“Off the Wall” Podcast

Exit Planning is a Team Sport, Part 2 | Prioritizing Your Personal Wealth in Preparation for a Business Exit

Jun 21, 2023 Business Exit Planning

If you want to keep yourself, your family, and your assets safe throughout your business exit, tune in to this episode. This is Part 2 of our series, Business Exit Planning is a Team Sport.  (Listen to Part 1 and Part 3 here).

Tune in as hosts David Armstrong and Jessica Gibbs continue their discussion with Greg Maddox of Cultivate Advisors. In this episode, they’re talking about the importance of prioritizing your personal wealth throughout a business exit (separate from business wealth) and why you need an experienced wealth advisor on your advisory team while planning your exit. Greg also teaches you how to identify, address, and manage risks in your business so you can have a smoother exit and post-exit experience. He also breaks down the tax strategies and tips you can use to save money now and set yourself up for success in the future.

Bonus: We’ve teamed up with Greg to offer a free resource to help evaluate the health and value of your business. Get Cultivate’s Business Health and Value Assessment here: https://bit.ly/3COxTMW

“That’s what the freedom point is about, it’s about how do I sustain my life without my business, or make working in the business optional? That’s the freedom that we would eventually have.”  – Greg Maddox


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Episode Timeline/Key Highlights

[00:44] Introducing Greg Maddox & the topic of today’s episode.
[01:35] Why you should consult a wealth advisor during business exit planning.
[07:18] What’s your freedom point?
[13:03] Why do entrepreneurs need a wealth advisor that has experience with business ownership?
[17:01] Separating your personal wealth from your business wealth.
[24:36] How to identify the risks in your business.
[28:46] How to address/manage risks in your organization.
[36:23] The importance of business continuity planning.
[41:05] Tax strategies and tips for business owners who want to exit.
[47:18] Don’t miss Part 3: Maximizing ROI for a profitable exit.

Resources Mentioned

Listen to Part 1: https://bit.ly/gregmaddoxpart1
Learn more about Cultivate Advisors: https://cultivateadvisors.com

About Greg Maddox

Greg is a Senior Business & Exit Advisor at Cultivate Advisors in Chicago, IL. As a serial entrepreneur, Greg Maddox provides his clients with the same long-term planning he used to make his own businesses successful. From owning a mortgage company that went through the housing bubble crisis to a financial services company during the ’08 financial crash, Greg steered his businesses with clear foresight no matter the turbulent environment. Now, as an advisor, Greg brings exit planning into the present and helps his clients live their Ultimate ExitLifestyle—even if they never sell! And for those ready to move on to the next chapter in their lives, he ensures they are mentally and financially prepared to fund their next step and live an amazing life.

Connect with Greg

Connect with Monument Wealth Management

Visit our website: https://bit.ly/monumentwealthwebsite
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Connect with us on LinkedIn: https://bit.ly/MonumentWealthLI
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Connect with us on YouTube: https://bit.ly/YouTubeMWMFit


Jessica Gibbs [00:00:33] Hi. Welcome back, everyone. This is part 2 in a 3-part series about business exit planning with Greg Maddox from Cultivate Advisors. If you haven’t already, go back and check out episode 1. It was a great conversation. Just want to remind everyone, Greg is a former business owner who now advises other small business owners on how to maximize their exit opportunities as part of Cultivate Advisors. And in episode one, he talked about the business owner journey that Cultivate has developed called the Exit Lifestyle Accelerator. And I want to kind of remind everyone that at this point in the business owner’s journey an exit hasn’t happened yet. Go back and listen to at least the beginning of Part One. If you haven’t and hear Greg talk about why exit planning is completely separate from actually leaving your business. So in this episode, we’ve talked about seeing the big picture. We’ve talked about the strategic planning related to running your business. And I think in this episode we want to get a little more tactical. I want to talk about protecting your family, protecting your business and protecting your assets. So at this point, you should understand what your business realistically looks like, which means that you can turn your attention to taking more tactical actions which will help you get through to your Greg, as you put it, your “Freedom Point”. So can you explain why a wealth advisor should be brought in now at this stage in the business exit journey?

Greg Maddox [00:01:56] Yeah, let me give a little bit of a quick reframe. So prior to this, you need to identify what is your freedom point, which is that target sales price that after taxes, fees, debt payoff, your percentage ownership, you would walk with enough to fund whatever’s next, which could be the next business. Or it could be that you’re ready to turn a new leaf in a chapter in your life. We need to then understand if that’s where we’re going. We have to understand, where are you at? So there has to be some type of an assessment, health and value assessment of the business so we can create the two goalposts, so we can reverse engineer a plan, hopefully 3 to 5 years to grow the value of the business to what it currently is to that freedom point value. And once we have that plan, that plan is not just about the business, because your life as an entrepreneur is very complicated or complex, I should say. And so we talked about in the last episode that it’s a team sport and that’s what we’re getting into today. Who are those other teammates and what other planning has to happen? So there’s once you kind of understand the freedom point value that you’re going towards where you are today with current value and current health assessment of the business, then when you create the plan, there’s two parallel paths that are happening. There’s the growing of the business. So it’s the work that we do at Cultivate is to grow the value of the business alongside the like a non-equity partner with the business owner. But the other parallel path is happening is the tax, legal wealth, all of this other planning on the personal side that has to come along for the ride. And so the why now and not just at exit? Well, the work that has to be done takes years. The thinking that has to be done on some of this work, you can’t cram into the six months prior to exit. Let me give you an example. A client who’s basically exited operationally, so he only works about 15 hours a week. He’s not in the office anymore. He and his wife are in a motor home visiting grandkids, stuff like that. And he calls in for the leadership stuff, proving that the business is an asset that can run without him. He could sell it. Somebody else would buy that business. He’s not sure what he wants to do yet next. And so is he going to sell it to his leadership team? He’s got kids who are smart, young professionals who see the lifestyle Dad has built. And after they see him start to think about the next chapter in his life, like, hey, I would have mine live in the way that you live, Dad you know, how about I get it from you? And so having those conversations are not as straightforward. Are you willing to be the bank, Mr. Business Owner, because your leadership team, the two people that are on your leadership team, do not have the deep pockets to write you a check. And your daughter, who’s expressed interest in buying it or taking it over from you, are you willing to be the bank for her? And if you are with her, then she’s not in your business now. She’s a professional, making really good money living across the country. So if she really wants to take this over and you really want to keep it in the family, then the decision she has to make is that she has to quit her current high paying job, move across country back home, start off at kind of a lower rung on the ladder to learn this business from the ground up over about a three year window to get to the point where she could take it over. But then you also have to be willing to be the bank to accept payments over time from her on this business. So are you prepared to have those conversations with your daughter in a way that keeps the relationship good? Are you prepared to have those conversations with your two key leaders? And the answer is, if this guy was like six months away from a transaction to then be making these decisions, it would be really tough to try to compress that because he needs to think about how you want to approach it. He had to think about what he really wanted. It was keeping in the family. He didn’t want to be the bank for all of it. He’d be the bank for a little bit, but he wanted a chunk of money. In his case, the answer was he didn’t want to be the bank for all of it, for his daughter. So for him, his financial security and his wife’s financial security trumped keeping the business in the legacy of the family. Now, everybody’s different on that. And so why now? Why do you bring these people in now? Well, because, number one, the part that’s often overlooked is just the decision making dynamics that a business owner has to go through to kind of wrangle with what is it I really want? And if I choose that path versus this path, what is the impact on me? I got to be the bank. How involved in this business am I going to have to be post my quote unquote exit to make sure that the next generation is successful with it? How will I structure the way I set up my tax, legal and wealth world to accommodate that path versus another one? Well, so as an example, if I have a let’s say that in this case, I do want to keep it in the family, that legacy is super important for me. And let’s say that he was thinking about this many years in advance. Well, then we’d be focusing on growing the business in a way in coordination with you guys. As wealth managers say, we need to start separating wealth at a significant rate and building other income producing assets for him at a significant rate so that in five years or seven years or whatever the plan is, to be able to him step back and kids step up. He can’t have all of his eggs tied to if the kids do well enough to pay him, you know, as the bank, we need to have another plan in place.

David B. Armstrong [00:07:18] I love that saying freedom point. And here’s what it immediately makes me think about. And I’m wondering if this factors into some of the things that people should consider differently as it relates to an exit plan or completely consider and drop the other word, which is you hear this all the time, what’s your number? Right? Somebody would say to me, and I’m making this up, Dave, what’s your number for you to exit? And that that is a lead in to a transaction question, right? Because if I say X millions of dollars, their next thing is going to be like, Well, what if I could help you achieve that? What if I could get you? And that’s a way of thinking about it from a transactional standpoint. But if you asked me, instead of thinking about it, like, what’s your number? If you asked me or someone asked me, have you ever thought about what your freedom point or points look like, it starts to sound a lot like what you just actually started to describe, which is that partner operational exit. We were joking before in the first episode about like, Hey Jessica, I may take three months off now after everything. And that sounds a lot like a partner taking an operational exit while still involved with leadership things. And maybe that’s a better way to frame it is Freedom Points.

Greg Maddox [00:08:28] So I built a piece of software that helps calculate this and helps kind of high level, put that five year plan together and it’s based on the lifestyle cash flow that they want. So the freedom point is really based on the lifestyle. The only reason. So in the previous episode we talked about a client who current value was 3 million. Her freedom point value was 23 million. The only reason that 23 million was relevant to her because it was based on, in her case, being able to push out a half a million dollar a year lifestyle that after taxes, after fees, resources she already had, that would be enough. As conservative as she was to kick off a combined cash flow of a half a mil. So to me, the freedom point is really just to put a fine point on the point at which you could live that ultimate exit lifestyle even if you never sold because the cash flow is either there from you built the business to a level that you could extract your half a million, million, $2 million a year or whatever it is, and the business, it doesn’t starve the business of growth capital and you’re not involved in all the day to day anymore, or you’re only involved the bits and pieces that really excite you, so exiting operationally. Or flip side is the business could be sold and you could get a lump sum of cash after taxes, fees, debt, and your percentage ownership that when I combine that with the wealth plan you guys have already built, it overflows the cup. There’s enough in there to fund whatever’s next for me and the things that I care about. And to me that’s what the freedom point is about. It’s about how do I sustain my life without my business or make working in the business optional? That is the freedom that we would eventually have.

Jessica Gibbs [00:10:14] To flip what you’re saying. And a different perspective of what I’m hearing as a planner is you need to do the work to understand what your business realistically looks like in order to help your wealth advisor narrow in on what actions and outcomes are realistic. Because I’ve certainly dealt with that before of people coming to us and saying, Yeah, I think I can sell my business for, throw out a crazy number. That really was aspirational. It wasn’t based on anything that they were actually doing to get to that number. And that number wasn’t based on any sort of freedom point or doing the work to understand what is it that you actually need in order to accomplish everything that you want. So I think that’s what I’m really hearing, is that you got to do the work and that’s where you can have a much more realistic conversation.

Greg Maddox [00:10:59] And the work is multi-dimensional. So there is the technical tax, legal, wealth business planning aspect of it. But then there’s the whole human side of it. Like I gave in my example of do I sell to my leaders, Do I sell to my daughter? Well, how does that impact me? What does, how does my role change post exit? Do I have to be the bank for how much and how much do I comfortable with? How involved do I need to be afterwards? Is that the lifestyle that I want post exit? Am I going to be happy? In the last the first episode we talked about 75% of business owners profoundly regret selling a year later. Well, this starts to add some color to it. It’s what I wanted. I wanted my daughter to take over. I thought I was okay being the bank, but I didn’t do enough outside planning and stacking of other resources, so I became wholly dependent on cash flow from the business while my daughter was running it, taking an owner’s take for herself. I was ready to be done. So I spent the first couple of months kicking her off and then I checked out and then I found that the money wasn’t coming in and I had to jump back in and I had to basically refix my business like there’s all these things that could happen. If we don’t, it’s like, why is it that I’m not happy later? It could be that I just don’t know what to do with all the time and money. I have good first world problems, but there’s all these other things that most businesses aren’t sold because I didn’t have an asset anybody else would buy. And so it’s something like this, I passed it on to my kids. Did I actually get any money for that? Was I happy about that? Was I able to fund what I wanted to do next, or am I just working for less money now because I’m giving part of the owner’s share to my kids because I wanted to tee them up? And am I really happy about that? I don’t know. So this stuff takes time to surface what you really want, what are the different ways that that could play out? And then based on that, what is the planning that we could do to make sure it works so that you have options? Just because I want to sell it to my kids doesn’t mean that’s going to happen.

David B. Armstrong [00:13:03] As a follow on to a question that I asked in the first episode. So it’s tangential here, but why work with a Wealth Advisor who’s experience in working with business owners and not just your current advisor? It gets back to that financial advisor versus wealth manager.

Greg Maddox [00:13:16] Yeah, totally. Somebody who understands the complex nature of an entrepreneur’s world both on the financial and non-financial front and has the skill sets or expertise in-house to help deal with it and help coordinate with the other. Because we talk about the team sport, help coordinate with the other professionals or advisors that are required to pull it off because to get this stuff right, there’s no one person who knows it all. I have a friend tell me a saying, “No one of us is as smart as ALL of us”, but that’s only if we’re talking to each other, right? And sharing those perspectives so that together the outcome is much better for the owner than if we were all just talking in silos.

Jessica Gibbs [00:13:58] Yeah, Monument. We always talk about a good wealth advisor, but what we aspire to be at Monument is we’re serving as the quarterback between your various players, you want to be in the owner’s box enjoying your snacks, have the comfy, sees the air conditioning. You don’t want to be down on the field coordinating all of your players, your tax, your legal, your insurance. And that’s what a wealth manager is going to do, is that they’re going to make sure that everyone who is contributing their very specific piece is actually working together. And that’s what we strive to do, is we’re trying to connect what steps you need to take and what partners you need to pull in so that everything is aligned and that you can get to your big picture and it can be what you want it to be.

Greg Maddox [00:14:37] Yeah, focus on the result. And the result for an entrepreneur requires multiple perspectives of multiple technical lanes of expertise. Otherwise we’re not going to get there. Certainly not as well as we could.

David B. Armstrong [00:14:50] Right. And it’s funny because we’ve experienced some of this ourselves and it’s dawning on me now, but all of this building, the team and everything, I came from a firm that I didn’t own before and I didn’t deal with any of those things. I didn’t deal with legal structures. I didn’t deal with stacking your retirement plans. I didn’t deal with doing valuations. I didn’t. Deal with doing K-1s and partnership returns and all those kind of things. And then when we started Monument and we started doing all of the things I can relate to every single thing that you’re saying. And in fact, we have our own team at Monument that are outside people who are experts in everything, right? Because we have a tax attorney, we have a corporate attorney, we have an HR attorney, we have a SEC attorney. And these are all different people and they’re part of our team. And so I think one of the great things about working with a wealth manager is that wealth managers tend to own their own businesses. And one of the powers of not just Monument, but any advisor who’s truly a wealth advisor and owns their own firm is they can relate to all of the things that you as a small business are dealing with and probably provide you with some real contextual experience based on what they’re doing to operate their business every single day. Because once a week we’re talking with something with attorney or accountant or the whole operation of the business has nothing to do with clients and managing money or wealth plans.

Greg Maddox [00:16:06] That’s a huge point, though. We’ve decided to make that a key differentiator at Cultivate Advisors. Everybody who works for us in an advisory capacity has owned a business for at least ten years and we’re scaling our company for value and eventual exit at some point in the future too. So like we’re eating our own cooking and it’s not theory for us. Our first business wasn’t becoming a business coach. It’s like, okay, we know what it’s like to sit in that chair, make those hard choices, then deal with the reality, not just the Instagram version of being an entrepreneur and also understanding what happens when you get it right and what happens when you get it wrong and how that ripple effect both ways can affect things. Yeah, I think it’s critical. You bring up a great point. I agree with you. My experience is that most wealth managers are going to be owning their own RIA, probably.

Jessica Gibbs [00:16:55] That’s registered investment advisor firm for those who are not not in the financial industry. I do think it’s worth acknowledging, though, that it can be really difficult for business owners to think about their own wealth picture separate from their business. I think about one couple that we worked with that Monument and they’re serial entrepreneurs and it’s like any time that they had any sort of income from a business they’d like immediately pour it into another business at the expense of building their own personal wealth outside of their businesses. So how should business owners approach prioritizing their personal wealth outside of their business? And particularly if there are constraints on what they can realistically do based off of the stage that their business is in?

Greg Maddox [00:17:40] So now you’re getting into your world more than mine. But if I go back to the last episode, talk about the three big problems I owned a job, not a business. All my financial eggs, income and otherwise are tied up inside of this operating business and end up over sacrificing in the personal, family and health front in order to try to solve those first two issues. From that perspective, I think that everybody wants to turn their business into an asset that gives them time and money so they have some choices using some of that time and money to invest in other income producing and liquid assets that are separate from your core operating business. I would say liquid. So like these people keep rolling into another business, another business. There should still be some baseline of liquidity that’s required in a plan. I’m assuming that they’re super diversified. All of the businesses that they’re doing are in a variety of industries. So if the market tanks, then all go down or one thing happens, then all go down that they’ve built a portfolio of businesses that make sense, even then, you still need to deal with having some liquidity just for life. And I get it. Most entrepreneurs, their business is their best asset. And I’ve said before it, they’re absolutely right there where they get it wrong as they think it to be their only asset. And so if you look at the even billionaires, right, who own business interests all over the place, they still have a significant amount of liquidity separate from that. So they have choices. Cash is king. You look at in 2008 and 2009 when the markets crashed and the mortgage bubble burst and the housing bubble also burst, people who had a lot of cash, bought up a ton of real estate because the banks weren’t lending. Mortgage market crashed. It was very difficult to get a loan. So prior to that, if real estate investors every Tom, Dick and Harry was going to a real estate investing seminar to go buy real estate with very little money down or other people’s money or what have you. Well, then that all went away. And so the people were able to capitalize on that opportunity where people actually had cash available to do it. So that’s an opportunistic way. I’ll give you a different example. I had a client who left corporate America, started a business, grew it successfully. It was never a monster business, but it kicked off about 400K a year to her and she was wired to save. And so when she came to me, she was looking to get ready to sell. We helped her prepare. We helped her find the M&A person. It’s going to be about a $2 million transaction and had multiple offers pick the one that she liked best. We were two weeks from the closing table and then. March of 2020 happened. So COVID. COVID happens. Money dries up. The buyer immediately pulls back the cash. We don’t know what’s going to happen. COVID was a direct nuclear bomb to her business. Her business required people being in her space in the real world. So a $2 million payday went to zero overnight. Now, luckily for her, she already had multimillions liquid separate from the business because she saved along the way. She separated wealth along the way. When it still stings to have another $2 million payday coming and then the rug pulled out from underneath you. She had to go back in the business to lay half the people off. She had to downsize her real estate footprint. She had to struggle through the COVID reality and then the reopening of the world and build the business back up into something. And two years later, our guy sold it for half. It was worth half. It was half the business it used to be. So for her, I look at that as kind of a cautionary tale. The fact that she was separating wealth along the way had nothing to do with me. And the way that I believe that you should do it. Until she was already doing that before me. But thank God she did, right? Because nobody thinks that’s one of the five D’s that’s disruption or distress. What are you going to call it when the industry shifts or the market shifts and just dramatically chops your legs out from underneath you? If she did not already have that liquidity right now, she would be working until she dies. She would just have to work, rebuild a business when you thought you were out, when you don’t have the energy or the mindset and you’re doing it now from a place of scarcity as opposed to abundance, when you first start something and everything is big. Bigger vision for the future and hopeful and total confidence. And I have many years of runway to do it. Now you’re at the other end of that pendulum. It would just be horrible. So luckily for her, she agreed in her own brain that it was important for her to separate some wealth. She still lived how she wanted to live. She was traveled. She was able to build the business to the level that she wanted to. It didn’t require her to be there all the time. So she did a lot of the things right and maybe she didn’t buy as much stuff as somebody else on the same cash flow would have done, but ended up working out if she had a crystal ball. She couldn’t have planned it out any better than the way that she did it. And so that’s just the reality of it. I think that we don’t know what’s going to come our way. Life, the industry, technology, family dynamics, health. There could be something that was totally fine that never happened to me. All of a sudden, it became an issue that you had to deal with. It forces your hand to leave your business sooner than you were planning on. 50%, by the way, is the stat of people who will leave their business, not on their terms and timeline. So why not plan for that? And somebody like you guys at Monument, a wealth manager, could show them a plan. This is look, we could find a balancing act here that still grows the business, maintains your lifestyle the way you want. You don’t have to eat ramen noodles even though you’re making millions of dollars a year. And we can separate wealth and tax advantaged ways for you and help you build an ecosystem for both opportunity and stability that will work for you and your family. Most people just are unaware of it.

Jessica Gibbs [00:23:32] I think back to just conversely, that couple that I mentioned before, the serial entrepreneurs who just kept investing everything in their businesses, I mean, eventually they just kept handicapping all of their personal planning opportunities that eventually just became like, there’s nothing that we can do to help you because you are not willing to kind of detach your business from your entire wealth picture. You know, you’re not willing to see that as part of it, not your whole thing. They just were where they were young and they were just so set on the businesses are just going to one day yield us a ton of money. We’re just going to keep pouring stuff into that at the expense of cash reserves. As you said, liquidity is so important. Saving for your own retirement without taking those cash flows and putting it into retirement savings, not just covering living expenses. So it’s just something we see a lot. It’s that personal element. It can be forgotten and it’s just so detrimental if you do.

Greg Maddox [00:24:22] The last thing about that couple that they’ve now made their whole future contingent onto multiple transactions that hopefully when they’re ready to sell the market is an agreement that you have something worth buying for the right price.

David B. Armstrong [00:24:36] I think business owners probably know the risks that are attached to their business. Right. And I’m a little guilty of this to ignore them sometimes. Can you take a few minutes and talk about how to identify some of those risks? Can you identify some of the risks that you’ve seen?

Greg Maddox [00:24:54] Yeah, I would say that the issue isn’t that they’re not aware of the risks. Business owners are smart people that figured out something, whether they have book smart training from a university or not. The issue isn’t that they’re not aware of the issues. They don’t feel it. That doesn’t feel like risk to them because they feel in control of it. And it goes right back to this conversation with these serial entrepreneurs. So I’m in control of it. Well, just means it. So you’re working harder. I’m the key person. I’m involved in all the key decisions. The key accounts are with me and they know me. When my team comes to me for question or is faster for me to either just give you the answer or I’ll just do it, rather than taking the time, energy and some money to build out a training resource and onboarding or some way to develop that so that I can only answer the question once and I have a resource that answers it for all times moving forward. So these are areas of risk, right? That simply stated, you have customer concentration, you can have vendor concentration or employee concentration. Those are three key areas. And then you can even just talk about from the owners perspective that they are the chief cook bottle washer, right? That if they left for 90 days and could not text, email or call or talk to anybody in the business, what would happen to the business? And for most businesses, it would be catastrophic. It might limp along some day. Well, it wouldn’t die, but it wouldn’t be at the same level when I came back. Right. Ideally, you want the business to grow without you there because you set up the team and the systems and the processes so that you don’t have to be the one who’s injecting that bit of secret sauce into everything to take it, to move the business forward as opposed to just maintain it. So there’s a lot of risk associated with the business owners maintaining control and not wanting to let go because it seems easier and quicker and faster. But it will also be the same thing that they bitch about, like why can’t these people why can’t I find good employees? How many times I have to tell people how to do this thing the right way? Why don’t they do it like me? How come I can’t hire the right people? Oh, my God. They screwed this up. I had to jump in and save that big account. Well, whose fault is that? If those things are happening, it’s the business owners fault. If the team is not operating the way you want them to operate, you have not taken the time, energy, resources, money to build out the training, onboarding, development and then ongoing accountability systems, leadership systems we call them, into the business to give your people what they need to succeed in your definition of success. We think we just throw bodies at it. I’ve got enough cash flow to hire somebody, so I’m going to hire you. Shadow Bob for a minute. Shadow Susie just jump in there and do it. And then I get pissed that you don’t do it right. That’s unfortunately the reality with many, many businesses, even larger companies, too. All of this stuff is risk to the next owner. All this stuff is risk. If you got sick and couldn’t come to work the proverbial hit by the bus, what if it’s just hit by sickness or some disability? You guys know the stats on that. That takes me out of the equation for a minute. What happens to the business if I’m not there to problem solve for everybody? All of these little things. I don’t know if that answers your question, but these are the areas is just the reality of them taking too much control and not taking the time. This idea, you know, I was in the military. They say you have to “slow down to go fast”. Right. Slow as smooth. Smooth as fast. I could try to run across this field now, trip and fall. Or if I go slow and smooth, I’ll make it there faster. It’s the same thing in the business.

David B. Armstrong [00:28:37] Yes, I use that line a lot here because it came out of the military. So. So it did answer the question, but it prompted another one. So I think the high level answer to the question, “What can business owners do to address this risk?” Is to do something to address the risk. That’s the answer that everybody kind of heard. But there is some serious work there. And you talked about some of those things. So at some level, a business owner, in order to address those risks, has to address those risks. You’re the person who can’t leave. You’re the person who says, why can’t I hire anybody? And you said, you know, whose fault is that? There’s some internal looking that needs to take place from a business, but is there actually something you can do about it? And I almost lead the answer by telling a quick story, which was way back in the day. And I use my air quotes for people who aren’t watching the video. Of Monument, I had developed this interest in going and hiking the Pacific Crest Trail, which would take six months to do it right and eventually figured out that there’s no way I could do that. There is no way I’d be able to take six months off. Then I started thinking, What if I did it in sections? And what if I took 30 days off to do it? And at first there was no way that was going to happen. Pre Jessica Pre, Emily Dean and I and another partner. And because of that other part there’s no way that was going to happen. Zero. But then we made some structural changes to the ownership here. We bought a partner out we brought Jessica and Emily in quickly identified them as next generation owners, started developing their leadership and involving them in operating the business. The next thing you know, I’m out hiking the Sierra section of the Pacific Crest Trail for 30 straight days with no cell phone, no text message. If they wanted to get in touch with me, there was nothing they could do about it. And talk about having to figure it out. And guess what happened when I came back, Greg?

Greg Maddox [00:30:26] I bet it was better.

David B. Armstrong [00:30:27] It was fine. Fine. But what ended up happening was I fell and tore my ACL. That’s what ended up happening. But otherwise, I’d still be doing it. But yeah, and it was a great lesson for me. It was a great lesson for Dean. It was a great lesson for Jessica and Emily. It was a great lesson for the whole team. It was a great lesson for our clients, too, which was, Hey, we’ve built this team. We just basically validated it. And I’m wondering, that may be how a business owner can address the risk, but maybe you have some other ideas what people can do.

Greg Maddox [00:30:55] Well, yeah, building a team is one. We’ll start there. You said validating. I’d say empowering is the term that comes to mind for me. So many leaders or owners, I’ll say, will build a quote unquote leadership team, but not empower them to do jack without them. And even if that was your M.O. prior to leaving, once you decided to leave for 30 days and be totally unobtainable, guess what? De facto, they were empowered. They had to make decisions. They had to step up and figure it out. That is also huge for them to know that you serious about it as the owner, that you are serious about giving me not just the accountability, but the ability to make the decisions. Don’t just hold me accountable to the results, but give me the power to actually make those results happen inside of a lane. That’s a critical piece. I’d say that structurally, besides just building out the leadership team, generally, it’s like, how do I develop people, process and systems? So you talked about people from the leadership team. Well, there’s three main areas that you have to develop some training systems and process around. So there’s think about companywide onboarding. When you bring on a new person, you get to learn a little bit about who you are, how you started, how we do things differently in the world, why we do it. Also learning a little bit about how the business is structured, who else is here, the areas that we work in, also company wide. Here’s the tech stack that we use. You might have come from we’re Microsoft. You came from Google, right? Or whatever. Here are the different tech stacks that we use that you need to be aware of. And here’s some basic training on all of those. Then you’ve got that bucket number two, the company-wide tech. Bucket number three is where most people start is the team. So by department and by role, how do I onboard you into that department to that role? Because that department of that role could have its own set of KPIs and metrics or how we measure success or what you’re held responsible for. Like, where are the tools and resources that you’ll need to do this particular job? Who are the leaders in that department that you’re going to be interacting with? How do I utilize the tech in this role? Or is there different tech that this role uses that the other roles do not? Simple example there is, if I’m in finance, I might have to be super familiar with QuickBooks and everybody else doesn’t need to know QuickBooks. But then how do you get down to how do I do the job? How do we measure success? What are the metrics? KPIs? Are there any rules of the road that are different for this role that don’t apply to other roles? And then what’s the development plan? How do I take somebody and give them a roadmap, an ability to say inside of this role? Here’s how you grow in our company and here’s how we’re going to support building your skill sets, mindsets, etc. in a way that’s alignment with what we do here and in alignment with eventual leadership. Because if you were a fast growing company like we are Cultivate, that’s a lot of opportunity. As the company grows, you need to have more leaders. As you figured out, David, if you wanted to get to the point where you could have a little bit of freedom, you couldn’t do it all yourself. And so there’s an opportunity there which also should be attractive for you to find the right kind of people. But then those people are going to also need to understand, well, what is the path like? How am I supported not just in my job of how I deserve to get paid if I do what I’m supposed to do? But most people are equally as interested in like what is the growth possibility for me here? Especially if you’re competing as a small company against the big guys, Right? And I think it’s I mean, I live in the small company world, so I think that there’s a huge benefit to being able to put your thumbprint on things and make an impact and and move more quickly in a meritocracy into leadership versus the bureaucracy of many, many large companies. So there’s that. Then it’s like, well, then how do we get all of that out of people’s heads and onto some type of a platform in some kind of a format that is easy to find, organized and engaging in a way that if I’m one of your workers and I need help in solving a problem in my job, I can easily find that resource and it gives me what I need to solve the problem and keep working as opposed to is everything going to be a course like an LMS? Well, I don’t need to sit through like six tutorials. I see this one question answered. And so we have a platform that we developed for ourselves and we figured out how to clone it for clients who need a platform. Then we also realized that all of our clients raised their hand for the platform, but nobody knew how to create the content. And we had gotten really good at creating the content for some enterprise clients. And so we have a whole team behind the scenes that will say, okay, you know, because the owners are busy, the leaders are busy, People have time to say now, create a training program, give us the raw materials, record what you’re doing. You have to show somebody had to do it anyway. The next time you’re showing somebody, just do a Zoom recording and send us that and our team will turn it into the training. So when you ask for specifics, you have to actually build out the assets that are the systems and process and leverage tech enablement where you can eliminate human error.

Jessica Gibbs [00:36:12] Yeah, I mean, Greg, I think that you’ve been talking a lot about building out a team which is really important to addressing that famous person syndrome of like you, the founder, are no longer there and you’re not the business isn’t able to function. I think that something that we’ve we’ve been involved in in the past that’s like almost even more fundamental than building out a team is business continuity planning. I think about one client in particular where he really was involved and he ran the businesses and that if something were to happen to him, death, disability, incapacity of some sort, his wife was the one who was going to be inheriting this and she was completely detached from the businesses, like did not even know who should I even talk to to sell these businesses If something happens to you, like who’s even the person I should be talking to? So even before we started talking about business succession planning and estate planning, which is it’s a big bear to tackle in itself, we actually started with business contingency, business continuity planning. If you’re not around what is going to happen to this business, who should she call? Get some basic check writing ability so that she can cut the checks needed immediately to vendors or to people. That actually was the first place we started because we all recognized back to kind of what Dave’s original question was about risks that something happening to him was a huge risk to these businesses being able to continue to function. So I do just want to plug that succession planning is what everyone wants to talk about, but that contingency planning, that continuity planning, it paid off so well.

Greg Maddox [00:37:38] The continuity, I love it because that’s just like, okay, because lot of times it’s like it’s temporary, right? Someone’s in the hospital for a period of time and just not able to do their normal role. Well. How are decisions made? How are checks continued to be written and how do we communicate to internal external stakeholders kind of as the big three things there and having some plan in place there. But I will tie that back to in that example, if that particular business owner had not also put in and documented those systems and processes around those kind of three buckets, the companywide onboarding, company-wide tech, and then individual department roles and have all of that kind of baked out, at least in a version 1.0 It makes her job coming in and trying to figure out how to keep this thing afloat a thousand times harder. Just because she has check writing ability, it doesn’t help. The business is probably not running itself just yet, so we still have that risk. So we only have out which runway we have in cash, which then leads to the planning that you guys could do to even deal with that. That same client who I talked about who was exiting operationally was she I sold to my daughter, to my leaders. He hadn’t didn’t have any real planning done. We helped him get connected with the right folks. And when they did a comprehensive tax and estate plan with an eye towards the exit and the wealth manager put together a comprehensive plan that included the right risk management stuff and insurance, etc., like the wife. And they had been living well for a while, so they were not financially stressed at all. They don’t worry about cash flow for a long, long time. But in spite of that, there was an immense amount of stress that lifted off her that she talked about just having the plan in place, that if something were to happen to her husband, she now understood how everything was going to be taken care of, how she was going to be okay, and then we would not have to rush into selling the company because with proper risk planning she had between their money and then that extra money from the insurance policies, we had enough liquidity that we didn’t have to make any rash decisions about anything to figure out how we’re going to now sell the company or make decisions inside of the company. So I think people sometimes when you’re an owner and you don’t feel the stress anymore because A, you don’t recognize the risk the same way that you’re not operating spouse might. And then you got it past that kind of scarcity mode and you built it to a level where you have consistent cash flow that you know, and you’re not worried about meeting your needs and having some abundance. I think that the owner, the operating owner seems to discount the level of stress that is still on that non-operating spouse that just because things are good from a cashflow, they don’t feel the same way about risk that you do. And even though right now things are great while you’re operating the company and you’ve had a decade or two of great, great cash flow, that non-operating spouse in the back of their head is still think about, well, what if something happens to you? I remember what it was like when we were struggling, and I have no clue how to run this business If something happens to you and I don’t know of a plan, I can’t bring it up because you do want to talk about it. There’s a lot behind the scenes that happens there that this kind of planning solves. Even if you weren’t being confronted with somebody in the family saying, We got to do this.

Jessica Gibbs [00:41:03] Yeah. So I want to switch gears real quick because you mentioned cash flow. And when there’s income, there’s taxes. Right. So I want to do a deeper dive on tax strategies because we know that taxes are a really big challenge for business owners. You’ve got things like phantom income, self-employment, taxes. They add complexity, the additional taxes that you may not even be able to cover those taxes from the business. So what tax strategies should business owners be thinking about to help them now and to set themselves up for success in the future?

Greg Maddox [00:41:33] So to put the big disclaimer out here that this is not tax legal or or wealth or investment management advice.

David B. Armstrong [00:41:39] Yeah, we got it. Right. Right. Talk to your lawyer.

Greg Maddox [00:41:41] But I could tell you the kinds of things that I see those professionals bringing to my clients. And so one way we called it earlier, Dave and I were talking about stacking retirement plans. So most entrepreneurs who fail to separate any wealth from their business, they’re always looking for ways to reduce taxes in the current year. And so you get people who say, Oh, well then you have let’s pre-fund a bunch of our expenses, let’s buy a bunch of shit this year that we’re going to need next year, which doesn’t really accomplish anything because next year I now don’t have those expenses and I have to manufacture something else, just kicking the can down the road.

David B. Armstrong [00:42:18] We’re guilty of that. We’ve done that in the past.

Greg Maddox [00:42:20] I mean, it solves a short term problem, but the same problem exists next year. So what about stacked retirement plans? Well, you had mentioned earlier, I have many clients putting multiple six figures a year away into their own retirement accounts as a top line deduction to their operating company. And it’s increasing their liquidity and helping fund that retirement bucket. You know, Jessica talked about earlier, most business owners are totally unaware that exists. They understand like a 401k, they look at the 401k is like something to treat their employees right. Because at a certain level, if I’m earning a really good money as a business owner, my ability to put 25 grand a year into a 401k is just inconsequential. I’m not going to solve my wealth gap at 25 grand a year at a pop, so they don’t really care about it. They look at, Oh, this is a benefit for my employees. When you educate them that, hey, there’s actually a way to to structure this so that it’s a benefit to your employees and to you in a way that you’ll actually care about. Because I got clients putting, you know, four or five, $600,000 a year top line deduction from their business. So reducing taxable income in that year by the four or five or 600,000, and then putting the vast majority of that 600,000 into their own personal retirement account as a blessing from the IRS. There’s a cash balance plans, defined benefit plans. These are just different types of retirement strategies that are available to business owners that most entrepreneurs just aren’t aware of. These kind of plans exist, so that’s one. Another longer term strategy. I was just in a meeting with a wealth manager and tax attorney talking about a business owner who had has been very successful, used to be in one of the large franchises. He was number one in the country as far as number of franchises and production. He sold that stuff off. He’s now got another venture that is in the MedTech space. So he has a bit of a SaaS component to it. If people listening understand how valuations on that kind of technology work, they’re valued at extremely high multiples. So if you have something that works, you have the ability to scale the valuation from relatively nothing in the beginning to literally could be hundreds of millions of dollars not so far down the road for an exit. And so if you’re going to take something from relatively nothing to hundreds of millions of dollars to $300 million valuation at sale, well, that’s a massive tax bill. So there are programs out there in the fact that it has to be right and you need to set this up in enough lead time. But there’s a thing called qualifying small business stock to 1202 stock the 1202 refers to the IRS code where if the fact pattern makes sense, it’s actually leveraging a C Corp. And then when you go and sell each of the shareholders can shelter up to $10 million in gains. So now you’ve got maybe mom, dad, kids. You start spreading out ownership appropriately to shelter a lot of that. So that’s something a lot of people aren’t aware of. Why would the IRS do that? That’s to incentivize people investing in small businesses, give them an ability to, you know, shelter a chunk of those gains as an incentive on the front end to get involved in something that’s risky. But if you’re an entrepreneur who’s figured something out and you can grow something to a significant amount of value in the future, doesn’t have to be 100 million. What if it’s 30 million and I could shelter ten of it, or it’s a husband wife, I could shelter 20 of it if the fact pattern makes sense. So there’s just a lot of these different strategies out there that are wholly dependent on the fact pattern. But you need we talked about in the first episode that all advisors are not created equal when it comes to tax, legal, wealth. There’s a different set of playbooks available for successful entrepreneurs that most tax legal wealth advisors don’t know because they usually are dealing with the more of the masses. I could deal with highly compensated executives, but they’re W-2 employees for corporations. Different playbook than what’s available for the entrepreneur. So having the right people on your team allows you to have a combined conversation, not in silos. From the wealth perspective, from the tax and legal perspective, from the business perspective, to say, hey, this is where we think it’s going business wise. Let’s bring in the right tax legal wealth, folks NOW before we have a huge tax problem, before we have a huge asset protection problem, if we miss opportunities to create wealth inside of this business. Let’s bring this team together and let’s let them each operate in their lane of expertise to have a combined conversation that gets it all on the table and we can massage out the best version of that that gets the business owner from where they are now to where they want to be with the most choice of control.

Jessica Gibbs [00:47:12] Yet another reason why bringing your team together when there is an offer on the table, it’s too late. So thank you so much, Greg. This is fantastic. As we’ve been saying, this is a three part series, so make sure you tune into the next episode, the final in our series work, we’re going to be doing a deep dive into the third phase of Cultivate’s exit lifestyle accelerator process. Greg, remind everyone, where can people find you?

Greg Maddox [00:47:37] Sure, they can email me Greg at Cultivate Advisors dot com where they could check out my personal website at my exit lifestyle dot com.

David B. Armstrong [00:47:45] Great. Thanks so much.

Jessica Gibbs [00:47:47] Great. And remember, subscribe to off the wall on your favorite podcast player and and also Monument Wealth Management’s YouTube channel to be alerted when the next episode is out.

David B. Armstrong [00:47:56] I’ll even throw out of hey why don’t you just drop a review in Apple iTunes for us Like, I mean, if you’re going to give us anything less than a five star, just email me and tell me what you don’t like about it. But if you like it.

Jessica Gibbs [00:48:07] There you go.

Greg Maddox [00:48:07] Scream it from the rooftops.

David B. Armstrong [00:48:09] That’s right. That’s right. All right. Thanks so much, Greg.

Greg Maddox [00:48:11] Thanks, guys.

About "Off The Wall"

OFF THE WALL is a podcast for business professionals and high-net-worth investors who want to build wealth with purpose. A little bit Wall Street, a little bit off-the-wall; it’s your go-to for straightforward, unfiltered wealth advice on topics that founders, business owners, and executives care about.

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