Plan the tax and income questions before a business exit

Source transcript, with paragraph breaks added for readability. Speaker identities have not been inferred. Verify quotations against the recording.

He spent so many years building this business and it's actually very successful. If you wanted to order one of his products, you had to wait like 3 or 4 months to even get the flip was switched in his brain. He was just done and there was no time to do any further preparation. No chance to clean up financials. No chance to review where money was going and what it's doing. I just knew the writing was on the wall that he was going to have to walk away from this and almost give it away. Not because the business wasn't valuable, but because the owner was just tired and done. He never planned for the exit. 25% tax on a $5 million business sale. We're looking at $1.25 million of taxes paid. How do we keep that on your balance sheet working for you rather than having it sent to the IRS? When money leaves your balance sheet, you never get a chance to make money on that money again. It's gone. All right, welcome to Beyond

the Bottom Line. I'm your host, Joey Lon, and this show is about pulling back the curtain on how the ultra wealthy actually protect and grow their money without the gatekeeping or the complexity. Today's episode is going to make some people uncomfortable because it challenges the most common advice business owners hear when they sell their company, which is five words, pay the tax and move on, right? So, we're definitely going to attack that. And uh we're lucky today we have our guest Tony Patterson, a certified financial planner out of Iowa uh who co-founded Envision Wealth uh specifically for uh because he kept watching business owners leave millions on the table when selling their businesses. He grew up in the industry. His father ran a financial strategies practice. And after more than a decade working with business owners and manufacturing companies across the Midwest, he's became he's become obsessed with one question, right? How do you help an owner keep the most amount of money possible uh from the biggest financial transaction of their life, which is

when you sell it? Um, so his specialty is capital gains tax reduction. The strategy that the ultra wealthy use to defer, reduce, and sometimes even eliminate taxes when selling businesses and highly appreciated assets. So, if you're a business owner like myself, uh, who plans to sell someday, right? Whether that's that's in 2 years or 20 years, this conversation could save you a lot of money than almost anything else you're going to hear this year. So, um, with that said, welcome to the show. Tony, thank you. Looking forward to it. Tony, you shared something with us, uh, that I think every business owner, myself included, watching needs to hear this. So, you said you watch a manufacturer sell his business for less than one time his seller discretionary earnings, right? Um, not because the business wasn't valuable, but because the owner was just tired and done. He never planned for the exit. walk us through like what happened there and what that cost was for that person. Sure. Um, you know, with with with that individual

and his family, um, you know, he spent so many years building this business and it's actually very successful. If you wanted to order one of his products, you had to wait like three or four months to even get one of his products. And um, it was successful making money uh, making good money, especially in the Midwest. And so he just kept saying, "I'm getting tired. My body's getting beat up." you know, when one of the guys doesn't show up, I'm sitting on the welding table and I'm filling his spot welding and he was just done with it and he wanted to sell. And so, as much as we tried to prime and prep him for that, um, just the time and attention wasn't there for it. And then the one day came and said, "I'm done. I'm ready to be done. How do I be done with this?" And unfortunately, this is, you know, a couple years after our conversations, and the flip was switched in his brain. He was just done. And there was

no time to do any further preparation, you know. So, um, you know, we had no chance to clean up financials, no chance to review, uh, where money was going and what it's doing, and and quite frankly, no time to even hire anyone to help uh, to help market and broker the business. So, he called up handful of individuals, took a little bit of time, and unfortunately um, you know, I got a chance to even listen to some of those conversations with potential buyers. And I just knew the writing was on the wall that he was going to have to walk away from this and almost give it away. And unfortunately, one of the conversations seared in my brain is was this conundrum of do I just work another year and make that money or do I sell the business and make that money? And and at the end of the day for him, he wanted to see the business continue beyond himself rather than just working another year making the money and shutting the shutting

the door. Um, but it was it was a tough piece and I just looked at it and go I tried to help, you know, a couple years ago get this up and running, but I had uh just wasn't ready for it. So, I needed to up my game in order to get people in a spot that they could plan, prepare, and and maximize the value of their business when that time comes. Um, and so that just sears in my brain when I'm talking with business owners about the potential exit. And the reality is is everyone's going to exit at some point in time, whether it's your decision or uh possibly health or timing or whatever that looks like. Um, everyone's going to leave. And so preparing for that became a little bit more of a mission critical uh uh work for those I walk with. That's interesting. and and we were talking before the show, we just had Scott Bushki on on the show uh a couple weeks ago and obviously he's more of a

of an M&A uh type business. So, I'm I'm happy that we have now the financial advisor side where we can talk about the taxes. So, with them it's more about the strategies, right? Getting more offers, finding having a some brokers to find you more buyers, right? So that you have the leverage. Uh but one really important preparation aspect of of of of selling the business is how do you structure it to pay the least amount of taxes. You don't want to give away 40% of yourself to to to the IRS, right? So where does that come into play? And obviously for that person, he didn't have time, I imagine, so he paid a good amount of taxes. What's that process to prep for taxes and when should you start? Well, it it depends a little bit on your full financial picture. Um, you know, if you have assets outside of the business, that's helpful. But the reality is is most business owners, when we think about their net worth, you know, the majority of their

net worth is tied up in the value of their business. They've been re they've been reinvesting profits to continue to grow and grow and grow. And so, it's not like they have this massive investment portfolio on the side. It's they've been taking those earnings and reinvesting to grow the business. So when we think about that the the conversation says you know in in an ideal world most of the sale proceeds get get sent to you as the business owner as a capital gain. There may be some there there may be some of the sale proceeds that gets put as an ordinary income if it's uh maybe some depreciation or depending on how that sale is structured. But ideally for a business owner selling it's a capital gain event. And so when we think about that is saying what are ways that we can offset a capital gain and that's that first conversation that we work with. Are there current assets that we can use that you have right now to help us offset the gain

from your business or when the business is sold how do we how do we invest those the proceeds of that business to help us create offsets from the recognized gain from the sale of the business? When is the right time to prep for that? like to let's say for example right and we talk about that with Scott again that most business owners when they ask when when do you want to sell the knee-jerk answer is always 5 years right we don't know why but five years that's a normal answer and it's funny cuz that when he was talking about that's what I had in my mind as well um so let's say I want to sell in five year the business when when and why should I start the preparation to limit the the the taxes that I'm going to pay from the net amount that I'm going to get for that business. Yeah. So, it depends a little bit on a couple of those strategies that we use. And unfortunately, I work in the

world where most people aren't thinking ahead about that. Most people are working in the hey, I'm selling this thing. What do I do about it? If we can get two or three years in advance knowing that and putting some of those tax strategies together, that would be great. uh because we might be structuring the business sale for certain payments to you to get sent in a different way that uh that's helpful for the business and can be mitigated in taxes in your world. Um so ideally a couple years in advance would be great. You know, you mentioned that fiveyear rule. The the reality is if I came back and asked you in five years when you want to sell your business, you'd probably say five years. Um it's a rolling fiveyear joke. Um, but if we can get ahead of that within a couple um within a couple years would be great. The the worst case scenario really is is you know most business owners want to sell the business and get over that hump

and then figure out what to do, but at that point the structure is already established of how the sale went through. The money has already been recognized as a gain and maybe our timeline is a little bit different. um some of the strategies we may chat through. Uh ideally you have a full year in front of you to help reduce the taxes on it after the sale. So it's not like you're totally out of luck once the sale has happened. Um but you're going to be a couple steps behind the eightball a little bit. Yeah. Yeah. No, it's like anything, right? Like it's the preparation that uh that that tells you what what the outcome is going to be. Do you have in mind like a perfect situation that happened? like just to give me the idea of like what's the what could I expect the what would be the lowest amount like or what's the lowest amount have you seen in the business you've worked with sell uh relative to their income that they

paid in taxes at the moment of the sale. So, so when we think about that and going back to the capital gain, um, you know, when you're selling the business, there's I don't want to say there's no possible way, but in in most instances, you're going to be incurring a capital gain upon the sale of your business. Just like buying a stock and letting it grow and then selling the stock, you have to in a sense incur that gain. Now, there are things that we can do in advance, possibly some charitable giving and that we want to set up and and a lot of that does play into things, but at the end of the day, selling your business is a nest egg for most people. It's their retirement nest egg. They're going to turn this business into uh investment income that they can live off of. So, while the charitable thing is a lot of conversation that we do have, I could reduce your taxes by giving entire proceeds of your business to to

nonprofits, but that's not what we're trying to do. you want to keep some as well. We're trying to keep it in our pockets. Yeah. So, if we have that capital gain come through, the one thing that I would share is is if we have a capital gain on this side of your of your tax return potentially, how do we generate capital gain losses to offset that? Okay. In an ideal world, we're generating capital gain losses, but our net worth is continuing to grow. and explain what what capital what is does capital gain losses like means. So so when you buy so when you buy a stock um and let's just say you went out there and bought a stock and then two months later the value of that stock went down. Yeah. You can sell that stock and have a loss that would then get to be used on your on your taxes. So for the first instance of what some of those methods that like uh step one the simplest version of that would

be instead of taking the proceeds of your business and buying like an index fund in the S&P 500 you might use that those proceeds to go buy a direct indexing investment strategy. Hm. And what that means is instead of buying the top 500 companies in one single ETF that many of us are familiar with, you would actually go buy the individual stocks of the S&P 500. Got it? So, you would have the same investment. So, you have the same investment outcome as a as a ETF, simplistically speaking, but some of those stocks inside of the S&P 500 are actually going to lose value in the given year. So like, yeah, we think, you know, Google, Apple, Amazon, those companies in the S&P 500 typically uh increase in value over the year, but there's some of those stocks that are actually going to that are going to go uh lose value. Yeah. So, what we would want to do is use that direct indexing approach to sell those losing stocks in a given year, but we're

not going to sell the winning stocks. We're going to have those winning stocks continue to grow. So what we have now is portfolio gains. The the portfolio is still growing, but we're realizing losses along the way. Ah yeah. So let's say let's say I guess that works with crypto as well, right? Let's say I bought Bitcoin two weeks ago. But the reality is is if you and right now it's it's you know winner of 26 and so we've seen Bitcoin drop drastically. Yeah. In the last 3 months, but the reality is is Yeah. That's a loss for you, but you your net worth lost money, too. Yeah. Yeah. And that's not a fun way to get tax losses is to actually lose net worth. Yeah. Yeah. Yeah. I want to get tax losses while my net worth is continuing to grow. Understood. And so that's the goal of what we're trying to do is saying, I want my account value and my portfolio to be growing because there's a lot more fun ways to lose

money than just having a statement show up in your show up in your inbox every 30 days. Like there's a lot more fun ways to lose money, but I want to I want to have those losses incurred to you, but have our portfolio continuing to grow depending on the amount of money we're investing and depending on the timeline that we have in front of us, that'll dictate how much losses we can generate. Yeah. And those losses on your investment portfolio can be used to offset the gains of your business sale. Interesting. So, yeah. So, it's it's very it's balancing your capital gains and your capital gains losses as well, which is one of the strategies to use to limit the taxes you'll pay at the moment of sale. Correct. Correct. So, so in an ideal world, um let's just call it most investors don't have a ton of liquidity because they're their net worth is tied up in the business. Market. Yeah. Or in the market. Yeah. Mhm. So, so in a sense it becomes

a little bit of a of a time crunch to say we sell this business, we got to take the proceeds and go put it to work over the course of the year to generate losses to to offset the sale of that business. If you sell the business in November, that only gives us a month to generate losses compared to the incurred gain versus if you sell the business and get the proceeds on, let's just call it January 10th, you then have 11 and a half months to work with that money to generate losses that can be used to offset the gains reported in that same calendar year. Yeah, that makes sense. That makes sense. And I want to go back to what you said earlier, the five uh most expensive words in business. Just pay pay the tax and move on. Where does that advice come from? Why do CPAs and financial adviserss say that? And what does it actually cost a business owner when they follow it? Well, so it's said because, and I'm

not trying to throw anyone under the bus here, um it's said because simplicity is easy. Yeah. and if we just pay the tax and move on. That's a really simple answer. That's a really easy answer. So, not necessarily a bad thing. It's like you got the money, you paid your tax, and now you can move on from it. But the reality is is if you think about a business that sells for $5 million. Yeah. And just for easy simple math here, let's just say that there's very minimal basis in that business. So, that all $5 million is a capital gain for the business owner. For simplicity, in the United States, we're thinking about like a 25% tax rate. We're going to have a capital gain tax, net investment income tax, and probably even adding in some state taxes on top of that, depending on where you're at. So, in that example, a 25% tax on a $5 million business sale, we're looking at $1.25 million of of taxes paid. And so, the goal is saying,

how do we keep that million million dollars plus in this example? How do we keep that on your balance sheet working for you rather than having it sent to the IRS? And and what I would say is when money leaves your balance sheet, you never get a chance to make money on that money again. It's gone. So you sell for 5 million and you pocket 3.75. That's a million dollars gone and you never get a chance to make money on that. So, if we can keep that money working for you and compounding into the future, what type of what type of impact can that have for you, your family, and your community, and that's what we want to see happen. Yeah. Now, depending on timing and depending on how we do that, we might not be able to mitigate 100% of of the gains. We might not be able to offset 100% of those gains. again, timing, value, and some some deeper conversations around uh the structure of of that direct indexing strategy we talked

about, but we can we can recoup a lot of those taxes for you and and put them to work so that they're on your balance sheet and not in the IRS's pocket. Yeah. The the main takeaway from that is like we've done we've done a dozen of episodes uh on the show so far talking with experts like you and obviously we've got a pretty decent network with Reserve Wealth Group with adviserss and and stuff and the main thing that I hear all the time is is access to specialists in different different aspects of their business on the legal side, the accounting side, the financial advising side, even the uh the bro broker side if you want to sell your business. It's like one person won't do it all. If they try to sell you on that, like run the other way and then find those specialists, right? Find a company that can help you place and stuff like that, like people, someone like you. And coming back to what you said before, the reason why

that advice is so prevalent is like there's a lot of paradigms in our mind that we have to overcome before we can even like entertain the idea of some of these tax reduction strategies. So, if you think about it, me as a financial planner, when I first heard about these, it's going that can't be done. No way that's possible. How would that even work? And now we see this mountain of of learning and research and understanding and and cross- refferencing things to make sure it works. And so, when a CPA sees that, again, it's like, can't be possible. No way that's possible. And they and you know, they throw out silly questions to me because they don't think it works like that. And the reality is is personally speaking, I think that those walls are built up by other trusted professionals because if this works, how many other people did I let go and follow my old advice that should have been doing this? And that's hard to overcome when you go, wait, if if

if Tony's able to help this guy save over a million dollars in taxes, well then I let Bob, Joe, and Jim off the hook in the last three and five years because because I told him to pay the tax and move on. And I didn't know that was even possible. And it's hard. I don't want to call it ego. It's just it's just the nature of how we build and protect and think about our professions. Yeah. And we call it the licensing gap that we believe is is the issue. It's like for you, Tony, like we're not going to ask you to I'm not going to ask you to file file my taxes every year, file my tax return or do my bookkeeping, right? It's not your specialty. You're not licensed for that, right? So it's the same thing as asking the the kicker at the Super Bowl to to to start being the QB, right? It's not going to work. Um and some somehow like it and in and when you put a sport

analogy, it makes so much sense. When you put a an hospital analogy, it makes so much sense. You're not going to ask your general doctor to do your heart surgery. Like that makes a lot of sense. But for some reason in finance, it doesn't it doesn't make sense. You have that one guy that you started with when you were making less than a million dollars a year and then you stuck with that person and he gives you the whole advice on everything or they they keep you in that box from what they are licensed to advise you and anything outside of that, they're not speaking about it because they don't want to get in trouble, which makes sense. So it's it's on your responsibility to seek out, right? seek out and see how you can get that help. And and even what I've learned is like this there's there's no monopoly on somebody that has all the good ideas. Like I have some great strategies that I'm proud and I can really help reduce taxes,

but that doesn't mean I have the monopoly on all of them. There's plenty there's ideas and things out there that need to be vetted and explored. And it just that's just how it is. It's like there's no one silver bullet. There's no monopoly. There's a lot of these different things that work. And I'm just I'm grateful to have a couple of those tools in my bag to bring to the table to help business owners when they have the biggest financial event of their life. That's so interesting. And uh you talk about three ways to handle uh those capital gains. Uh you were saying to the the defer, reduce, and eliminate, right? That most business owners don't even know you can do anything beyond just pay it. So break down what each of those means like in plain English. So when we think about deferring that capital gain tax, that first thing I described to you was saying let's reinvest that portfolio um and in an ideal world as we as we're just bringing the the

blunt strategy to the table. We would want 12 entire months uh the full calendar year I should say January to December to have that investment working for you generating losses to offset the gain of the business. If we do that right and we have a couple of those right strategies in place again depending on the amount um we might be able to get 30 50 80% of those those gains um offset if that makes sense but as I said before happening at the same time is that the portfolio is still growing and we're not selling the winning investments inside of that portfolio. So, we have the losses that are incurred now, but the portfolio that we invested in still has winners working for us. That's nice because our net worth is growing, but there's also a tax liability building when we invest in a stock and it's growing along the way. So, the first thing we want to do is reduce or eliminate the current, defer that current tax, reduce it, but but what we're

doing is now creating another tax along the way that's getting built up because of our investments are still growing. And so the next step is saying, okay, what capital gain strategies can we use to slowly get money out of that portfolio over time that has gains built inside of it and continuing that strategy over a handful of years. Um, you know, creating capital gain losses isn't just a one-year event. That can happen multiple years in a row. So, if we can slowly pull money out of that investment portfolio with the losses that are incurred year over year over year, that's not only going to help us with the year one large capital gain event from the sale of a business or maybe sale of real estate that you've owned for many years, but then when can when those losses continue to build up over time, we can use those losses to offset the gains that the portfolio has. And that's the goal of what we want to do. And then potentially the portfolio may stay

invested and uh you may own it for the rest of your life. You get a step up in basis. You may slowly dribble the money out of that portfolio to to take money out in a tax neutral event. Um and so that would be some of those things that we would want to explore over time to help us uh reduce defer and then eventually eliminate. But it does take strategy. It's not just a silver one-time type of thing to say the capital gains is gone. First we take care of the capital gains in year one and then we slowly diminish that over time. No, absolutely. And one thing I'm trying to do as well on these episode is trying to extract as much tactical advice as possible and and just educate the market, right? Because you need you need a professional to implement anything. This is not tax advice. This is not financial advice. This is education and you need someone professional to implement that. But I think before getting something implemented, you need to

understand it. Um, so without turning this into obviously a tax seminar, give us some give us some strategies that you've used for for for other business owners in the US, like what are the tools available for people like me um who's who's selling a highly appreciating asset? What are the most impactful ones that most owners never heard of before? Well, the ones that we heard of is what I described in in and step one of that is is what we're familiar with called t uh direct indexing, okay? instead of buying instead of buying an S&P 500 fund, we're buying the 500 companies individually. Where the real real tax impact is built on top of that is a strategy that there's some real specialty firms in that come along and use um uh long short tax loss harvesting strategies and and that's when you sell you sell the loose the the the losing stocks. So each individually Yeah. And so what in essence what they're doing is not only do we have the base of the

portfolio, whether it be a Russell 3000 or even a bond index, we can we can tweak the risk on it. Just because we're generating losses, it doesn't mean it's a high-risisk investment. Um but then what we're doing is building um long and short positions on top of that portfolio. And that allows us to really leverage our money in a way where we can get two to three times the dollar at work for you. And when we have more money at work, there's more gains and there's more losses. Yeah. And when we have more money at work and there's more gains and there's more losses, those losses are amplified to help you in that year one of the event of the business sale. Got it. Okay. And so there are specific investment strategies like the one I just described to you. It wouldn't be a suitable investment for someone putting money in their 401k. Yeah. the investment objective doesn't align with with a 401k investment objective. This is a this is a this is an investment

strategy that the goal is to economically grow your money. That's the first foremost goal is saying we want to grow your money. The second goal is saying we're doing this in a way that naturally has loers that come along with it. And those losing positions are what help us create losses and those losses by law can be used to offset other capital gain events. M and I guess that's the difference between like for example just investing in a in a Vanguard ETF of like the NASDAQ you just instead you find financial professional that can help you pick the stocks individually so that you have more flexibility in playing with the capital gains and capital gains losses to offset some taxes right I've never heard of that that's really smart and this is this is a separately managed account and so what that means is it's it's Joey it's specifically in this example it's your account you're not you're not part part of a fund with everybody else. Like they're taking a look at your specific

account and and choosing to keep the winners and letting those continue to grow and then individually plucking the losing investment positions and building losses along the way. Yeah. So, for example, a client that we worked with is, you know, getting a business sale that was happening in two different tanches over the course of a couple years. Okay. When we met, it was too late. I mean, not too late, but the first trunch had already been um realized its gain, and then he was like, "What do I do about the second one coming through?" He felt he felt the pain on the first one and knew another and knew another $5 million was coming in. And so, we took the the existing money that he had already been paid out on and put it to work in this strategy. So that next year when his gain is paid out, we've had these losses been built up for a couple years and they're carrying forward each year. So he has this large loss carry forward that can

absorb the gain of the next trunch of the business when that gets paid out to him. So, like if I understand that properly, so let's say for again easy number, you sell your business for $10 million um and you've got you've accumulated $3 million of uh of losses. So that means you're only going to be taxed on the seven instead of the 10. Exactly. Exactly. Exactly. And at a 25% rate, when we start thinking about 25% tax rate and it saved you $3 million of of gain, that's $750,000 still in your pocket. Yeah. So again, it depends on timing. It depends on the amount of of gain that we're trying to work with. We may not be able to get clean up all of the gain, but we can there's some and in some instances we can if we have enough coming back to what you mentioned at the beginning of the episode, if we have a couple years and some liquidity to put to work to start generating losses, yeah, we can have enough

losses generated to help us offset that gain down the line. That's so that's the type of thing that the quicker you start the the better it it will be. That's really good. We uh in terms of other strategies, right? Like on this show, we've heard a lot about obviously life insurance and how the the wealthy just buy more life insurance and it's kind of a misconception that people have that I'm like I don't need to they don't they don't see it as a as a as a wealth asset. They see it as oh like okay a life asset. Um, is that one of the strategies that you use for that specifically or not? Yeah, we do. So, um, you know, any great financial plan is is is a combination of tools that we bring together. So, what I just described to you with the tax loss harvesting methods, like that's great. It's a great tool to help us in there, but it's not the only answer to someone's financial world. And what we have found

is that life insurance is one of those tools that's a great answer to someone's financial world. Um, you know, most business owners when they sell their business and it's a $5 million or $10 million exit, but whatever you have it, um, at that moment in time, they're under some estate planning considerations. And most people say, "I got $10 million. I don't need to have life insurance." It's like, that's a fair point, but you would want to have it. And you want to have it for all the benefits it can bring to you in your lifetime. Most investors are out there, you know, taking a taking 20, 30, 40% of their portfolio and putting it into a bond position of investing. And and quite frankly, that's a safe prudence investment strategy, but I would rather have, you know, with some of with those I walk with, I would rather have the bond portfolio of your investments actually sit in the cash value of a permanent life insurance policy. Over your lifetime, they're going to have similar

type of returns. And then we have an umbrella of protection of death benefit that comes over top if some not if but when something happens to you. And so those are just the simplest methods to stepping in and saying why would I want to own life insurance if I have this big pile of money. And it's to it's an asset protection strategy rather than a I have young kids and I need to have life insurance because if they pass away if I pass away they need to go to school. If you have $10 million it's like there's a lot of money there. I get that. But the benefits that life insurance can bring to you in your lifetime are a reason why most people I walk with want to strategically reposition their assets into into life insurance companies. They pay good dividends. They continue to grow. It's a safe asset. And we want to continue to harness the stock market, but not all of your money is going to be invested in the stock market.

for the safe money that we want to invest, let's put it into the cash value of a permanent life insurance policy and have it protected and growing for us. Yeah. Because you have guaranteed returns, right? with uh with those policies. the the biggest benefits that I see right when I think about that the the the life insurance is the um it's it's kind of like any other it's an asset like real estate for example that whenever you need the money you can take you can take loans from it and and use your money cash uh taxfree and I guess that's one of the strategy you can take out take out money from your business right uh since you're making those investments with your business but what happens when you sell the business though that that was my question what happens when you sell the business and you've accumulated this whole life insurance with business money and now you don't have the business anymore. Do you keep it? Does the other owner takes it? Like how

does that work? Honestly, honestly, I if I'm the boner, if I'm the owner of a business and I sell my business and then I still have my life insurance policy alongside of it, if I've used some of that cash value to help me grow the business, let's say I borrowed some money out and invested it for an operating line of credit or for business real estate, and now I have this big influx of of cash because I sold the business or sold the real estate. I'm going to put that money back into my life insurance policy. I want it back into my life insurance policy as a safe place for me to continue to have that money grow and then have it be easily accessible. One of the things I've learned with with many business owners is when they sell their business, there's a couple months of like, oh good, no stress of business. I'm good. Then like they start to get the itch again and they go, what am I going to work on

now? And so when you sell the business, we want that money back in your life insurance policy because it's easily accessible for that next endeavor if that's something that's that's coming around the corner. And if it's not, putting it back into our life insurance policy creates that safe part of our investment portfolio because we're getting guarantees from the insurance company and helping us to continue to grow the money. Some of that money should be invested in the stock market and continue to grow and um and potentially use in some of those tax loss harvesting strategies, but but anything we want to have we want to have a good chunk of your money in a in a safe guaranteed asset with that protection that goes along the way with it. And then it's easily accessible for those next endeavors, too. I see. No, that makes sense. That makes sense. And also one thing that we've talked about a bit offcreen is uh that you also work on ordinary income tax reduction, not just capital gains. So

break this down a little bit more like for a business owner who's making great money every year, six, seven figures a year personally, like what are the biggest blind spots on the income side that's costing them a lot of money? Well, it it helping reduce those um you know, you can do that one of two ways. you can put that towards an investment that um your contribution helps lower your income taxes by way of money. You know, we're maybe familiar with that 401k plan or a defined benefit plan. Your contribution lowers your income tax due in that current year because it's a deduction for you. And then there's other investments that um I'm going to keep it on a high level today that you can reposition your assets that just like I described on a capital gains method um these investments that that are available for um I mean for people with good liquidity uh with with the the high net worth space um those investments then create a loss that's deductible against your ordinary

income rather than your capital gains. And so just like I described before where we can reposition money to create losses and those capital gain losses can u offset a capital gain event. There's similar type of strategies that when you put your money into the investment, it's creating a loss that gets passed on to you in an ordinary income loss. And it's just the awareness and understanding that those types of things exist is saying and it has to fit well with you. There's a little bit less liquidity compared to what I've described before. And so there's some of those considerations that we would want to take into account of putting our money in investments that um may not be able to be readily sold at the end of a stock market day. Um, but the tangible benefits are it's still growing for you and it's creating losses that get to be deducted against W2 or K1 type of income for um for business owners and high high earning professionals. Yeah. So, I mean what I'm getting

out of this is it's really it's it's balancing and I've never seen it like this. So, thank you for clarifying that and sharing that. But it's really thinking about the losses more like as much as the gains that you're making because correct you might if you if you don't think about the losses at all like I was thinking like most business owners think um like you're going to lose more just by paying more taxes on a bigger amount right than if you were to strategically place some losses to it into it right that's really good think about it this way if we're thinking ordinary income and and um I love California I love visiting California, but you know there's the California tax. Yeah. And if you're earning the highest earning in California, you're your earnings are 50% tax rate on just about of your ordinary income. Yeah. So when we think about that, if if you have an investment that's growing for you, the your deposit is still growing, but you're getting a you're getting

a deduction of $200,000 per year that can be used against your ordinary income. Yep. That's like a $100,000 of less taxes paid in a given year. Yeah, that's a lot. And so, and so then going full circle of what we chatted about, most people when they properly understand how life insurance works and how it's not a cost, it's an asset that you're building, most people want life insurance when it's done properly. Yeah. And so the question would then be is how can we take money that you're used to sending to the IRS, recapture that back into your pocket and then use that to help build the asset of life insurance that you want. Yeah. Yeah. You got to switch the mindset from using it like the wealthy is using life insurance, not just like your the mom and pops um is using it, which is a way different like a W2 or a business owner. It's a way different mindset uh to have. Right. Correct. Exactly. That's interesting. And um one thing as well more

on the talk a bit about the key employee retention which is another other strategy right the protection and the legacy part of it. Um one thing that stood up was that protecting again key employees when a business owner is planning an exit like how does the key employee strategy fits into the overall plan and why should a business owner even care about that uh when selling their business? Yeah. Yeah. Well, let's think about it on the flip side. If you're going out there and buying a business and even just using that manufacturing example we started the show with. Yeah. Um let's just say it's a it's a it's a step above that and the owner is no longer um directly tied to the daily operations of the company. The owner has done a good job of replacing themselves, hiring people to run sales and run manufacturing and oversee production. And now that owner wants to sell the business. If me and you were going to buy that business, we're going to look at it and

say, "That guy's running the show. That guy's running the show. That guy's running the show." That's why we're interested in running buying the business. Yeah. Because hopefully we can buy the business and keep all three of those people around so that the business continues to produce and make profit like it does for the current existing business owner. The problem is with me and you potentially buying this business is that the big assumption that we just made is that all three of those key employees are going to stick around and do what they want to do. Yeah. Well, when a business sells or even when a business is put on the market and you know there's buyers out there, there might be competitors. There might be other people in there that go sniffing around and saying, "Hey, Jim runs the show over at the manufacturing shop. He might be a little uncertain with what's going on over there. what's the future of that company? Yeah, we should make a run at him to hire him. Yeah.

And so, as a buyer of a business, I want to make sure those key employees that, you know, as I said, that run the show, that make it happen, I want to make sure that they're going to stick around beyond the business owner trans transition. So, there could be some things that we want to put in place a um some sort of compensation plan that's tied to a timeline beyond the selling business owner's desired exit. Yeah. So, if the business owner thinks he wants to sell it in two years, we need to put some incentive compensation plans in place for those key employees that get paid out in five or seven years. So creating incentives for those key people so that it makes it harder for them to to to go away. Right. Exactly. Done. Right. I mean it has to be an incentive that's aligned with the key employees goals. Yeah. Well, so it's like, you know, I don't know if they have a potential retirement or potential child that needs to get put

through school or something that we can maybe uh tie a little bit more emotional connection to that to that benefit for the key employee. But but ultimately what we want is we want that key employee to stick around through through the exit the retiring business owner's exit. Yeah. That's then going to lock down and retain the value of that business when we go to sell. Yeah. Yeah. For sure. Because again, if you if you don't if you don't have any key employees and you're the person running the show, again, your valuation just tanks, right? So if you have a solid business and you have a solid valuation, that means that you do have key employees that can run the show better than you do once you get out. And if those are not protected, then your business is at risk of losing the value. So that's what this compensation executive compensation plan does, right? Exactly. Exactly. And so then um you know all those are all those are really important things to say you know

what are the what are the reasons the business is valued here. Yeah I said before it's not because the owner is involved in day-to-day the owner has done a good job of removing themselves but that still means that there's real people doing real work that we need to make sure are stuck around. Yeah, that makes sense. And okay, okay, like if I'm a business owner hearing this and that makes sense like for sure like for I need to do this. If I'm looking to sell, it's going to add more value to the business, going to protect my employees. Now, how much does it like how much does I know it's it's it's per business, but how much would I expect to to pay for that? And what is the tax because I think there's tax benefits to this as well. Like how does that look like? What's the value for me on that end? Exactly. So the balancing act is is is the key employee in receipt of that? Ideally, it's a golden handcuff that

they're in receipt of that until until that benefit is paid. Yeah. And so a little bit of that tax benefit is deferred for the business because it's not actually paid out. It's a it's a liability on the on the balance sheet because we have to pay this out in a couple years, but we actually haven't paid it out to that key employee yet until they reach that metric. Okay? And so and so it's not as much of a pure tax play at this moment in time because it's still not paid out as a direct payment to that employee yet. We're going to tie it to that vesting schedule at the end or where they where they are actually in receipt of that of of the of the bonus. But coming back to it ideally and this is where the whole five years preparing for exit and that kind of compensation comes around. Ideally, what we find is that most business owners think they're going to get more money in their pocket than what they actually

do. And Scott probably talked about this a couple weeks ago, is they think, you know, I went golfing. I went on a fishing trip and my buddy got 5 million, so I'm going to get 5 million because I make more money than him. Whatever it is. And the reality is is there's there's likely a gap between the value of the business and the financial planning money that we need in order to continue maintaining our lifestyle. So the reality is even if you could sell your business for $5 million, you may you may need to have seven or eight million of proceeds in order to maintain your lifestyle after selling the business. Yeah, that's good. Then again, the biggest thing that Scott talked about that I took away from it, he talked about the the three numbers that every business owner should know if they plan on selling, which is number one is the the the real market value. That's the first thing any business should do, even if you're not even thinking of selling. I

just know what your business is valued at. And it's it's going to be a big slap in the face that it's maybe not as valuable as it is. Like I know that for us, like I know that we have a big vision, we have a big thing, but right now it might not be as as big as we think it is, right? So that's a good first step and it also protects you against some unsolicitated offers that you might get and stuff, right? So that's one thing. The second part is the net number, right? After everything else, after taxes and that's where your your job comes into play or hopefully we can hopefully we can minimize that that gap through all the strategies we've talked about. So what's that net number? Let's say 10 million. You're going you're going to want to have that net number as close as possible to that 10 million. And finally, the third number, which is probably the most most important one and the one you have the most control

on, which is the lifestyle number. So, how much like how much money do you need to fully retired and and live off of that cell or that exit for the rest of your life? And again, most people don't do the work uh to do that. And and uh if you haven't, get the book that that Scott did. And it I I I got it. And there's a lot of workshops and and workbooks that you can work together and figure out those three numbers. So like it's again it's the team, right? You need a good financial planner, a good financial advisor like yourself that can help on the taxes side make the preparation years in advance so that you're not getting hit through taxes um and planning all of that together. So it's getting the right team, getting the right people in place and understanding. So hopefully the conversation today that we're having helps you on that end. So and even to what you said if if we can ideally what the goal of proper planning

does is if the value of your business is here we can make that net number closer to the value. Yeah. But then also if the value is here and we need to have it a little bit higher because it's not going to meet our lifestyle goals. Yeah. Then we need to grow the company a little bit. So, even going back into the key employee incentive planning conversation, if we're five and three years in front of this, we can set up those long-term incentive plans aligned with the tie them with KPIs of the business that are going to grow the value of the business. Is that something you can do on your end that you advise the the businesses on as well? We need to So, ideally, in a world where we're saying, okay, net profit for easy math is a million dollars. If we do X, Y, and Z, and we get our net profit up to $1.5 million, then the value of our business is going to be instead of here, it's going to

go up. And we can use the cash flow, the net profit growth to help fund the incentive plans that we just put in place for these key employees where we can say, I'm not going to pay you. Well, we might have to use a little bit of current profit, but ideally, we're using the growth of our profit to then pay that long-term incentive compensation. And so, the work that they're doing to grow the value of the business, the profits of that growth is funding their their um key employee incentive plan. But the reason why you want to give it to them is because it's not only growing the profitability of the business, but it then is in a sense growing the value of the business. And if you grow profits by 30% and you're a million dollar business and now it's a $ 1.3 million business, if your business gets a three or four times multiple, that's really making an impact on what you can expect when you go to sell. Yeah. Yeah. The only

thing I just keep thinking about is really assembling your your team of Avengers, right? Like if you just got that one person doing everything going back to that like and the beauty of that of that team is that if you do it properly, you're not you're most of the time not even paying out of pocket right for it because it's all it's all through the margins of what you're going to save that that business broker, that financial planner, financial adviser, the CPA can make you. So a lot of the time it's not even out of pocket that you're paying. So, why not just seek it out, right? And business owners are really good at this stuff. They like they know that they can they know that they can buy a pair of shoes and sell it for two times more. They know that they can buy the raw goods and do this and sell it for three times more. But the reality is is in the service-based industry like we are when we're helping business

owners, that same arbitrage can be received on a business owner's end of things. If you pay $10,000 for a plan and it creates $30,000 of of of increasing your wealth, it's the same thing you're doing in your business. And you can just do that on your uh on your net worth statement by understanding how to coordinate all these strategies together with whether it be with someone like Scott, an M&A guy or a business uh a CPA or someone like me, a financial planner and exit planner. I I know you meet with a lot of business owners every single week and you've got a lot of experience in the space. Like what's the common the most common questions or myth misconception that the business owner come on the call with you and and they ask you and you're like why why are they still thinking this or why do they not know this? What is that one thing that you could uh you could point on? two things that the two things that are just education

um is that the tax the taxes that you pay in the when you sell the business, they're brutal and and it sucks and if we can if we can reduce that, that's great. But even even if you pay the tax and move on, when you go and reinvest the proceeds of your business, that's creating a ton of future taxes down the line anyway. It's like it's like the taxes aren't done here. we have to have strategies that continue to mitigate the taxes beyond just this one-time event of your business sale. And so, it's like there's so much attention and effort and and welld deserved of getting to the hump of selling the business and reducing taxes and all that, but we get to that point in time and then you go, "Oh crap, now I get these massive 1099s from my investment portfolio and I'm still paying a bunch of taxes along the way." So putting strategies in place that say help us with the the big capital gain event, but then let's put money

in in positions where it's reducing taxes or helping us spend our money with the least amount of tax possible after that. And then the second misconception that I see a lot is just the value of a business and the market that's there for their business. You know, I go back to that manufacturer that I shared before. Um, it ended up being someone local that bought it, but he had to go through a lot of cycles and a lot of word of mouth and a lot of things out there that I he had a really nice business and his ego was hurt a little bit when he realized that people were passing on it and just the market of of who's out there for your business is um it's interesting. So hopefully doing some of those things that I I imagine Scott mentioned of of removing yourself as an owner from the operations, getting your books cleaned up, hiring people to um uh to to to oversee things and get yourself out of the operation is

a big deal. And I guess that's also the beauty of business. It's that it's there you're you're I don't think there's something in life that gets you closer to reality than business, right? Like the market will tell you very quickly if what you do is good or not, right? And uh often time you you have that big ego the the founder uh you've never did you never done that before so you think that oh it's way way more than than it than it actually is. So that's a good first step as well. Um, no that's good. And and again making making it super tactical for for this episode all this conversation was super educ educational but if a business owner is watching this and again they said okay that famous fiveyear play plan to sell um and they haven't started planning anything about tax strategy around the sale. What's the one move that they can make this week to just start or get or or get closer to a good established plan? Well, just like

you said, even come back to the the valuation. We have to understand where our valuation is at because that's going to drive what tax that we're trying to work off of. And then from there, we say, "Okay, so now we have a valuation and we and we want to tackle this. Let's take a look at your full financial picture because there might be assets that you already have that need to be repositioned or reinvested to optimize your tax position for when you go sell that business." So, it's it's saying, "I I got the value of this business and it's really well." But if you have other personal assets that you've built up over time, or maybe you you've inherited a little bit of dollars or you've sold a different real estate portfolio and that's sitting in investments for you, we need to take a look at how that money is working and to say if we can put that money to work to prepare ourselves for the business sale, that would be ideal so that

we don't have to do a mad scramble of timing and work once that business sale closes. So, so tactically we need to look at like the the entire financial picture to figure out what we can do with that. And then you know there are methods for selling a business on a contract sale or some of those things down the line. But that's in a sense a little bit risky because you're not getting the money in your pocket and you're hoping that that business can continue to succeed without you there. If that makes sense. um that I mean that helps ease the pain of taxes over a handful of years and you don't have that blunt one-time tax trauma. Um but that's not ideal for many people. They want to take that money and be done rather than I got 20% of my money and I'm hoping the next 5 years the business continues to do well so I can get a little bit out of time. So ideally we're working 3 five years in advance

to figure out how to position our current assets to prepare for that sale. That's extremely valuable. So, I mean, I think Tony, that was a very good conversation. I want to thank you for being so so open and a lot of people are not willing to share that knowledge and and they're hidden behind a like we said at the paid wall or gatekeeping. So, this is exactly what we want to do on this show. So, thank you and we're super grateful to have you on. Uh so, I appreciate I appreciate your time. Yeah, appreciate it too. I have one more question to ask you which is something we ask all the guests at the end of the episode which is again Tony, you grew up in the industry, right? your father built his own financial strategist practice. You now co-ounded your own firm. Um, if this episode outlives all of us, which hopefully it will, um, what's the one lesson about wealth and planning and tax savings that you would want every business owner watching

this to take away? Um, I said it before and I would say it again. When money leaves your and I would say when money leaves your model, when money leaves your balance sheet, you never get a chance to make money on that money again. When you send money to the IRS, when you purchase something, that money is now out of your control. It's gone and you no longer get to make money on that. So, with the, you know, with the conversation being held around taxes, how do we plan around taxes? If you're paying a 50% tax rate like in California potentially, that's a really big return on that money that's saved in your pocket. And now if you get to save that money in your p pocket and it continues to compound for you in the future, that's a lot of growth and wealth that can be created by reducing what gets paid out if you can. And the reality is is when it comes to taxes, there's a lot of great ideas out there.

There's a lot of bad ideas out there. um and and just working through to vet what works for you and making sure you have that team of people around you to to coordinate with it. That's so good cuz I think uh from all the conversations we've had like and I've got with other other guests the all the every single time you think you've done everything you could is always more things that you could do, right? So getting some second opinions, third opinions, fourth opinions um is often times free, right? and uh like you're you're just you're just hurting yourself if you're not getting those. So that's that's very good. So making sure you limit the amount of money that goes out of your pocket, right? So that you have control over that's that money to yourself. Exactly. And then the best part about it is business owners, the reason they're in business is like it's a high growth, high return type of endeavor for business owners. Exactly. So, if you had more money in your

pocket just to continue to use as fuel to grow your business, like now you're really starting to accelerate your wealth. 100%. 100%. Tony, was a pleasure. Thank you so much for your time. Um, if you if you guys enjoyed this uh enjoyed this podcast, all we're asking in return is to subscribe, like the like the episode, share it with a friend that might get value from it. Uh, we're not asking any other thing in return than this. And if you have any questions for Ton or myself, drop them in the comments. We'll be more than happy to answer very quickly to give you the best advice as we can. Other than that, we're dropping episodes every Monday and uh we'll see you guys next week.