E175: Financial Advisor Tyson Ray Discusses the Importance of Exit Planning for Business Owners

[00:00:00] Ronald Skelton: And welcome to the How2Exit podcast. Today I'm here with Tyson Ray. He's a founding partner of FORM Wealth. Thank you for being on the show today, Tyson. 

[00:00:07] Tyson Ray: Yeah, I appreciate you having me on. 

[00:00:08] Ronald Skelton: It's funny. As I was looking at your profile beforehand, I was like, you know what? Why haven't we had more financial advisors on here?

Almost every conversation with a business owner starts off with, have you talked to your CPA and have you talked to a financial advisor? Mainly because we were talking before the show, the concerns that, this isn't going to, a lot of people see the number on an offer, an LOI or something. And they think, you know, Oh, I'm getting $4 million and they don't think, well, there's taxes and legal fees and all this other stuff on their end that comes out and the net to them is much smaller and can, can they, or can they not retire on their, how are they going to, what's the plan to use the money and do with the money?

So I was, it was kind of one of those things. I've interviewed 180 people and I thought, why haven't I talked to a few more financial advisors? So that it's going to be fun today. I think we're having a great conversation about what can they do prior to sell. What to expect during that process.

And then, you've got a book coming out. We'll talk about that and stuff. So thank you for being here today. 

[00:01:07] Tyson Ray: Yeah, I appreciate you having me on. I think I'm trying to get a message out to my industry that these financial advisors need to stop selling last week's lotto numbers for a fee and start focusing on a bigger picture because they, we definitely can add a lot of value if we start looking at a, a total relationship instead of a transaction.

[00:01:26] Ronald Skelton: Yeah, I get that. How did you get into the space? I always kind of joke, the running joke on this, uh, the show is, you were born and now you ended up on a show about mergers and acquisitions and buying and selling companies. Could you fill out that little gap in between, right? 

[00:01:38] Tyson Ray: Yeah, yeah. I mean, the short version is, I grew up with an eviction notice on the refrigerator cause dad's business went under.

So I saw what that looks like when, when that doesn't work and, got into financial services. And when I did, I actually at the age of 26 bought out my senior partner. And so I kind of did my own transaction and then I proceeded to buy out four or five more, within my own industry and that was unique. But I started having clients that were going through the transaction and I was watching them struggle with, how much and how does that work within the plan and trying to catch up to where the attorneys were or weren't. Or realizing that the client wasn't really understanding the attorney's legal language or the accountant's accounting.

And I finally had a transaction where I had ended up injecting myself in a scenario where an eye doctor was selling it to his junior eye doctor. It was always the plan for the decade they worked together. They just never really worked the details out. And then we got to the rubber meet in the road, they weren't in agreement. 

The relationship was struggling and I cared so much. I started working with both of them and I realized, the space of sitting down with them together. Working out what is their arrangement while at the same time working with them individually and they're planning to figure out how it works for them individually, bringing the spouses in and working out the fears that the spouses had about each other and the transaction. We put the whole thing together.

And then I let them go off into their ways with their separate attorneys and then watched months of legal ease go back and forth where we all of a sudden, I realized again, attorneys were doing their job representing the best interest of their client, but quickly getting away from the agreement that we had. Which I kept reminding the clients from the beginning.

The agreement means you're not going to like it because you have to agree to something. Like you don't get everything you want. That's not how this works. And it took me finally calling the attorneys back in to gather the two of them and telling them to knock it off. We had the agreement. You guys are now taking it different directions and it's not cost effective.

And the outside of coming out of that, that solution that ended up happening, I sought out and actually got a certification and exit planning back. I think before the industry started picking up on why advisors should even be involved. And since then just feel especially that that's just a missing area where an advisor can step in and help bring a lot of insight to whether the business should be sold, how it should be sold, and not necessarily have to get out of their space. I think there's expertise for attorneys and CPAs and business valuations and brokers and all that space. The reason I wrote the book is to try and teach advisors.

There's a total relationship that, that, that needs to understand, that the advisor has the opportunity to understand. The estate plan and the spouse's needs and the family needs and how that business is structured and the employees and all that goes into the emotional part of the decision that really in the end of the day is what makes the decision and then how the numbers back into that.

And so that's why I'm excited about being on your show and just trying to help educate the clients on what advisors they need to seek out and help advisors realize a space they should explore and get themselves into for helping more people do these transactions. 

[00:04:43] Ronald Skelton: It's interesting. You hear people all the time.

Like, Hey, I've decided today to sell my business. It's like, cool. In five years, we'll, we'll get it done. And they're like, what do you mean? I was like, selling a business isn't an overnight thing, right? There's a, the financials and the accounting practices and everything else had to be shored up and you're trying to maximize certain numbers.

And, historically you've tried to minimize taxes and maximize what you get to pay yourself. And, without having to, you know, drive taxes to the roof. And now we're looking at how do we maximize the numbers, the seller discretionary earnings, or EBITDA, depending on how big you are and get the most valuation for the company.

That just takes in this instant yourself from it, right? There's that model, you know, where you're not the key operator inside of the company. So for most people, they should start looking at exit three to maybe five years prior to the, when they really need to sell. What do you see as an advisor when they should start talking to you?

Is it earlier to that? I mean, my mind's like, a year or two before you decide to start doing the exit plan, but what's the, what's a safe zone where somebody could go, Hey, in the next X years, I'm probably going to sell this thing. What do I need to start looking for? 

[00:05:59] Tyson Ray: Yeah, we, we think that, it's true for clients that are retiring as well.

And cause selling your business often as a transition into retirement. We are ideally, we'd like to catch you five years ahead of time. And the hard part is, is everybody, uh, for forgets how fast time passes, rigHt? And, uh, and later becomes now, as I like to say. And the shorter the timeframe gets, the less options you have, the more of a crisis you put yourself in. And part of the five year window, uh, in, in quite frankly, within our practice, our clientele, we're, we're having that, you know, you're starting the business. We're having the conversation what the exit plan looks like. Because when you start the business or you're getting the business off the ground, or you're in the first decade of your business, your exit plan also needs to take into consideration the catastrophic loss of yourself.

Or the longer out you are, the more time you have to help the business. Don't want to realize, Hey, you're doing what three or four jobs are for someone that's going to take this over. And how do we need to start backfilling some of those or, or accounting for some of that. Because yeah, you're taking this income in from the business, but that's really these three, you, you, you don't realize you need these two or three jobs that you're doing.

Whether it's sales or finances, uh, or just the visionary or whatever. And then the other, the biggest part I come into is the struggle of the business owner's identity. And can they let go of the business and do they want to let go of the business? And can they let go of the business?

The best planning is that is the, that happens day one and early on is trying to get the business owner to be realistic about getting some of their wealth out of the business. To remove the, I have to from a sale over time. To I can, or I should, cause it's the best for the business, but, uh, there it's just a wonderful opportunity and it's so, it was, I got bored a sense with the, with just the standard here, mom and pop are gonna retire.

They got a couple million bucks. We're gonna help them pay off their debt, live happily ever after. And did a lot of that. And I'm a student teacher, so I like to learn new things and then teach it. And, uh, man, I thought, well, I want to challenge. So I got into business exit planning and like that's Pandora's box.

Like that is the epitome of financial planning if there ever was one. And the biggest thing that's the, you know, the emperor asked no clothes is what I like to say. Cause at the end of the day, I'm realizing, it's not, there's a total marketplace from probably your mom and pop business to probably $25 million of valuations that the entire industry, the trust companies, the law firm, you know, that that's underserved your mom and pop shops are underserved effectively as far as the planning goes.

And I assumed incorrectly that the bigger the business, the more they're served. And what I'm finding is, is that I recently was doing, or coming alongside a family. And the valuation is you know, 150 million. This is a substantial company. And loyalty fatigue and relationship where everybody kind of grew together.

So everybody assumed this stuff was done. So when I started showing up and started asking for just signed documents to find out, they can't produce the signed documents. They have drafts, but for whatever reason that never got back to no one can find them. Or that the second to die life insurance policy that was going to solve all the estate taxes.

They didn't realize the fine print from the trust company that was saying it lapses at age 80. And it's like, well, wait, what are we doing about that? Uh, and so again, there's just this wonderful opportunity for the financial advisor industry to realize the need and the opportunity. However, it comes with having to learn some things.

And it also comes with, this isn't fast. Like this isn't, I can't sell this today. This is a relationship. And you can make it in, you know, if you're passionate, which is mine, is to make people's lives better. Holy buckets. I mean, there's nothing better than helping that transition of the business, the family, the employees, the clientele, the community that benefits from all that. But it's a long road.

[00:09:47] Ronald Skelton: Yeah, I get it. And you're kind of flipping the script because in my world, often the financial advisor, is a part of the problem and not part of the solution. I'll give you this scenario. And it happens more often than I want to admit. But, uh, a financial or a business owner, you know, happens to have his monthly, quarterly, whatever it is, call with the financial advisor.

He tells them, say, Hey, really thinking about selling this company. I know I've got a good investments out there. I'm wanting to do X, Y, and Z during retirement. What does it look like? And that financial advisor maybe spends a minute, maybe spends an hour, but comes up with some numbers as you know, well, you need about two more million in your, in your, account and then you'll be, you'll be able to require exactly, you'll retire exactly what you want.

And then what happens is the business owner takes that to a broker, he starts calling brokers up and go, Hey, I want to sell my business. I think it's worth about 2 million. That's what my, my financial team says it's worth. And they just, they, they impose the number. And unfortunately most brokers in most States that I'm going to pick on brokers for a second, have no barrier to entry.

There's no license or requirement period. Like I'm in California, even though there's a license requirement, you just have to be a commercial real estate broker. And is absolutely two different worlds, right? Unfortunately most of 'em will go, well let, let's, let's do our best and see how we can get you there.

And then they try to massage numbers, tweak things and stuff. And then, you know, a lot of 'em will take the listing knowing that it's not worth two, it's worth 1.2 or you know, or some number. But that realization will come after it's set on the market for a while and the owner sees it doesn't sell.

So. There's a lot of properties are a lot of, uh, uh, businesses out there that are listed in the initial phase way overvalued for, for that reason. And when you get down to the story is how did you guys come about that number? Well, that's really, really needs to be to retire. Okay. Who told him that?

Well, he called his, a financial advisor and he's that much short in his retirement account to, to live up to his plan. It's like, okay, well that has, that's neither, that gear is not part of this machine, right? It has nothing to do with the valuation of your business. It's an external need that, you know, maybe you need to work on the business a little bit to get it up to that point.

So it will be. But, uh, yeah, there's, there's a problem there. So I love that as a financial advisor. You took an exit planning course or training. So now you see the inside of that world and that gives you a new perspective of is, isn't just, okay, we need to get this person this money so he can retire a while.

There's a process for that business to be worth what he needs to make his retirement work. And you can uniquely com, you know, have that conversation. I think it would be a very good thing for any financial advisor who has a bunch of business owners as clients to do what you've done. 

[00:12:41] Tyson Ray: And there's, there's two things I say that you can get your driver's license, that's getting the license. That doesn't mean you're a good driver. And, uh, so in one of the core tenants of our advisory firm at FORM, FORM Wealth Advisors is brutal honest truth. And in the total relationship book, we talk about one of the, one of the, one of the molds of the industry that I want to break.

Is this, this appeasement that advisors give their clients. Cause at the end of the day, what really the back, the problem of your example that you're sharing, and it's true of a lot of small businesses is that they're, they're taking so much out of their business and spending it in their lifestyle.

They didn't build the wealth that they need to be able to retire. And they're now in this scenario that they want to sell their business, but they can't sell it for the cashflow it generates for them. And so their only exit plan is to keep running the business. They don't want to run anymore. And then you can't afford to hire the employee to take over the business because your lifestyle, it's just, and what happened, the advisor all along the way was just like, yes, you can, yes, you can.

Cause you're not touching my advisory assets, right? You're taking it out of the business. And that's where the total relationship needs, the advisors need to see a bigger picture, to make a bigger difference. Instead of fighting over the scraps of what is their investment account or what's the 401k or what, or what, what, how much do I get of the money that you have?

And what I found is, is that when you start with the business, especially in business exit planning, you start with the business, you'll end up with everything. Because you become that trusted advisor and consultant and everything comes into the play. 

[00:14:13] Ronald Skelton: Yeah. And a lot of people don't understand, what's all in that business, right?

We had a financial advisor come into the conversation. Uh, the owner brought him in. The way we were in the negotiations, we were the business required cash to run. Part of the acquisition, we're like, okay, we need at least 90. I'd like to go to 180, but we need 90 days, uh, cash left in the business to operate.

And the advisor was like, no, that's going into his account. And it was like, he had no idea that, you know, that is a very standard practice. 60, 90, even 180 days with the cash is left in the business so that it can continue to pay payroll and buy supplies and fulfill on contracts that you know, it already has.

And, uh, if you're going to play the role of financial advisor to an entrepreneur and you don't understand the business world, it's illogical to me because that is such a huge part of that person's life, right? 

A business owner takes that job with him or that company with him everywhere he goes. 

So there's, it's still always a big portion of our mind time or our mental capacity. And if you don't get that, you might not understand that, you know, what you're talking about that, the identity tied to it, somebody can spiral pretty quick after selling a company.

It happens quite often. It does. Right. They basically get a lump sum of cash. They don't know what to do with it. Uh, they think they need to live on it. They think they want to invest. It's a, now it's real. They're either retired or they have to pick out something else to do.

That money either has to go into something that's long term or short term, depending on the one of the two. It needs to be something that will give them a steady payment if they're retired. Something, or, you know, keep that chunk safe for probably earning something if they're looking to buy a business in the next two or three years.

Cause a lot of, that's what happens. Even some of the 50 something year olds. They sell one business cause they are kind of done with it, but they're just not done totally. Yeah. They're going to go buy something, uh, interesting, fun. 

[00:16:11] Tyson Ray: Unfortunately, some of them sell something that's perfect and buy something that's broken.

[00:16:16] Ronald Skelton: That happens. Um, there are some of us that think we can fix anything. 

So, but going back to you know, this whole entrepreneur spirit, spirit and stuff, buying something that's broken or not highly functioning can either be a win or really bad decision, right?

In your case where the owners like they'll buy something that's not working, if it's something they fixed 100 times, there's a good chance they can turn it back around. But, uh, I don't do that. I'm, I'm 51 years old. I'm looking to buy things that are well run. 

[00:16:50] Tyson Ray: There's enough businesses out there that people want to sell that are fine. You don't need to buy the broke, let the broken ones break and then buy the pieces. It's cheaper. 

[00:16:58] Ronald Skelton: In the beginning I started like, you know, what's the, you know, I started like everybody else. What's the SDE, what's the EBITDA, you know. Now I'm just caring on I'm more interested in, okay, what's the steady cashflow?

[00:17:08] Tyson Ray: Well, the hard part too, though, is that when you, you know, the hard part for the entrepreneur is to figure out at what point do you want to be, well, it's first to find out, do you even want to be retired? Does your spouse want you to be retired? Does your family want you to be retired? Because that's a constant stress of the entrepreneur wanting to go and conquer the next thing with the whole family pulling him in the other direction.

And part of the role of a financial advisor is once that final sale is done to the extent we want to go and retire, is to really protect the entrepreneur from themselves because we can't take this capital that you're supposed to now live off of and subject it into payrolls and risk and recessions and COVID again if you're actually going to be retired.

You know, it's one thing to go play in a business for the fun of it. It's another thing to risk your family's livelihood and the legacy of the successes that you've had. At some point, you have to either, you hang it up or you keep it till you're dead. Uh, and some people get to choose that, which is part of the plan, which that's fine.

You can do that. You plan for that. And that's again, where I don't find attorneys or the CPAs, they're not wired relationally necessarily for the, for the educations they have to have. Focus the details that they have to have and the gifts and skills that a business owner needs. And that's again, where the psychological part of decision making and planning is where it's right for the financial space, but the industry has been taught how to sell and peddle product for so long.

And our differentiation is somehow I perform better in the past, instead of helping fix your future, which actually we can control that. I have no idea what the markets are going to do, but we can, we know you're going to exit your business. You're either going to die with it, or you're going to sell it to somebody else. It's one or the other. What's the plan? 

[00:18:42] Ronald Skelton: Yeah. Yeah. 

Eventually everybody, there is a succession plan. Either, either you're planning, planning it for yourself or, uh, the good Lord or, or whatever you believe in is doing it for you.

I've met a few business owners where they got a great business, got them on the phone, I'll give you a good example. There's one in Oklahoma. they make a great product. They're in stores all over the place. The wife wants him to retire.

They built a beautiful house out by the lake. A big, you know, 700 K home, which is huge in Oklahoma, overlooking a beautiful leg. And he never goes out there cause he's still running this business, you know, 30 miles away. So she's really keen on him retiring. He's back then he was 70 something. I think he's probably close to 80 now and I got him on the phone and I had known him a little bit.

He offered to be a, an investor to buy, you know, when we were buying houses. Basically be a private money lender. His terms are a little steep, so we had better money, so we didn't use his. So I'd met him once or twice. Took him, taking him to lunch, uh, a couple of times. Good guy. When I get him on the phone, he's like, why would I retire?

All my buddies died within two years of being retired. You know, like I don't play golf. I don't do anything. I, I wake up in the morning, I come here and I run this. And I was like, well, you're going to retire at some point, right? You know? And he says, yeah, not from the business. I know it sounds horrible, but, uh, I'm gonna come sit in this office chair until I can't get in it.

And uh, I was like, cool. Now what happens to the business after that? Right. You know, cause his son was working there, but didn't want it. His son comes and goes as a sales rep for the company, but nobody else. We didn't have it, he didn't have somebody who was going to be there on it. 

And I was like, at the end, I was like, do your family a favor, pick somebody in that company, a general manager or something, and put him on the signature cards for the bank accounts, put him on the payroll software. Enable him that in so many trust, but enable that person that if you end up possible, it's a hospital, hospitalized or something like that, that that Friday payroll can be made because he can log in and do it.

[00:20:43] Tyson Ray: The codes to the safe, where the key is that opens, whatever the heck, all of it, somebody. Yep. 

[00:20:49] Ronald Skelton: I seen a beautiful electric commercial electric company when we first got in the space that got totally destroyed. They were doing, I want to say, had I did the math one day off the back of my hand because I looked a couple smaller commercial electric, but they're competitors actually. And based off the number, I think they had 26 trucks.

I think they were doing seven, seven to 11 million a year. They had to have been because they were, they were booked. Like they were, they were one of the bigger ones in town. Um, husband and wife, uh, owned it. Uh, wife pretty much has stepped away years. Didn't know anything about it anymore. Husband dies of a heart attack, massive heart attack at home.

Right. Nobody could cut payroll within a week. They couldn't get jobs and they couldn't buy supplies. Nobody was on the bank accounts. And with, by the time it was done and probate had their thing, they were just selling off equipment. There was nothing there to sell, right? They were auctioning off, you know, the trucks and all the employees that already found other jobs.

It was horrible. And if you look at a business like that, you know, it's a service related business. They're running well. They're doing probably 15 to 20 percent margins, um, on something, 10 million, you know, two. So just call it one and a half, 2 million in EBITDA. Um, they're going to sell three, 4 million could have been went to that family, you know, easily.

Um, maybe my, maybe more, maybe my numbers are off, but it went from that to, you know, maybe a couple hundred grand in equipment. 

[00:22:17] Tyson Ray: Yup. And the greater risk for those, those examples are the first generation's already passed it to the two siblings or the three or four siblings. And now what are you doing? I had a case that, that, and one of the way, our process for taking on an exit planner is we will have an interview with the owner and their spouse if they'll bring their spouse, we prefer it.

And the multiple owners, like however many owners there are, I want to interview each one before I'm going to decide if I'm going to take the case. And in this example, it was, you know, one of the sons, dad had it sold it to, you know, died, left it to the two brothers.

One of the brother's sons was the CEO running it for the last 10 years, crushing it, loving it, and now asking the question, Hey, what happens? You guys are in your seventies. What's what's the plan? And, uh, I interviewed all three of them individually. Kind of caught there's a bit of a riff. Um, and the agreement I have with folks is, well, can I share what you share with me with them?

Cause coming from me, it'll be less emotional, whatever else. And I sat him all down at the end of those interviews to basically say, you're not ready to sell this business or even talk about it because you're, you're not aligned. And I said, do you want me to say it? Or, you know, I pointed to one of the 75 year olds and he looked at his brother and said, cause dad let you drive the truck when I was 18, I'm not turning over my half to your son. 

And my son still may be the CEO, even though he's never been in the business. And it's just holy butt. You know, but these are real emotions that anchor people in these family businesses, and it's like, Hey, this is all, let's now let's know that's the case. There's the case, right?

So now we can plan, cause this isn't being sold. We're not transitioning shares, but when they die, now you got it, you know, so it's not a matter that you can't do it. It's just set the expectations so everybody knows. I think the other problem that the financial advisors have is it is, um, there's 70 different ways to do something and 68 of them are right.

Depending on like what, what that information is. And that's where again, being a student teacher of advising people is to, it's one thing to get the license, like we talked about. It's one thing to drive the car. It's another thing to explain why you're driving the car this way and this is why the answer is this way.

And, um, I just hope more people pick it up, or we're all going to be really busy cause there's a lot of businesses that need to, need this type of help, that are transitioning in the next 10, 15 years. Either on purpose or because, they're exiting. And, you know, to your, to your example, you know, there's a good saying, if you're going to get the Lord's plan, you're going to reap what you sow.

[00:24:40] Ronald Skelton: So that said, there's all kinds of stuff that goes on inside of this. Having somebody on your corner from the financial point of view, a wealth advisor, a, a certified financial advisor, especially someone like you as a exit planning knowledge now, I see that as a missing in the industry. We have, we have MNA advisors, right?

Who look out for the business's best interest. We have attorneys who look out for protecting liabilities and, risk assessment and risk management. Right. And then you have brokers for marketing and the deal and trying to, you know, get line up buyers, but they're missing for, okay, what is the family of the business owner need?

And what does it look like after the close? So what are some of the things that business owners can do, three years, five years out to make sure they have a, you know, not just in the exit planning of the business side, but on the wealth planning side? The other things that they can start doing earlier on in business when they know, okay, I'm going to, I'm not staying here forever. I'm going to eventually sell this. What are some of the things they can put in play? 

[00:25:50] Tyson Ray: Yeah, I, I kind of, I, I kind of will explain that and kind of the three tranches that as a business that I used to put times to this, but everything's happening so fast these days. I would say you have your startup phase of a business.

Um, in that phase, especially if you're younger, you know, thirties and forties, I encourage people go get a 30 year term insurance, I mean, millions, depending on how big your business is going to be, term insurance policy, because someday you're going to go to some bank and you need some loan to build some building to take you to this next level.

And all of a sudden you're going to be surprised that they want life insurance to guarantee the loan. And to go pick up a couple of million dollars of term insurance for 30 years and then have that in place when all of a sudden you're 45, but now you've got high blood pressure, you got cholesterol issues or whatever it is.

Your health issues are your insurance costs is not going to be what it's going to be when all of a sudden you have to get it. And I'm sure most insurance salesmen would prefer me not share that little piece of wisdom, but it's really inexpensive to get when you don't need it. The other thing in that startup phase is just be really conscious of, how you take out your debt. 

Too many people are, are happy to buy the shortest term debt or the lowest rate debt, but don't realize that part of the struggle, the financial crisis is when the banks all decided not to lend and your debt rolled, you are the one that had the biggest problem.

And sometimes getting that longer, that longer term debt for a fraction of a percentage more gives you a longer runway or just be really mind, I'm telling people this constantly start paying attention. Your 3 percent debts rolling at seven, eight, nine. When is that happening? How does that, what are you planning?

What the cashflow is going to look like there? Are you going to do your budget next year? And all of a sudden realize, wait a minute, my interest costs are doubling. So that's kind of your startup phase. Insurance, paying attention because it's cheaper when you're starting out. And what's your, how you pay attention to how your debts are staggered or not staggered and don't buy the bank's low rate because the bank gets to resell the note or refinance the note and do another closing in two or three years if you can get it pushed out farther.

In that middle tranche, which I would call the kind of the growth phase where you're just taking off. You've laid the foundation, you're crushing it, you're taking market share, that's the phase where you start needing to think about your catastrophic planning of how do you backfill yourself.

And what I try to encourage business owners in this regard is keep a list of everything you hate to do. Because everything you hated to do, and I, someone had to teach me this, everything you hate to do, God creates somebody to love. Which, okay. If you collect enough of those, there's the next position. And then often what you're collecting and you don't realize it, it's the next, it's not the next secretary.

It's the next executives that you need to put in place. And take these really keep this, this burden you're taking home with you every day because you're business owner, how many of those things can you package and give to somebody else? That's probably better suited because you're growing yourself into expertise that you need to start paying for.

And so that's kind of your middle phase. And then you're starting to get into the exit phase of what is that end? And it's fine. It is fine. If it's, I want to die in my seat. That's your right. You built this thing. But, how do we enjoy being in that seat until you're dead? Let's have fun doing this. What does that look like?

And, and again, accept the reality of doing that plan. Cause I think that ending phase, we are all invincible, so I don't have to worry about it. Right. And it's just like, for your family, for your employees, for your customers and your clients it's like, they all deserve to know what that is.

And if studies are out there, if you actually have the plan and communicate the plan, they'll be even more loyalty. They won't go anywhere. They can, it's like, everybody knows. Great. This is what's going to happen. It's that's really, really high level. And then as you're aware, it's like sitting down and having, and that's why we wrote the book to try and teach advisors this, I think client, I think attorneys could learn from it.

I think accountants could learn from it. It's like the, the talk, it's sitting down and having the conversation with someone to understand, what's the estate plan? What's the cashflow plan? What's the automobile plan? What's the house plan? Like, what, how does all this piece together?

Because you've lived, we all live our whole lives projecting this future in our head and it shows up. And then how does that conflict with your spouse? Because what's their plan? And can we provide both? You will dying in your seat and them happy because yes, we're going to schedule the vacation.

That's where it's like, it's just such a natural space for planning. And it has nothing, the problem is it has nothing to do with selling anything.It's bringing information into the present to plan what the cashflow needs are going to be. How we're going to solve these problems. And therein lies the opportunity for the financial plan, but it's not, I don't get to basically go back and say, well, last year, this did this and it outperformed that.

So maybe we should own some. And unfortunately that's the entire financial services industry, or that's how I feel. And I'm trying to break that mold through this book, talking about exit planning, because the need is out there and it, you can make such a difference. And it's not just the business owner.

It's everybody involved in that, that, the family, the, like I said, the employees, the clients, the community, everybody. 

[00:30:38] Ronald Skelton: So there's a, a common thing amongst the, earning, you know, the ETA guys, the, uh, entrepreneurship through acquisition. And where they always, they're telling, uh, business owners on a regular basis, especially when they're, trying to get creative about the structure of the deal. 

Go talk to your financial advisor about how, uh, carrying a note would impact your tax liabilities,and disperse them over years. Mainly because it comes in the favor for the ETA guy, like the guy behind the business. Do you see that occurring with some of the conversations you have?

Like, look, if you sell it and they go out and get a loan and they give you a big check all at once, your tax liability is a one time hit, it's X. Right. And then if you sell it, you carry a big portion of the note, you can request at this stage, you probably request at least 5%, probably even seven, 8 percent on that, on that note.

And, uh, now you're making an 8 percent on your money and you've got a steady income for the next 10, 15 years. And your tax liability is you're only taxed upon what you're paid per year, each year. Uh, so it spreads that out too. What's your gut feel on, on the two paths as far as, uh, lump sum versus, you know, some type of structure payment?

[00:31:54] Tyson Ray: Yeah. So they, like everything else, there's pros and cons to both. The lump sum, I'm more of a fan of a lump sum if there's not any relationship with the buyer. So if we don't know who's coming in, it's the private equity or some company's coming in, and especially if they're coming and taking everything over, it's like, how much risk do you want to leave on the table of a default?

Now that being said, I don't like also, I don't like the extreme because there's, it's tax, it's not tax efficient. Like spreading that out, there's some benefit from that. Although paying attention to what's going to happen here in the next couple of years, maybe different, may change that a little bit.

But it's talking about what their comfort level is of the risk of who's buying the business and what the likelihood of those payments can be made. A lot of times it's a little bit of both, and not all or nothing. However, on the lump sum, the conversation needs to quickly shift of what are we doing, like if the advisor is worth their salt, they're controlling where the deposit of that money's going. Because what's amazing is once the bank gets it, then they're all over that and trying to sell whatever they're going to sell and peddle whatever product they're going to peddle.

Or all of a sudden the psychological thing is, here I have millions of dollars in cash and that either they either short circuits them or all of a sudden it's like, well, I can buy this and then mental accounting steps in and all of a sudden you're off buying another business or a car or a house or whatever.

And so it's really trying to define before they get it. What are we doing with the deposit that we're going to get? It's going to be this, we're going to carve out taxes. Let's do that first. Sanctify that, get the psychology out of there that you're not paying. I've had clients and all of a sudden you're going to cut this million dollar check for taxes.

I've created a separate account, just called it taxes. Cause if we leave it in the same account and it sits there for a little bit, they think it's theirs. It's like, no, no, no, not yours. Right. Psychology. So there's issues around the lump sum on the installment sale, especially the financial planning. Like every, anybody that's going to do an installment sale, has to have or understand how much of that monthly payment, do we need to set aside so you have money when the installment sale is done. And then I try and have those two payments ripped apart in the payment process, same reason we're really bad at saving or paying ourselves. It's like here, if I'm getting this monthly income on my installment sale, your lifestyle may all of a sudden become that lump monthly income.

I have one client, I keep telling him, you sold it to one of your, one of your family members, and there's many. And you're supposed to be saving half of it for the many, because that's their estate and you're not, and we're five years into the 15 year deal. And in the end, these other siblings are going to wonder where the business went and they're going to blame the other one that bought it for a fair price.

And you like, there's that, so the installment sale creates the issue of you have to then save some of that wealth to create that nest egg, if you have that planning need. 

[00:34:34] Ronald Skelton: Right. And as a, as a buyer, one of the things I would ask is how do you want this payment structured? And what you mean? I'm positive you probably want it to go to one more than one account. 

I'm going to automate this process where it's a wire transfer every quarter. Which accounts and how much do you want in each account? Right. Because if they tell me, I'll send it all to this, I'm like, who's advising you on the back end? Right.

Cause I get it. Even if nothing else, they should, they're, they're separate out their tax liability into a separate account, right? So they never, never touch it. It's there's, you just get to let you at the end of the day, you just do whatever they ask you to do. But, um, there's something to be said for, you know, planning out, out what that looks like and working with somebody like you, right.

To, um, see which avenue is going to be most advantageous to the business owner. 

[00:35:25] Tyson Ray: What I found on the installment sale for the entrepreneur is I've, again, part of the game of growing wealth is all of a sudden when we started saving and this is the account we're going to build this nest egg again.

And they got to see it start growing again. It started, it started almost medicating that need to build wealth cause all of a sudden they saw it happening. Where they were doing it themselves on a P and L or whatever. Again, left to their own impulses, or worse left to the reaction of, we're just closing.

It's wired to the bank. They have to figure it out. The advisor may or may not get the number that they need. And especially the, the greatest risk on the installment sale is they don't realize that has a term it ends. And do you need to save any of it? And the greatest risk on the lump sum is, how long does that need to last?

And how's that need to be invested to generate the cashflow that the business was giving you before you spend it? I know the things that don't generate the cashflow. 

[00:36:18] Ronald Skelton: It's interesting. I've seen some really interesting stuff. Um, one of the ones that was out there that I would, if I were selling a big business, I'd probably look into for myself.

Owner did not need the money, he did really well in his investments. He owned a bunch of commercial real estate. Uh, he owned that business second generation. Dad did really well in investments. You know, he's doing really well on them. So he was selling the business, but he wasn't like, okay, I have to have the money to retire on.

And, um, I was, well, I wasn't the main acquirer. I was just, you know, in there helping negotiations and, uh, trying to get a fee kind of thing. Cause I do that occasionally. But one of the cool things that was structured inside of the deal that I got to see was, the owner was staying on it as a, as an advisor and a, I think a 15 or 20 percent role.

His entire salary was being paid to an investment vehicle. Some form of annuity insurance policy that did a guaranteed, back then it was a couple of years, I want to say it's six or 8%. but, uh, at a minimum deposit of every year of like 500 K. It was, it was a big policy of some sort. But, uh, that's how he was taking his payment structure over time.

He's like, just feed this insurance policy. It's, you know, I'm the beneficiary and my kids are the secondary or it's per surveys or whatever you call it in the insurance world. So my blood, you know, it'll, it'll stay in the family. And I don't know the tax implications of that, but it looked like it would be more tax advantageous because it's a structured ownership portion of that because he was still a 20 percent owner.

[00:37:49] Tyson Ray: Yes. So some of that is, um, that goes back to time. Some of that you can't do the day of the transaction or the year of the transaction. Even there's windows of time where, most likely the scenario you're talking about is he, he gifted or moved a percentage of his ownership into some type of irrevocable trust. That then that was receiving a distribution to then do some of this planning.

And that all boils back on the estate planning side, which again, you can do if you have time. 

[00:38:17] Ronald Skelton: It was a trust situation. I'm familiar with trust. I use trust for everything. I have a bunch of real estate in trust.

[00:38:22] Tyson Ray: But I wanted to say, based on your point, another thing businesses miss is, a lot of times we recommend if they haven't already done it, which goes back to planning is pull the real estate out.

Let the business be sold first. You retain as the business owner, the real estate and the rent. And then once the transact, either you keep it for forever or that once that transaction or installment or lump sum is done or a period of time goes by, then they can have the option or, or to buy then the real estate and, and not necessarily do it all at once.

Now, of course, most of the buyers would prefer to have it all at once in most cases, but again, you're the seller. So you get, you get to set those terms. 

[00:38:59] Ronald Skelton: I know an avenue that's a little bit, if you want to chat about this sometime, I know I have a team who can do what's called a sales lease back, and they'll sell the real estate and lease it back to the owner.

And usually they can get a premium on the real estate so long as the business can support the, the lease payments over time. And, uh, but the right company is just pretty cool because like The, the team I use now, they work with investors. It'll fund future expansions. One of the biggest scares that you have is say I'm on a, say I have a manufacturing plant and I'm on 10 acres and I'm only kind of putting my parking lots in my buildings.

I'm only really occupying say six of it. I have room for expansion. If I sell lease back it and I need a new welding shop or something. I used to be able to just go build a welding shop. And now that these other people own the property, I'm on, I'm just a lease see what happens. A lot of these places, uh, that we work with they'll actually fund the building of the other building. Build it into the loan or into the lease and lease it back. So they'll, they'll fund future expansions 'cause it just makes the property worth mo more money. But, the cool thing with that is you can get a premium on the property. If the comps in the area are, are a million bucks, you might actually get 1.2 or 1.3 on a sell leaseback structure.

Because you know, especially because the, uh the reader, whatever, bind it, no, they have a great tenant. You've been there for 30 years. 

[00:40:22] Tyson Ray: Well, and, and, and where we've also seen that done and it doesn't have to be for business exit planning. And just because you want to do an expansion. It's getting financing that some of the local banks in the area wouldn't want to touch.

[00:40:32] Ronald Skelton: I know people that buy businesses that way. They actually buy the business and the, uh, the real estate all at once. And to pay the owner down, they just sell lease backs to the real estate. And uh, get that little bit of premium or whatever and give that cash to the, to the owner as a big chunk, uh, of control, you know, getting the owner what they need.

It all depends on, you know, There's, there's a million ways to do it. Like you said, there's 60, 60, there's 70 ways to do this, 68 of them are right. It's the same way with these deal structures and stuff. What are some of the things that business owners and, or say the buyers can advise business owners in the early stages? You're looking at selling the company. I do ask a lot of times, have you worked with a financial advisor?

How does the exit work? I mostly, I don't want to know in a state of mind where they're at, mentally. Have they prepared for the sale? Does it, have they worked with their advisor? Uh, if they worked with other people, did they have an image or a vision of what it looks like after they close. Because, if they don't, then we have to start building that together as part of the rapport building process because they won't close right at the last second. They're like, they'll have that, oh, crap. What am I gonna do next? 

Wake up call and deals fall through all the time because, um, the owners just don't know what's next. The question to you would be, what are some of the things you can do early on? Or we can list, um, like if you're thinking about selling a company and you have the next three, four, five, 10 years, when is the appropriate time to have that conversation with you?

[00:42:05] Tyson Ray: Yeah, I think it, um, I think it's trying to get the message out that, it's not waiting until you're frustrated. It's not waiting until you have the health issue. It's not waiting until the business is failing or struggling or, you know. Part of being a successful entrepreneur is doing the planning of the future.

WHat I like to say is, is that the more time we have, the more options we have. The shorter time we have, the less options we have. And life is all about making decisions in the future that we're not going to regret. And if we can communicate to the business owner, that part of your regret might be that you won't tackle this issue. 

And there's plenty of literature out there. Your business is worth more if your plan is in place. Your employees are more loyal if the plan's in place and people know who's the, I mean, there's nothing but wins. And we got to break the stereotype that's out there that somehow psychologically I'm failing or I'm thinking about the end or, and again, it doesn't mean you have to sell the business.

It just means we got to, you're going to die. At some point. Nobody wants to admit that. What's that plan? I mean, given the fact that most of them don't even have a state planning done and they own a business, it's like there's so much out there to break the stereotype that somehow it's, it's like the end game when no, it's part of the game.

It's nothing but upside for them to do it. And then the hard part is, it's finding, you know, here's what I can tell you. I, my experience is most business owners need the attorneys, appreciate the attorneys, but don't, this isn't the type of conversation that comes out in it from most attorneys. 

And, uh, the, the financial planning, uh, certified financial planning practitioner with the CFP has some of this. There's all kinds of designations that are out there. And what those does, you know, if they have letters after the name, other than maybe MBA, and even maybe the MBA. It means that they got the license to practice to be a financial advisor, but then they got a third party certification of something.

I mean, start there because your, your normal advisor that just passes a license doesn't necessarily have these, have this knowledge. But it's a convert you, it's just, and I think it's a matter of finding someone that you could sit down and have a conversation that you would tell them everything. Your hopes, your fears, what the risks are of the business, what the issues are with the kids, everything, because it all comes out in this planning process.

And you'll know by the conversation you have. And I try to write a book for advisors to realize this is what you should be asking. Not what their asset allocation is, a large cap and mid cap and small cap and what their rates of return are to what some index looking backwards. It's, do you know where you're assigned to state documents are? You know, do you know, who knows the code to the safe where the money sits? Or the, to your point, how we make pay, who knows the code to log in to hit pay, payroll?

If you're the one doing it, cause some of these business owners, that's the last thing they let go of. And I think it's just, uh, we have this opportunity. I appreciate you having me on to kind of share for both the financial advisors that can hear this, Hey, this is a huge opportunity. And there's a lot of wealth in small businesses and big businesses, quite frankly. And yet for the business owner to just go have a different conversation and, and, and not have the conversation with your stockbroker or not have your conversation with your financial advisor about money that you have, you've already created.

It's having a conversation about what the future holds. 

[00:45:19] Ronald Skelton: How many of the wealth advisors out there you think are geared up for this conversation? I mean, is that something for somebody easy to find, easy to find to, they can go out and find a, estate planner and or a financial advisor who has business knowledge?

I think there's a, I think that may be the reason why a lot of these businesses don't. It's like, yeah, you know how to, you know, put my money in stocks, but you don't know that the first damn thing about what, how a business runs. Like you remind me of, uh, I have a friend who's a chiropractor of all things, but he specializes in things that other chiropractors don't do.

He aligns hands and feet and if he flies around the world teaching other people. Like, if somebody's hands or feet are miserable, they're miserable. So he teaches them how to adjust that type of stuff and it adds revenue to their business. You're teaching or preaching, I guess you would say like, Hey, financial advisors, go out there and get exit certified.

Most of your business, a lot of your clients own businesses and you can add revenue to who you are and what you do and add utility, a service, I guess that's the word I should use, to your clients that it's, it's hard for them to find anywhere else. 

[00:46:23] Tyson Ray: Well, and the advisors are wise to do it because the bigger the business, the more they likely will lose that client in the transaction.

And I think that, yes, I feel like I'm a profit screaming at the top of my lungs that, you know. And part of it was just me doing the business, paying attention and, and catching what a failing business is. I had a client's great people came in. You know, they spit out my salaries are 150, 000 between the 2 of them.

They took it equally out of the business, yada, yada. A year or two goes by and all of a sudden they need a hundred thousand dollars to put in the business. And I didn't think a whole lot of it. Okay. They're doing whatever they're doing. And about two or three years go by, they need another 200, 000 to put it in the business and they wanted to finance their house instead of taking out.

And I'm like, what? And I asked for their PNLs and I asked for the last couple of years. And I went back and just showed them like, guys, the money you put in the business, you took out as a W2 salary. I'm like, I don't know how your accountant didn't catch this, but you're, you're basically putting money in and paying yourself out as a salary because you only have one other employee.

And that's not where it went. What, wait, wait. And then they started realizing, oh, this, this contract didn't come in and this money didn't come in. And all of a sudden, and it's just like, this is again, where the advisor space is set up to do what they're doing. And, I just, um, you can only help people that want to be helped. And I, and you can't help everybody, but I feel that, it's just ripe and, and quite frankly, we are a compliment.

I'm not a competitor to the attorney. I'm welcomed in these meetings. They love the fact that we're helping with the psychological aspect of the sale and all the things that go into it and helping move the whole transaction forward. It's a very rewarding thing to be a part of.

[00:47:58] Ronald Skelton: Awesome. Awesome. Well, Tyson, tell us how do we reach out to you? When's the book coming out that give us the input on, how somebody can have a conversation with you? And when your books are going to be available and where they can find that. 

[00:48:12] Tyson Ray: Sure. Uh, the book is already, uh, for sale on Amazon or pre orders.

It's coming out the end of October called Total Relationship. The website, total relationship. com will be coming online as well for some people that would like to, to see some of those things or just kind of, uh, connect with us there. The easiest way to connect with me is through LinkedIn. And if you reach out to us and share that you came from, uh, How2Exit, on your show, we have a little kind of PDF that explains some of our business exit and succession process that we take clients through.

Yeah. So, uh, the total relationship. com is the website and then, uh, the Total Relationship book is on Amazon coming out at the end of October. 

[00:48:51] Ronald Skelton: Awesome. Awesome. One key takeaway. If somebody can remember nothing but one thing from the show, what do you want them to walk away remembering from this, this conversation? 

[00:49:01] Tyson Ray: It's not a bad thing to do something. I think the biggest mistake the business owners are making is they're letting the urgent crowd out the important. There's a famous quote I was once shared and the day to day running of the business takes up some of their, so much of their energy. They're missing the most important business decision they could make for the success of their business, which is what happens if they didn't show up the next day.

[00:49:23] Ronald Skelton: Awesome. Well, I thank you for your time. I, we had a great conversation. We'll call that a show. 

[00:49:28] Tyson Ray: Thanks, Ron. 

[00:49:28] Ronald Skelton: Awesome.