing them for their money and the Complexities that come from having the money and investing the money, and I always tell them listen, keep your mouth shut about your sale, don't tell anybody you're selling, if you can help it.
Speaker 2:That's my personal advice, because Life will be a lot easier for you. You, unfortunately, when you you keep growing the company and you'll find out that the world, you know it, narrows, you get less and less people that, unfortunately, will be your friends, and so the fewer you have, the fewer people you let know that you've been, if you're being pretty successful, as much as possible, you know, you either decide to keep it secret, as you can, or you embrace it. But if, but whichever one you're gonna do, there's gonna be a division. When you do, I'll tell you, because you know, like you, you got all this money. Oh, we're gonna go to Tahiti, you know Tahiti for a month. You guys want to come. Well, that eliminates a whole bunch of people you know right there, so it can be divisive Friends and family. And so I say, as much as possible, keep it close to the best. That's my, my opinion, awesome.
Speaker 1:Do we have any questions from quick questions of the audience? Anybody have any questions?
Speaker 3:Regis asked more yeah, no friend.
Speaker 3:Yeah, yeah. So I mean I don't know how in depth you're gonna get on any particular topic, but this is this has been helpful. So thank you. But, like, do you guys ever advise anybody on actually acquiring businesses? Mark, mark and I've had conversations over the the past year.
Speaker 3:Quick, quick story about me. So we I bought a business last year that I'm actually, randy's, just shutting down because I just don't want to do it anymore. I made a little bit of money out of it, learned a lot. You know I've talked to mark a little bit about it. It was in the wheelhouse of what we do from a real estate investment standpoint personally, but, interestingly enough, it's just a business. I just didn't want to continue for other people. You know we're gonna continue to do what we did, but I turned it around quite well and I, you know, made it profitable very quickly by the end of the summer.
Speaker 3:We bought it in April, all the different things, but it was, you know, my radical approach. Definitely, you know, scare a lot of clients off and all the things, and I'm cool with all that. However, it was interesting because I I think what I would like to potentially pursue is actually acquiring companies of. I don't know if it was you, alan, or you, randy, who said you know I maybe it was the electrical guy, it was just like I'm, I'm fucking done like I just I don't care about selling it, I just want to, I just want to go to bed, you know. I mean so like.
Speaker 3:But what's interesting is I know I know why I shut it down. I made pretty quick decisions, but I know I know what it feels like to be like. I just don't care anymore. And and naturally it's not that you're necessarily trying to get into the business, or and and naturally it's not that you're necessarily trying to take advantage of someone. But the reality is you can get things for penny eyes on the dollar by tapping into that emotion where you're still helping them out Like they don't want it anymore and they don't want to go through a grueling Three-year Perpetual setup process. And so the short question here is you know, do you guys actually Assess or help, coach people looking to acquire businesses and then turn them around and then make them profitable we're more profitable and sell them? Because I talked to mark about that as I'm going through a transition of what I want to do next In addition to my investing is. That seems like an interesting option for me, but I don't know if you guys do it from that angle too.
Speaker 2:Yes, some of our clients, part of the growth strategy is acquisitions, and that's been true. I've worked on acquisitions my whole career. It's for the smaller businesses. It's not as it's not as normal on the smaller end as it is in the mid markets. In the mid markets there's lots of acquisition work, you know. And then we had, like one of the companies we sold towards this at the end of last year in December we had rolled I don't know seven, nine something Companies into the company that we were advising. So we ended up with they had acquired over the course of a couple of years. We're working with them. We'd gone through, I think, three or maybe five acquisitions and then we rolled another seven or so together at the same time of the close and so we got a huge exit out of it.
Speaker 2:So acquisitions is a great strategy if you have good tax advice, you know your operational side well, right. So if you don't know the business yourself, then you need to have people understand integration. And so it depends on the same thing. You can do it. You can do it with the team if you have people already in place or if you're really good. So it's recognizing the value of the company you're purchasing. They're the financial value, if you will. Then there's the people judgment side and integration. How's everything going to work together? Or if you're just buying a company first and then you're, or if you're adding your, you know, bolting one on to you, or you're just kind of you're moving your small company into a bigger one Because you're buying actually a bigger company. So it depends on what the strategy is. But a lot of acquisitions go well and a lot of them, even with super, super big companies, a lot of them don't go well. So, even with the best minds in the world. So, man, marrying culture to me is one of the most important pieces, so that the people don't feel like.
Speaker 2:So, if you were giving example, so here I had one of these. So one of my companies was in the fruit industry. Then this is years ago and we went to sale and the company that we ended up selling to was Cargill. Do you know who? That is? Bigot, right, the biggest grain owner and their marketer, all that stuff in in the US at the time. I don't know what they are still, but those guys came and I'll never forget. We're in our big table, you know around and they were signing and there's like five MBAs at the table and you know their lawyers and all this kind of stuff and and my farmers Working with and so I tell these guys, listen, cargill.
Speaker 2:I said, don't my work on Cargill. Cargill has never run a company that was fresh fruit or fresh anything. You guys all do grains and finish stuff. I said what you do not want to do is presume that you know more than these people about their business. So, as an example, you better not come in here and have your MBAs decide that they're going to change the inventory system until they actually know how inventory works in fresh fruit, because it's very complicated. And of course they chuckled, you know, and they came in and they changed the inventory management system and two years later Cargill sold that to another one of my clients for ten cents on the dollar. Yeah Right, so you see my point.
Speaker 3:Yeah.
Speaker 4:But, to answer your question, we don't go find businesses to acquire. We were not in the broker and M&A business. But in terms of strategy, in terms of, you know, helping you as a business owner build your business, yeah, We've been a part of a lot of our clients have bought or rolled up, or, you know, there's even a strategy of you don't even buy those companies, you almost. You find other companies like yours to kind of almost like sort of merge together into an exit to a bigger company. So at the end of the day, we're just working with leverage, right, how do we move up in?
Speaker 4:We haven't talked about this, but there really are tiers in the selling your business and so if we can move from a bottom tier to a middle tier, a middle tier to a bigger tier, the multiples on those can be exponential. So you know, you might have again just for purposes, but three to five, five to seven, seven to 10, well, if I can go from a three X multiple to a 10 X multiple because I combine a bunch of companies together, well I'm going to get a really big return on that. So there, that's a whole like hour discussion on how that all works. But but yeah, I mean I think we're not experts in the buying business, but we do help businesses grow their companies and and rollups are a part of that.
Speaker 2:We've had a lot of our clients buy other companies, so as part of an overall, strategy, when we have opinions and all those things, just like we do on the companies that we're growing. Ultimately, like we always say, ultimately the owner is responsible for his company, he's responsible for his decisions. But we want him to understand, we want him to get the best advice possible, and we would tell him we always say we'll tell you what we would do if we were you, because ultimately, to me, that's what advice is all about, not just here's. Here's your seven options. Choose one. No, this is what I would do if I were you, and here's why, even though these are the three options I think are possible, this is the one I would choose. And this is why and you can say I agree with that basis or that presumption or I don't like it, I'll choose this one over here. So, informed decision. Informed decision. Informed decision.
Speaker 4:But, as you know, the buying when you buy a company, the deal it's a good deal or a bad deal the day you sign the paperwork right. So, buying is really important, whether it's a good buy or a bad buy.
Speaker 2:Although I have seen. I have seen people making bad buys and making them into good sales.
Speaker 4:You just got to work a little bit. I tried yeah yeah. Mark, did you have something you want to say?
Speaker 1:Well, no, but we are out of time and I wish we had more time to riff on this, but I really appreciate you guys coming in and also for any of our listeners and particular clients. You'll reach out if you want to talk to Randy and Ellen a little more on this topic and they can help you in this process. Randy and Ellen, do you guys have a call to action or anywhere that you want people to go to connect with you to learn more about you?
Speaker 4:Yeah, if you go to the Braveheartbusinesscom you can. There's a meet with us or work with us and we just have a little survey. And if you want to chat with us, get an hour in our calendar. If you fill that out, you can jump on. We're happy to help. So there's also a lot of videos that you can watch. And buying the book, of course, go to Amazon. The bullet proof, wait, yeah. Bullet proof your exit there. Bullet proof your exit. Buy that book is a great overview for people.
Speaker 2:Yeah, it's 12 bucks. You can't load this on that one.
Speaker 1:Exactly Awesome. Well, thank you very much for for for giving us your time today. Really great conversation here. So you need all of us to start thinking about our exits from day one. I'm already thinking about mine and how I'm going to phase out when I have white hair, because I'll still have hair on my head, god willing, and if you want to learn more, you can connect with them and, obviously, if you need us, email me for my markproberCPcom. And also I said I'm hiring right, so you guys know anybody I'm hiring Send your best.
Speaker 1:CPA friends to us so we can hire them. Okay, have a good one. Thank you very much for your time. You, or anyone you know is interested in using our services or would like to join our team, go to info at markproberCPcom and email info at markproberCPcom.