E92: Certified Financial Planner Mark Willis Discusses Strategies To Maximize Your Money - How2Exit

Ron Skelton: [00:00:00] Hello and welcome to the How to Exit Podcast. Today I'm here with Mark Willis. He's a certified Financial Planner, and we're gonna talk about money. What to do before, during and after the sale of your business to maximize the amount of money you actually get to keep. Thank you for being on the show, Mark.

Mark Willis: Oh, glad to be on. Thank you. 

Ron Skelton: It's my trademark to have to mess up every one of my intros. I, this is probably, this will be show 80 something or 90th by the time we are here. I think I might've like nailed two of them. I just, I butchered every single person names. I was gonna just like not introduce anybody anywhere, like, Hey, I'm here with Joe.

Mark Willis: Well, we wanna be real. We don't necessarily need Larry King. We need you. We need, and your audience wants you, so no, it's all good. And who wants to be perfect? Not me. 

Ron Skelton: We keep it pretty raw and uncut. Let's just talk about, let's start at the beginning. We always do everybody's origin story.

How did you come about being a certified financial planner and, what got you into this space? And then we'll go from there and start talking about what we do in the B2B world. 

Mark Willis: Yeah. A certified financial planner was not what [00:01:00] I wanted or thought about as a kid. And it wasn't handed, they weren't just handing those out at the end of high school or college graduation.

I didn't really learn a lot about money as a young kid. There's some interesting early memories with money, but we'll skip over that unless you really want to go there. As it happened, I graduated from college with a mountain of debt on my shoulders, and, my wife and I moved to a very expensive city, Chicago, in the middle of a great recession, which really didn't bode well for us finding good paying jobs in the midst of the time when everyone's getting laid off.

So we had to figure out this money thing pretty quick because. Contrary to current day situations, we actually had to pay back our student loans, and the student loan payments felt like a mortgage. They were mega payments every month leaving my bank account. And, so we had to figure out money and budgeting relatively quickly.

And I remember we were so bad with communicating [00:02:00] with each other about money that we had to have our money conversations in public spaces just in case things got, violent and we needed witnesses or whatever. I mean I'm only half joking there. And we would also use, use, sugar treats like ice cream to kind of cool things down and keep things positive.

So we didn't have a, a silver spoon in our hand as young adults, and we didn't know what we didn't. about money. So part of it was just a quest to get more confidence in this money thing. I felt like money was the unknown uncle in the family that you never really met, but it was always sort of there.

And sometimes they cause trouble. That's sort of how money was for me. So I wanted a better relationship with money. I didn't want it to be an unhealthy interaction, and I knew that money was gonna be a part of my life for a long time, probably, hopefully all my life. So I wanted to get that [00:03:00] foundation set, and part of it was just personal desire to learn about this thing called money. And in part two of this, I was working to make ends meet, three or four different jobs at the time. And one of those jobs was with a CPA firm. And I was basically helping prepare tax returns for a, an accountant. And she was a nationally recognized CPA and did all the right things.

She was kind of your typical CPA, but she also did investments for her clients. And I remember, again, this was in the aftermath of 2008, and I remember the phone calls she would make to clients telling them, oh, I'm sorry, Mr. Client, you're 63 years old. I realized, but I'm sorry, I just lost you a third of your money or half of your money, and these conversations were.

I didn't want any part of 'em. And so I almost got out of the insurance and, taxes and investments. Bus, like almost got out of the finance business altogether. And it was just [00:04:00] something I didn't want to ever have to do, Ron. I didn't want to have that call with somebody telling them I just ruined their life.

I'm so glad that I didn't have the, my hand on the steering wheel in the midst of the last recession, and I never wanted to make that call. And so that was sort of my exposure to the world of finance. And I wanted something better, but I didn't leave the industry of course. And so I wanted something better for my own personal journey with money.

And so the CFP was sort of the best pathway to really getting like, I guess if I'm gonna do something, I'm gonna do it all the way. So I got that CFP to kind of get my legs under me and so I could serve my clients in the best way possible. Now these days, and just to wrap up, we work with clients all over the country.

A lot of them are business owners. Many are real estate investors, even, NFL Super Bowl champions. But most people I work with now are just, simple business owners, small to medium size that want more control over their life.[00:05:00] They got into business because they wanted more control.

And they want more agency. I really love the ability and positivity I see in the business owner and entrepreneur in this country. I feel like they're part of the solution, in this great big world we have today. 

Ron Skelton: It's interesting is, if you look at the industry of financial planning and there's different careers, right?

I actually know, and I won't say his name on here cuz I'm gonna tell you. I know a guy who's a stockbroker, been a stockbroker for a while, and I asked how he built his book of business and he said he would buy a list of, five, 10,000, active investors. And then he would make a prediction on a two to three, two stocks or three stocks.

And he would pick one that he thinks, a stock, it was gonna move one way or the other. He'd make a prediction on it, and he was sending it out to the list. I used to say 5,000 people. And 2,500 of 'em he said it would go up. So you'd tell 'em it'd go up and 2,500, they'd tell 'em it'd go down. Right?

And then, you know this, they had never heard from this guy. And then the one he got, right, he'd have [00:06:00] 2,500 people that got right. He'd send them all the prediction and this time, 1250 and 1250, right? He would go up on, he'd be right on half of them, right.

He would just lose the rest of the list. And now he's got, he sent 2 right calls on people. And then the next, he'd do that like three, three or four times where he goes down where he is only got a few hundred people. He is like, look, I'm gonna stop giving you these predictions.

If you want my help, here's my email address and phone number. Right. 

Mark Willis: Wow. 

Ron Skelton: And it's a game. It's just a horrible game they played and. And he's that's what all, that's what they, that's what he was trained to do at this brokerage. Right? 

Mark Willis: Wow. Yep. 

Ron Skelton: And, so there's a difference between somebody who's just trying to earn a transaction fee and somebody who's went through the certification process knows more than one avenue, more than stocks.

You're trained and if you're a CFP, you're trained in stocks, you're trained in, at least knowing what they are in the investment strategy, the funds that are out there, insurance products. It's truly a broader spectrum of things, right? 

Mark Willis: Yeah. There's a [00:07:00] incredible universe in the financial world, and most of us are really only told what to do with what I call amateur retail investment products.

We're buying our retirement at the mall and we're paying way too much for it. And in fact our investment guy or gal is gonna retire before we can. Off of our backs. Most people feel like their money is, that, I would say that most people feel like they woke up in the middle of a movie about money.

If you've ever had that experience, you walk into the theater 45 minutes late and you don't know who the characters are, you don't know what's going on. I feel like many people live their financial lives sort of like that. They feel like they've just walked into why is there a federal reserve? Why are there, stock markets?

Why do we have dividend paying stock versus growth stock? And what is a 401K anyway? And, why are we all doing it? We just don't [00:08:00] know. Oh, we just follow along. We just eat the popcorn and just move through our life. But most people, are being, unfortunately, hoodwinked, like you said, they're on that newsletter.

Boy, that's a crazy eye-opening story, Ron. And it's so true. I think, the average, money manager, does not beat the index, right? The market index. That's a crazy story. 

Ron Skelton: It's interesting that the and it still, that's still his job today. Right. Cuz he sends me the emails every once. They're like, you do know he told me the story. Right? And I like, 

Mark Willis: Don't believe everything you read in the emails, I guess. 

Ron Skelton: Right. I was like, I mean, you can do the same thing with horse races. I guess. You just pick the horse and, send it out. You'll send it out to, a 10,000 gamblers and the one you get right after the third time you do it, they'll pay for your tip sheet. Right. 

Mark Willis: Wow. 

Ron Skelton: Or whatever they call those things. It's, it's just as ethical, I think. 

Mark Willis: Mm-hmm. I can't believe, I can't believe that. Boy, that's crazy. 

Ron Skelton: And it's going on. It's happening. There's a lot of things out there, in the money world that you don't know. Like, so I went from an employee and I knew [00:09:00] what a 401K was and I knew that type of stuff.

Right. And then I got into real estate investing and I learned a whole new thing. Private lenders, hard money loans. There's a whole nother world inside of the real estate. Then I get into this thing and I still learn that there were still things outside of, that I never even heard of.

Right. Family, I didn't know what a family office was. I didn't know what, that most banks, most big banks actually have a privatized banking arm, right? If you've got more than depending on the bank, one to $5 million liquid sitting in the account, they have a special bank for you and they actually, special products for you.

It's insane, what those products are. It's, almost unfair cuz there's some real advantages to have that kind of liquid cash line around. But, and I'm imagining when I get to the next level, right? I mean, I'm not saying I'm at any of these levels, not anybody's business where we're at currently, but, I imagine when you get into that, say, extraordinary level, that hundreds of millions or billions of dollars, there's even a whole new language and, offerings and stuff out there that, that are not offered or even communicated to anybody that's not on [00:10:00] the, in that space. . 

Mark Willis: Yeah, you're exactly right. I think the, the question is, are we looking down? Are we looking around or are we looking up in our financial life? And Dan Sullivan says, always make your future bigger than your past. And he's saying he's gonna be thinking about his bigger future, even on his deathbed.

And how is that possible? Well, you've got a legacy, don't you? Don't you wanna leave a bigger legacy? Even so we can always think bigger. And whether you've got, a million bucks, 10 million bucks, a hundred million bucks, or just $10, you can have a bigger future and it starts with education, but it doesn't end there.

Education is the starting point. You need applied knowledge to really make a change. If you wanna change your situation, you have to change your actions and your really that starts with education, but it cannot stop there. 

Ron Skelton: Okay. So we're on this show. We spend our time talking about buying, growing, and selling a [00:11:00] company. So in this conversation, let's try to stick to that model. Let's talk about the buying, what you do before and during the, or before and planning the acquisition of a company. And then we'll shift slowly into, once we've figured out, we got that covered pretty well. We'll talk about different things we can do while we're running it, especially when we know we need to sell.

For those of you guys that haven't listened to the show and you think you can sell your business tomorrow, selling a business usually is a two to three year process or more because there's some accounting changes and stuff that need to be happen to maximize the value you're gonna get out of it. We can talk about some things that you can do.

I know you and I talked before the show, we talked before, there's some really cool things that can happen to ensure you have a decent retirement, nested nest egg when you know you're gonna sell in a few years. And then let's talk about the exit. What to do? How to minimize the tax impact? If you have some ideas on that of the lump sum of cash.

And more importantly, once you sell your business, unless you're gonna start an owner right away, you just went shifted from business owner to [00:12:00] asset manager. Right? And a lot of people don't get that. It's different than making a million dollars a year profit you can take home and, living on that and, investing it and stuff is different than, say you got five x you get a lump sum check of five, 5 million, you get hit for, let's say 30% taxes on that, right?

You lose 1.5 million of that , so now you got three and a half million dollars to live on. If you look at it, that's only three and a half years of your previous salary. There's some adjustments to be made and now you're a wealth manager, you gotta, you know, maintain that, grow it, scale it, or whatever you're gonna do with it.

So we can talk a lot, save some time and talk about what what happens when you get a check. Cause a lot of the guys that listen on the show, they either are selling currently or they're buying something to grow and sell it. They're actually flipping businesses and stuff. Does that sound like a decent path?

Mark Willis: Yeah, sounds like a great agenda. Let's jump in. Where do we begin? Okay, 

Ron Skelton: I'm out there, I'm looking to buy a business. I'm looking at all the different options to fund the business. Right? I have some money in 401ks, IRAs, that type of stuff. There's the [00:13:00] SBA, there's private investors. There's this whole landscape of where money can come from.

What is your insight on what's the, what's a great way to fund the acquisition of a cash flowing business? 

Mark Willis: Okay, I'm gonna give you a longer answer than you might want. So please, at any point, stop me and we can get, we can just break it into pieces. All right. I like to start with, well, please feel free to interrupt as any, as anyone.

Ron Skelton: I'm gonna zip my lips and let you, I want to hear it. So let's hear what you got. 

Mark Willis: Well, it's always better as a conversation. Let's just keep it real simple. How do we buy any major purchase? What are our options? Let's think about a car. Let's set aside the business. Let's think about a car. What can we do to buy that car down the street?

We can finance it, we can lease it, or we can pay cash. Now, yes, there's more complexity with a business, equity partners and so forth. But it's basically the same thing. We can buy it, lease it, or pay cash. So let's talk about the problems with Financing. [00:14:00] SBA loans, whatever we, whatever loan we might, private lending, bridge loans, whatever we might choose to do here.

Even owner financing, it's all gonna have somebody else's new surround our neck for some period of time. They'll control the interest rate, they'll control the cash flow. They'll control the outcome. I've got two little fishies in a little aquarium out there, and I control the environment that fish lives in, that those little fishies live in.

If I don't keep the temperature of that water just right, and if I don't feed them every day, and my daughter and I, we don't clean those tanks every so often, we're gonna have some dead fishies. So banking is the environment in which our money lives. And the problem is, well, like Mark Twain said, a banker is a fellow who will lend you his umbrella when the sun shines, but wants it back as soon as it starts to rain.

So as a certified financial planner, I've come to this conclusion, [00:15:00] you can push back on me if you want to. Banking has more to do with the success or failure of your overall financial life than virtually any other externality. Now, you still gotta get yourself right. So your internalities like mindset and your ability to live within your means, that's on you.

But all the other stuff, like I don't care what my rate of return in my mutual funds were. I have a great doctor, he's making a great income and he's got a great 401k, four through BK through his hospital and it's getting 12% in the last couple years on his mutual funds, whatever. And he is real proud of that nice 12%.

But he was spending a third of his income to service all of his debts. A third of his income to service, not to pay down, just to service the debts. The boats, the vacation home, the mortgage, the student loans, all that mess. So he was spending after [00:16:00] tax money of about 33%, and he was only making a pre-tax return of 12% in the 401k.

So he's not swimming upstream, he's going down the river. If you know what I mean. Right. So it's all one wallet. And this is why I believe banks have the biggest building in town. It's why they've been around for thousands of years. Not in this current situation, but there's a great book out there by David Graber, Ron.

It's called, "Debt, the first 5,000 Years". That's a jaw drop in title right there. So I don't agree with everything in the book, but the title says it all. Banks, or banking, I should say, banking is a fundamental part of the human experience. It says core to humanity as marriage, as friendship, as cave paintings.

So that four letter word debt, is as core to us as just about anything else right. So the question really is how do we [00:17:00] participate in the banking process? And a lot of folks say, well, I don't wanna participate in the banking process. I'll just pay cash for that car or that business, or whatever I'm buying. And that's cool.

We all like paying cash and Dave Ramsey loves talking about paying cash for things and there's fine. There's, benefit there. But let's stop and think about it. The big aha moment of my young adult life was when I realized that I was still financing it, even if I paid cash because I was financing it from my future self.

I was stealing from my future self every time I'd pay cash. How is that possible? Well, opportunity cost is the short answer, but the more elaborate way to talk about this is if I needed to buy a $50,000 vehicle and I saved up in my savings account and I was, let's say I was getting a generous 1% or 2% on my savings there, I save, save, save, save, save, live within my means, drive the old card, ride the bus for a few years.

I'm saving, I'm doing all I can, and then I build that 50 [00:18:00] K up. And then what do I do? I have to take a withdrawal. That brings my savings down to zero. And Ron, how much do you earn on $0. How much? 

Ron Skelton: Zero. Right? 

Mark Willis: Yeah. Yeah. And then you could, so you've broken your compound growth, and then you can only start to earn interest again slowly as you pack up money again for the next car.

Or the next business or whatever. So the sticker price on that vehicle might have been $50,000, but the true cost of that vehicle might be several hundred thousand dollars over my lifetime because of opportunity cost. Is that concept makes sense? What feedback do you have? 

Ron Skelton: No, I, I get that and, I kinda see where you're going with the le you know, leveraging of the money too, right?

Mark Willis: Yeah. Yeah. But, the quandary I had, and most business owners have, and most people have is, well, Mark, I gotta spend money. I gotta buy the business, I gotta buy the car. I gotta send my kid to college. I gotta buy the house. I gotta buy the real estate. [00:19:00] So I gotta do it somehow.

And I'm either gonna use somebody else's bank or I'm gonna save up my own money and spend it, whether it's in a savings account or a brokerage account or a shoebox. And those are basically our options. And either way, we're tied to zero net worth cuz either the saver saves up and then slams back down to gravity to Earth on at net zero again.

Or the debtor, he falls under net zero and then climbs and crawls and scratches his way back up again. Just to fall back down again. So we're tied to net zero. It's almost like the, the gravity force is pulling us back down to zero, or pulling us back up to zero as we pay off the bankers and the banksters.

That's a long way to get to how do we encourage, how do we employ the banking function to buy that business? How do we actually incorporate banking? And I wanna make a distinction between the word banks and the word banking. So one's a now and one is like a verb I guess I'm not good at English.

I [00:20:00] think that's right. So banks, I'm not interested in opening up a bank, but I'm interested in being in the banking business because whatever business you're planning to buy, whether it's, doing storage units or selling e-commerce online or doing a gas stations, whatever your business is, you are also in the banking business. 

You're already in that business and you're either the customer or the owner. And the customer, of course, is the person who owes money to the bank. I say that the person who is in control of the banking function will win your financial future. So who is the banker in your life? Is it somebody else or are you your own banker?

How can we become our own banker to actually control the environment, the entire environment where our money lives? I don't want to be the fishie in somebody else's aquarium. I don't want somebody else jacking up my temperature or messing with my food chain or whatever. I wanna be the banker. [00:21:00] I actually wanna pay myself an interest and actually collateralize my own assets and become a banker for myself.

So let me get off my soapbox. Love to get your feedback on that. 

Ron Skelton: So I, I know where you're going with this cause I know the product. I've sat through seminars on it months before, and if most people, like a lot of our audience, they're buying a business before they've accumulated enough to pay for the business outright. I say most of 'em are probably that, right? A lot of these guys are search funders, so they've raised some money, they're planning on using SBA loans. They're trying on using debt to cover it. But they have not, accumulated, the 500,000 to $5 million that they would probably be targeting on a search fund type of search, right?

And to tell, so are you looking at like saying even in the product, we're getting ready to talk [00:22:00] about, are you talking about delayed gratification? Like look, go ahead and work and save and put that money into this product and then do it. Or like, I guess I might be getting the cart before the horse here.

Mark Willis: Yeah. Oh no, you're asking a great question. I might as well let the cat out of the bag. And we're talking about a whole life insurance policy as a tool to act like a banking function in your life. So first of all, first and foremost, gotta say upfront. As a certified financial planner, I'm not gonna recommend anybody go do anything over a podcast.

And you know that Ron. But I found it to be a compelling tool for financing and yes. So for those that are not aware of this tool, I'll do a quick explainer and then I'll answer your question, about how you can use it to fund your purchases as large as a business, and I'll even give some case studies on this cuz I just got off the phone with someone who's doing exactly what you just said.

Buying a business, with a policy. Okay? So most people hear whole life insurance and they think, well that's the money I'm gonna leave my family when I croak.[00:23:00] That is gonna happen. There is a death benefit, but what we're designing here actually has a living benefit. That is really what's emphasized with this particular design of life insurance.

It's not term insurance. Term insurance is what we might rent for a little while our kids are young or whatever. That's fine, that's good. But dividend paying whole life insurance that's maximized for cash value accumulation and cutting the commissions by about 70% and flooding the policy with equity early on through paid up additions.

That's a long way of saying, a true bank on yourself, designed whole life insurance policy, a bank on yourself type policy is what we're talking about here. But it starts with the mindset of thinking like a banker and being fed up with somebody else controlling the banking function. So that's where it starts, or at least where it started for me.

The skills and the system and the tool, we gotta come down the ladder of mindset and get down to some tools. The whole [00:24:00] life tool can be used to act like a bank for major purchases. And here I'll quickly describe what the tool does and then we'll, we can get into how to do it, use it to buy a business.

All right. It grows the cash value. Now we're not talking about the death benefit yet. We're the cash value, the livings benefits, what we can spend on this side of the grass, before we croak, grows on a guaranteed basis every single year. Even if markets are tumbling like they are this year. As we're recording this in late 2022. The cash value grows every single year, contractually guaranteed.

Love it. Love it. Also, they throw dividends if the company is profitable on top of that guarantee. And the companies I typically recommend for this strategy have paid a dividend without fail for over 100 years. So I don't know too many businesses that have that kind of a track record with profitability.

That's incredible. They've made it through depressions, multiple [00:25:00] pandemics at this point. So that's pretty awesome. Second, it is life insurance. So we will leave our family something when we pass away. I can't overlook that. That's an incredible, advantage cuz it'll always be more than I saved in there. If I put a dollar into my savings account and die tonight, my family gets a dollar.

If I put it into the stock market, die tonight, my family might get a dollar, might get $2, might get 70 cents. We don't know. But if I put a dollar into my life insurance policy and die tonight, depending on your age and health, age, health, whatever. You might have $7, $10 for every dollar you put in there.

Just depends. I love that. So, okay, stepping forward here. The next piece is that money, that cash value is accessible. It's guaranteed. No matter what happens in the market, it's gonna grow, but it's not locked up like a 401k or a real estate deal. It's liquid money that I can access for any purpose.

That's what we're gonna look out for buying the business. So that liquid money [00:26:00] is also available with no taxes due. So we like that. I like that. Right. And then lastly and finally, incredibly, the cash value can be collateralized through a non-recourse loan, which is just a fancy way of saying I can get the money through a loan from the life insurance company, and yet my policy will continue to compound uninterrupted.

So if I've got 200 grand in my policy and I borrow against that to go buy anything, maybe I take 180,000 out to go buy a business or a down payment or whatever. My policy still compounds and grows as if I hadn't touched a dime of the money on all 200,000 bucks, and I'm in control of how I repay that loan.

So not only do I get uninterrupted compounding, so I'm no longer tied down to net zero. I'm no longer a slave to the banker, and I'm no longer financing it for my future self by paying cash. Now I've [00:27:00] got an uninterrupted J curve, on my cash values. So if I paid my loan off over the next three years or 10 years, my policy would show a full cash value.

Like I never took the loan out. To me that solves the problem of paying cash or using somebody else's bank. Okay. Gimme your feedback or, so my 

two questions is insights there.

Ron Skelton: The two questions I have is, this is funded with post-tax dollars, so that's why It's free. It's why it's free, free tax, free on the exit.

Right. Unless it's an insurance policy. So the second one is, is there a limitation, to how much money you can put into it in the beginning? Like, is there, like some products have, you can only put in 12 or whatever, it's $16,000 per year, like IRAs or something like that, per person or?

Mark Willis: The government has no say in how much each person can be, can open up for life insurance. No. The government doesn't have a say. The life insurance companies will have a say. So that's where you're capped out and you're typically [00:28:00] limited on either your net worth or a multiple of your income.

So if you're, just to give you some idea, if you're 40 years old, take your income that you make and multiply it by like 25. And that's maybe the maximum amount of death benefit. Now here's where things get interesting. I'll keep this brief. The death benefit, let's just pretend that that was a 10 million cap.

That your maximum, and let's say that old-fashioned whole life insurance, let's say that the the 10 million was gonna cost some amount of money to pack in there. But if I could take that 10 million death benefit and bring it down to $3 million, I get rid of a lot of the commissions. Quite candidly. I get rid of a lot of the insurance expense.

But if we were to pay the same amount for a smaller policy, so maybe that was 70 grand a year going into a policy, for example, just randomly picking that number, but let's say it was 70 grand a year. If we overfund a policy, it floods it with capital. [00:29:00] It's just like, and again, I'll use this quick metaphor here.

Let's say you wanted to buy a 10,000 square foot house and the mortgage was 70 grand a year. Again, I don't know if that's reasonable or not, but yeah, something like that. And instead of buying that 10,000 square foot house, you shrunk down the house size to 3000 square feet, but you still paid 70 grand a year on that mortgage.

You'd instantly be building up massive amounts of equity, and not only are you paying on the mortgage, but you're also throwing on additions onto that house. That you're paying cash for. So these paid up additions, are being added to that small 3000 square foot house. And before long, that house is now 10,000 square feet, 20,000 square feet, and you're just throwing additions, extra money into the mortgage, extra additions onto the house.

Literally they call them paid up additions on the life insurance contract. And that's how you're able to flood the thing with so much capital right away. If we can squeeze that death benefit down. Any other insights or questions on that? 

Ron Skelton: The other [00:30:00] one is, is there a holding time? So if somebody's looking to buy a company in the next X number of months, and they like what you're talking about and they're gonna set up one of these policies.

I know when I looked at 'em a while back, there was, money had to sit in there with a certain period of time. I think the one we were looking at, it was like one year. So you make all your deposits, but you can't do that loan back out of it for, maybe it was six months, but there was a holding period as like, it's not just you put it in, then you can ask for a loan within, the week, once the check clears.

Mark Willis: There are over a thousand life insurance companies in the United States, Ron. I've looked at a lot of them. Probably not all 1000 to be candid with you, but, most of them are not really designed or have the available products to do what we're talking about right now.

I'd probably say maybe a dozen of them can do what we're trying to accomplish here with bank on yourself. The companies I would typically encourage and look into and recommend to clients 30 days after you start your policy, you can get the money via loan. 

Ron Skelton: That makes it a lot more accessible. So this would be a [00:31:00] way to, if you already had the down payment money and you wanted to manage it smarter, be a way to do that or and it need to be your money, right? You wouldn't wanna take investor's money, lock it in, up the insurance, take a loan back out of it.

That would. 

Mark Willis: It's a smart idea. It's possible. But you'd want to get, sign offs on your investors that was what they were okay with as well. You don't want them to, now here's the thing, if there're beneficiaries on that death benefit, they may actually be happy to see that you're setting up a contingency if you croak before they get paid back.

But you do want to get Signoffs and talk to an attorney before you do that. Yep. 

Ron Skelton: Yeah. That sounds like a way that, you know, one of the ways that we can, fund the down payment and or total purchase of a business if we have access to capital. Right. 

Mark Willis: Let me tell you a quick story. I'll keep the names and details out, but have a father-son business. The son is buying it from the father. He has been a 50 50 owner of this business for many years, but now he's buying out dad. And for the next 10 years he's gonna be paying his dad, quarter million bucks a year.

Oh, [00:32:00] excuse me. Yeah. Quarter million bucks a year, for the business for the next 10 years to buy out that other 50%. Well, he's the business owner, so he gets distributions from this business. He's taking those distributions, the son is taking these distributions, putting it into a policy, and then immediately taking the money out, like within 30 days to pay Dan.

So he's buying and building up a very large policy loan that he doesn't have to pay off for the next 10, 20 plus years. So he pumps that money in, takes it out, but he's smart with it. And any windfalls his business gives him, remember he's now the owner of the business, so he's gonna get occasional windfalls.

He'll use that to wipe out loan balances on his policy. Meanwhile, dad is happy. He just wants the check every year and the son is incredibly happy because he's pumping, millions of dollars into a policy that he was gonna just see, leave his hands and go to his dad, it's still in the family, I see.

But you know what a powerful tool to be able to give the [00:33:00] son a capitalizing, uninterrupted guaranteed asset that he can use to pay Dan. And then ultimately, dad's gonna pass away and leave some money to son. And that son is gonna, what's he gonna do with that money? Guess what? He's gonna use that to pack into his policy.

And then one more piece to this puzzle is when son passes away, guess where that money goes? To the grandkid. So what a cool way to like help a family business, not only the family business, but the family. Enjoy three generations of wealth transfer there, and that by the way, that death benefit would be income tax free.

Ron Skelton: How familiar are you with trust? 

Mark Willis: Well, as much as I can be with, I'll being an attorney, sure. There's always more to learn. . 

Ron Skelton: The reason I ask that is some of the structures I look at and some of the ways I do real estate are inside of trusts and for various reasons, protection reasons, and that type of stuff.

You couldn't Google me and figure out what I own. I just, I, everything's buried in multiple trusts. We've been looking at a method for us to set up a trust. Have the trust [00:34:00] acquire these businesses for long term wealth. Does these privatized insurance policies, these privatized banking policies, do they work with the trust? Can you operate or does it have to be by any type of law or regulation? Have to be an individual? 

Mark Willis: No, you can, in fact, we often encourage folks to have the trust owned the policy. Certainly the trust could be the beneficiary of the policy. The trust cannot be the insured. It's gotta be a warm body, of course.

The trust is, a very easy way to keep that money out of, the bankruptcy courts or the lawsuit courts and that sort of thing. Great idea. 

Ron Skelton: Interesting. So we talked about what to do beforehand and during the purchase and stuff. Let's little, we'll talk about how does this play in on the actual running of the business or even preparing the business to sell.

Cause I've got some ideas on two different realms of this. The owner doing this himself because he's getting ready to exit and making sure his retirement set up correctly for exiting. And then even the acquirer convincing the owner to do this as part of a structured payment thing. My question, [00:35:00] we can get to that.

I want you to tell your idea of the inside of it, but somewhere along the line I want to hit, can you set this up to, a lot of times we buy, I'm kind of losing my train of thought here. A lot of times we buy things on structured payments, right? But could you minimize the impact of the taxes for that individual?

Because the structured payments are to the insurance policy on their behalf. So they almost stay as kind of an employee until it's paid off. Then you're just, and they can withdraw money as they needed on those loans and those other type of products, but they're not necessarily having such a, the tax impact would be, I guess it'd be when you do the distribution, it would have to be still taxed there.

So I was just trying to figure out what, would it minimize the tax of, the exit, right? Usually these guys, when you exit, they're getting one check a big down payment in a lot of payments or a big chunk of cash, and it's significant tax hit on that. 

Mark Willis: Well, so what I hear you asking is what do we do while we own our business?

And how [00:36:00] could this, self-financing strategy help you during the ownership? Like, capital acquisition or emergencies or contingency cash, that sort of thing? 

Ron Skelton: That, that would be a great way to go. Yep. 

Mark Willis: Okay. All right. Well, and you brought up some really great ideas. I'd be curious what you think, regarding the ownership during the ownership phase of your business let's say.

Ron Skelton: My idea on this would probably be, there's your standard living expenses, right?

So you're gonna take those as a, payroll, distribution of some sort, through payroll. And you're gonna pay taxes on that and do that thing. And then there's above and beyond, right? And the problem most of us have, and I've, I'm guilty of this in the past, I'm not pretty much now, if you see the stairs behind me, we live in a tiny home.

We're not minimalist to the extent. I guess we can almost officially say we are as of today. I still own a 2,600 square foot house and a farm of five acres in Oklahoma that has all my cool stuff at it. And when we sold it, I just told the guy you could keep it all, right. Like I sold it to somebody I knew and there's a [00:37:00] few thousand dollars worth of tools there, woodworking tools and stuff like that.

We just didn't take 'em with us in a tiny home. It was when I was holding onto it right. On the day-to-day basis, there's money the owner needs to live on and and be comfortable in. And then there's the company. If it's doing well, it's gonna give above and beyond that, right?

So my thought process was you take that above and beyond you stuff that into some policy for longer term. You can borrow against it, use against it. It's not your day-to-day payroll. But it's growing something that's gonna be substantial. By the time, you leave, even if you're flipping businesses. A lot of people think they're gonna buy an go in and buy a business and sell it a year later.

That's usually not the way this works. Even if you're doing rollup. It's usually a three to five year process. Our goal was three years, but they told us that was pushing it. Three years from the last acquisition we were gonna exit. We had to tell everybody, it's like, look, that's the plan. Three years, and it could take three and a half, four, right? But, so in that three year process, If you knew you were gonna exit anyway.

If you get into that [00:38:00] point where you're gonna exit, you could really maximize what you get out of the company by being careful about what you're doing with the money that comes through the company. Right? 

Mark Willis: Yeah. You've got a very creative mind and there's a lot there that I would just second and agree with.

There are maybe 45 to 55% of our business owner clients own the policy personally. And then the rest of 'em keep it in their business. So the policy can be owned outside of the business or in the business. And there's reasons to do both. And, the, let's just talk about the, those that have the policy outside of their business for a minute.

So let's say that you have a bunch of money. Let's say you got half a million dollars in cash value in one of these policies. You can take a zero off, you can add another zero one. These policies are very proportional there, but let's just stick with 500,000 personally owned cash. Now you wanna send your kids to college.

You can send, you can take some of that money and send 'em to college. You wanna buy yourself a yacht. You can do that. Be a small yacht, but you know what I mean. [00:39:00] You can also loan that money back to your business. Depending on your entity structure and some other details there. Your business then has a loan that they now must, they slash you must repay to yourself.

And depending on, again, your entity structure, you may be able to deduct that interest, but you charge your business so maybe you charge yourself 10%. Maybe you charge yourself 50%. Depends on what your accountant lets you do. It comes down to what your accountant says there, and again, how you're structured.

But the point is not so much deducting your interest. The power is the guaranteed line of credit. Had a gentleman, he had a million dollar line of credit in his business and he was using it all the time. For his operating expenses and more, and the bank called him up that dreaded phone call he was spending, by the way, over $70,000 a year to pay for compliance for the bank loan.

Had some staff people doing accounting and all that just to be in compliance with the bank. That's extra interest that [00:40:00] we don't cap, we don't count on the, the closing documents of the loan, do we? You know, that we're gonna have to get a bunch of extra staff members to cover the, all the compliance.

Okay. So anyway, he gets the phone call from the bank and says, we're terming out your loan. Give us a million dollars over the next five years. Ouch. That's not good. He was miffed at these banks. He said, I never want to darken the door of a bank ever again. Maybe for my checking account, but never again for a loan.

So he, termed out the loan with the bank, but he also capitalized the cash in one of these policies. He got a million bucks in there in five years. So he kind of feathered that clutch over a five-year period, and now he has a guaranteed increasing line of credit. That his competitors don't have. So his competitors still have to beg and plead and, kiss the ring at the bank shop down the street.

He's got his own bucket of money that he owns outside of his business for protection, for lawsuits and more. And he's got [00:41:00] himself an increasing bucket that he can hopefully increase his business on too. So that's operating expenses, that's capital. Imagine your farm equipment could be purchased this way.

Your inventory could be purchased this way, your tax payments every year to the IRS could be purchased this way. That's just during the ownership phase of your business. Now you brought up a really good point, which is when we get these businesses, we're not exactly handed a 401k outta heaven. And yet we're gonna retire someday.

Probably some, hopefully. And even if we're just selling the business in three years, five years, whatever, we probably also should have some assets outside of these businesses. The fancy word is diversification or non-correlated assets here. But, many business owners, their mind is the business. I don't know if this is true for you, Ron, or your experience, but a lot of business owners, like 90% of their net worth is wrapped up in business. And that's what they love. That's what they know.

And that's kind of where they focus their attention and their [00:42:00] energy. So why not have some money outside of your business that we've kind locked in? We've taken some chips off the table and we've made sure that even if the business gets disrupted by the next duber, we've got some kind of asset over here that's not tied to the current valuation of our business.

And even better if that other asset was again, non-correlated to our business, but also was still usable for the business. So it's one thing if I take some of my profits for my business and put it in a 401k or a simple, or a solo 401k or one of these other retail amateur investment products, but if instead we put it into one of these policies. Again, it's a non-correlated asset, so it's not gonna go off the cliff if the business does.

The whole life is there guaranteed, but yet it's still liquid and accessible for my business. If I, again, if I needed some kind of emergency or had an opportunity to take advantage of, the policy is there for that purpose. That's also now a golden parachute for me when it comes [00:43:00] time to retire. Just general, just worked with the gentleman out on the East Coast.

He's packed away into four different policies that he used his business to fund over these many years, and his plan is, he's in the middle of selling it right now, and he's actually, one of his policies was owned by the business and had several others outside of the business. He used part of the negotiation of selling his equity shares.

Was to say, Hey, you can give me cash, or I could just take that policy over there as part of my sale to walk away. So he's getting that business policy. He's also got his personal policies and he's using that as his golden parachute to leave his business and enjoy multiple streams of, tax advantage and even tax-free income from these policies.

So that's when you leave the business. Is that helpful? 

Ron Skelton: Absolutely. 

Mark Willis: Any thoughts there? 

Ron Skelton: Yeah. The thought I have is, is part of our acquisition strategy is they're a play where you can, cuz the conversation comes up, it's like, I'm interested [00:44:00] in selling my business, but after taxes I'm gonna get really heard.

Right? Or I think I'll run out, if I sell it now, it'll probably sell for 3 million or whatever, just pick a number, 3 million, all these guys like, I'm only 55, 3 million is not gonna carry me through retirement. There's just, I'm gonna have to do something else. I'm gonna, I might as well just continue doing this.

Is this a tool or a method that we could, show them, look, what if we, set up this, we hook you up with this insurance company, this financial advisor. They set up this product. We take the money, we put it, into that. It could be in chunks or in payments or whatever we put it into that.

You now have something you can draw off when you need it or, we probably, if we can probably structure it to where it reduces the tax impact quite a bit and then, now you're not having to worry about living on three, $3 million and becoming a financial advisor because the product already tells you it's gonna make X number of percent or guarantee a certain percent.

So it's easier for somebody to, to visualize and do the math of, with [00:45:00] $3 million into that policy over the next, say, five to 10 years to pay into it or whatever. And I got x number of percentage on it. Could I really live on that long term? At least they could do the math and figure out what it, where they would be, what would they get out of it?

Mark Willis: Well, yeah, there's a lot, there's a lot of creative structures here. You might know Jim Harbaugh, he's the former coach of the San Francisco 49ers. And he was, he is head coach of the University of Michigan football team. His retirement plan was to. by life insurance and the Michigan, university of Michigan actually, negotiated this.

They put 5 million in upfront. And then 2 million a year while he's head coach. And that money is being used by life insurance. And as he leaves and actually, add slot who's, a CPA and he's a nationally recognized expert on IRAs, he. all about this in his recent book, the Retirement Savings Tax Time Bomb.

It's one of my favorite recent books that he's written. And one of the powerful pieces to this is,[00:46:00] Jim will get a tax-free income off of that life insurance someday. Right now, he can, just essentially sit back and let the thing grow, without a bunch of complication. And, the University of Michigan gets to sort of solve that need and it's set apart from the 401k minimum participation rules of 401ks and other qualified plans. The business, or in this case, the university does not have to do the same deal with the assistant head coach or the, the water boy on the football team. Do they still call 'em water boys? I don't know, but uh, you know what I mean?

They can pick and choose who their favorite, most valuable, staff members are and give them that sort of a, executive bonus as it were. And in fact, that's what it's called. It's called an executive bonus. 1 62 a plan is the part of the tax code it's under, and business owners can do this. By the way, for your best sales gal or sales guy, you can offer these policies to your employees as a retention [00:47:00] benefit.

So Jim Harbaugh, he's loving life and that'll be a great golden parachute for him as a tax-free income to him. But it could be the same for some of your best sales people at your business. 

Ron Skelton: So how does the draw out work on when you retire and you need to make, you know it needs, when you need the money for income, it's in there and there's a cash value.

Is there a way to click it off and start drawing against it, or like, does it pay out like some type of annuity or what is it? 

Mark Willis: Couple. Yeah. Actually, funny you should say annuity cuz that's actually one of the options. You can actually have that life insurance transform into an annuity if you want. And one of the surprises that I had was that, yeah, we've lost the pension in this country, but life insurance can do a tax-free transfer using a, what's called a 10 35 exchange into an annuity, which then creates a stream of income for the rest of your life, as you know.

Or you can keep it in cash value life insurance. Let's say you've got a million bucks, 3 million bucks, whatever, let's say [00:48:00] 3 million bucks in life insurance, cash value at the time you're ready to retire. Now you've got that money and you can draw that money out, to supplement your other retirement. And what I love about it is, one, we can get it out without taxes due.

IRS says we can get the loans against the gain so there's no taxes there, and we can return our basis through withdrawals against the policy so there's no taxes. We've already paid our taxes on that money. So the whole 3 million bucks can come back to you tax free. And don't forget when you're borrowing from these policies on the gains of your life insurance, it's still compounding like it was all still there. So I just want that to sink in because let's say we live for 30 years in our retirement and we're, look, we're living on our money 3 million bucks. I don't know if, depending on your, how long you've planned to live in retirement.

Let me do the math on this. You'd be able to pull somewhere around $165,000 a year tax free, off of 3 million bucks and that money. Will [00:49:00] continue to compound over the entirety of your retirement. So usually when you've got a 401K and you pull 165 grand outta there, it's no longer compounding for you.

But with the policy, for the next 20 plus, 30 plus years, however long you live, it's still earning on the first year, second year, third year of your retirement that you drew on and spent decades ago at the grocery store or on the grandkids. And I just think that's an incredibly efficient way to have a stream of income in your retirement. I think it honestly could be a, it's not, again, I'm really pumping this thing up and I wanna be clear. There's some risks and downsides too. You still have to be a saver to pump money into these things. You can't do this with opm really, it's gotta be your money that you're pumping in there.

And it does take time, so it's not an overnight success story. There's some, even the best, most efficiently designed policies do have some insurance expenses, but for those that have the patience, it's been worth it for a lot of our clients. 

Ron Skelton: So [00:50:00] two questions. You're chugging along, you've got a bunch of loans out.

You're running business or something, you get hit by a bus. The life insurance policy side of it is say, let's just say it's got a $3 million value and you currently have $500,000 cash value with $250,000 worth of loans out. Does that $250,000 of loans out now that you're gone, does that impact your overall payout on the life insurance policy?

Do they get like 200 or 2 million 2.75 million or whatever? If I said $3 million on the policy. Is that just a subtracted, what's, oh, it is subtracted from the face value, or how does that work? 

Mark Willis: You've got it exactly right. Yeah, that's one. That's why it's a non-recourse loan. Because they know they're getting paid back. I mean, a hundred percent of us are gonna graduate to the other side of the grass someday. So the insurance company knows they're getting paid, and that's why there's no requirement to set up a repayment plan. When you borrow the money in the first place, cuz they know they, you're good for it.

So yes, you're right. If it was a 3 million death benefit, subtract out [00:51:00] your loan balance and your family gets the rest income tax free. They also got whatever you used the loan for. Hopefully it was a business or a real estate or something and not a casino weekend. But yeah, you get to leave them that as well. Yeah, it's true. 

Ron Skelton: That's interesting. So that's, that's cool. I'm trying to think what, I had another question there. It was around that same thing. It was about like the out pay. Oh. What happens in the event that like, if somebody's using this strategy and they go out and launch a business, this business, this podcast is about buying, growing, and selling them.

There's a high risk in that, right? And if you take money loans out to build something and all of a sudden everything goes haywire, what happens to that policy? You said you can decide how long are you're gonna pay it back on. What happens if you default on your own payments? . 

Mark Willis: Well, who's the defaulter? I mean, who's, I mean who's, who set it up, right? You just stop the payments. It's a lot like a heloc, but without a term on it. There's no requirement to repay a, a [00:52:00] policy loan. So you could skip a few payments, skip a few years, watch it, because the worst thing that, the worst thing that would happen is that you would not repay your loan.

And then you also, either can't pay the premiums at all anymore, or the policy doesn't have any more premiums cuz maybe we've stopped paying, cuz I don't know if a lot of folks might know this, but you can do a single payment life insurance policy or even a limited payment period, like three years or seven years, or 10 years.

So maybe to summarize what I'm trying to say in as simply as possible, if you got to where the loan balance grew and equaled your full cash value, they'll let you borrow about 90% of your cash value. But if that last 10%, if we never paid off the loan and somehow the loan balance grew, cuz it does charge a loan interest.

I remember the policy's cash value is also growing compound. Like there was no loan. But at some point if you never paid off the loan, let's say 10 years go by, you're not paying any more [00:53:00] premiums in the cash value in the loan equal each other. The policy automatically lapses. And you lose the life insurance coverage.

And if there were gains, you might be taxed on the gains. Now that's a bad thing, but it's very rare. I've only, I can't, I don't think I've got any clients that has ever happened to where they had a taxable gain or whatever. They would just walk away. The loan would be netted out. You'd lose the life insurance.

You don't have to repay the loan. And, there's no credit marks on your credit. You don't have to go through bankruptcy court or something like that. You just walk away. So that's the worst that could happen, but I've never seen that actually happen in the real world. 

Ron Skelton: Okay. Got it. So we're at the top of the hour, man.

This is a fun conversation and we could probably go on for a while. Let's make sure people know how to, reach out to you. What's the best way people can contact you if they're interested in learning more about this? 

Mark Willis: Sure. Yeah. It's just one of the tools we offer at our firm, lake Growth Financial Services.

This tool doesn't work. We don't [00:54:00] recommend it. We've got plenty of other strategies and options, but I gotta say, I feel like more business purchasers and investors need to know that this is a thing. I feel like it could put you in a better space competitive wise. So the best way to reach out if you'd like, we'd be happy to help.

You can find us at Kickstart with Mark. Dot com. That's Kickstart with Mark with a k.com and I'd be happy to speak with you about these or other strategies. 

Ron Skelton: Well, thank you for, answering the questions. It was an interesting conversation today. Appreciate you having you here. And then, hang out for a few seconds and we'll, and for those of you guys to listen to while you're driving, I'll put all the links to his stuff on in the show notes. So that when you get somewhere safe, you can actually, look 'em up and have 'em, so they'll be in the show notes.

So, but that's the show today. 

Mark Willis: Thank you, Ron, for having me on. 

Ron Skelton: Awesome.