Latest / MaxValue Podcast / Why your business might be your biggest risk Ft. John O'Dea

Transcript

Why your business might be your biggest risk Ft. John O'Dea · MaxValue Podcast

• 0:00
  SPEAKER_01: Hey, can I retire?
• 0:01
  SPEAKER_00: What is a buy-sell agreement?
• 0:02
  SPEAKER_01: What happens to your plan if something happens to that?
• 0:05
  SPEAKER_00: And most people don't think about their business as as an expert.
• 0:08
  SPEAKER_01: What if we did trigger the event?
• 0:10
  SPEAKER_01: Given the most common and likely scenarios, how is the business and the fellow shareholders going to survive?
• 0:18
  SPEAKER_00: Every so often check in, basically, and say, hey, you know, what's changed in the market?
• 0:22
  SPEAKER_00: What's changed with the business?
• 0:23
  SPEAKER_00: And just kind of talk through, okay, this is kind of where you are.
• 0:25
  SPEAKER_01: Like sell agreement is an important tool to have a written set of instructions.
• 0:29
  SPEAKER_01: Everybody knows what's going to happen.
• 0:31
  SPEAKER_00: You can adjust it.
• 0:32
  SPEAKER_00: We need more insurance now because our business has done better, and therefore we need to be insured for more.
• 1:08
  SPEAKER_00: He's an expert from the personal financial planning side of business exit planning.
• 1:14
  SPEAKER_00: And today we're going to dive into the topic of buy-sell agreements.
• 1:18
  SPEAKER_00: John, welcome.
• 1:20
  SPEAKER_01: Thank you so much for having me.
• 1:22
  SPEAKER_01: I'm a huge fan of your show and tickled to be here.
• 1:25
  SPEAKER_01: Happy to contribute to your community.
• 1:27
  SPEAKER_00: Awesome, awesome.
• 1:28
  SPEAKER_00: And so not everybody's going to know you as well as I do.
• 1:30
  SPEAKER_00: So why don't you give yourself give yourself a little bit of a self-intro?
• 1:34
  SPEAKER_01: An intro.
• 1:35
  SPEAKER_01: Well, thanks, Ben.
• 1:37
  SPEAKER_01: I think of myself as hired predominantly by people who currently own and operate a business and they want a financial plan or a retirement plan associated with how that business is going to play a role in achieving their financial goals and objectives.
• 1:51
  SPEAKER_01: Similar to if you're 65, you work at a big company and you have a fat 401k balance and you want to ask a planner, hey, can I retire?
• 1:59
  SPEAKER_01: But I do that work when the 401k balance isn't that simple.
• 2:03
  SPEAKER_01: It's a closely held business, and you want to understand how that business play a role in your future, whether you want to sell it, whether you want to run it forever, whether you have a kid in a business or an employee who's like a kid, how does the personal effect of running a business help you achieve your goals and objectives?
• 2:19
  SPEAKER_01: So wealth manager, financial advisor, but almost exclusively focused on the questions that people who own a business ask.
• 2:26
  SPEAKER_00: Every business and every situation is a little different.
• 2:28
  SPEAKER_00: And so they need somebody there to help guide them through.
• 2:31
  SPEAKER_00: Absolutely.
• 2:32
  SPEAKER_01: Super fun.
• 2:32
  SPEAKER_01: Just as fun as your practice, right?
• 2:34
  SPEAKER_01: Every business is both the process is similar, but the business is unique.
• 2:38
  SPEAKER_00: That's right.
• 2:39
  SPEAKER_00: Yeah, exactly.
• 2:39
  SPEAKER_00: Pattern recognition, but you need to have the pattern recognition because it is all uh a fun little mosaic.
• 2:46
  SPEAKER_00: Um, but let's start at the very beginning.
• 2:49
  SPEAKER_00: What is a buy-sell agreement?
• 2:52
  SPEAKER_01: So a buy-sell agreement is something that I worry a lot about.
• 2:56
  SPEAKER_01: If you imagine a business owner has an investment portfolio, and the investment portfolio is one company, one company can be very fragile.
• 3:04
  SPEAKER_01: Like what happens if something, what happens to your plan if something happens to that company?
• 3:08
  SPEAKER_01: For closely held businesses, a by sell agreement is a set of written instructions that multiple shareholders will follow to deal with that business under periods of stress or duress or or you know challenges.
• 3:22
  SPEAKER_01: So I think of a buy sell agreement as a written contract, very similar to a prenup or something like that, where a business owner or multiple shareholders that are involved in a business, they declare and state the behaviors that they're going to follow under certain conditions so that everybody understands who's gonna do what, to whom by when, so that there's no confusion around the process.
• 3:46
  SPEAKER_01: God forbid something horrible happens to somebody or the business in particular.
• 3:51
  SPEAKER_00: Right.
• 3:51
  SPEAKER_00: There's like those 5D triggering events like divorce and death and disability, et cetera, et cetera.
• 3:57
  SPEAKER_00: And I can, for some reason in my head, never get up.
• 3:59
  SPEAKER_01: There's a whole bunch of D's.
• 4:01
  SPEAKER_01: There's a whole bunch of D's.
• 4:02
  SPEAKER_01: Yeah.
• 4:03
  SPEAKER_01: You mentioned many of them that again we worry about.
• 4:07
  SPEAKER_01: Just if you're at this long enough, most shareholder disputes, there's another D, arise around what's going to happen when there's a surprise or a period of stress.
• 4:20
  SPEAKER_01: So somebody dies, one of the shareholders dies, one of the shareholders becomes disabled, one of the shareholders goes through a divorce.
• 4:28
  SPEAKER_01: This is especially important in community property states.
• 4:31
  SPEAKER_01: Um, you know, in a multiple shareholder situation, I really don't want to be in business with somebody's future ex-spouse.
• 4:37
  SPEAKER_01: Um other debtors, so we include D and debtors because bankruptcy doesn't quite fit.
• 4:42
  SPEAKER_01: But if one of your shareholders uh experiences financial distress and declares bankruptcy, their creditors may want to foreclose and take their ownership interest as part of that process.
• 4:52
  SPEAKER_01: So other debtors is what we worry about.
• 4:54
  SPEAKER_01: Um, it is very common that goals don't align.
• 4:58
  SPEAKER_01: And so one of the shareholders wants to depart.
• 5:00
  SPEAKER_01: There's a D.
• 5:01
  SPEAKER_01: So in departure, um, there are other colorful D's associated with somebody's behavior has turned irreverent and inappropriate, and so you've enforced them to become a D.
• 5:14
  SPEAKER_01: Um, but the departure process is something that you need to consider.
• 5:19
  SPEAKER_01: Um, and that can encompass voluntary and involuntary departures.
• 5:23
  SPEAKER_01: Uh somebody's interests are now just moving in a different direction, and it's really voluntary and supportive.
• 5:29
  SPEAKER_01: Somebody has, you know, is no longer contributing in a fashion and you're inviting them to depart, um and anywhere in between.
• 5:36
  SPEAKER_01: So departures is something that we really need to think about in terms of a triggering event to protect against.
• 5:41
  SPEAKER_00: Right.
• 5:41
  SPEAKER_00: Well, and some partners enter the partnership as a D.
• 5:46
  SPEAKER_00: So they bring it with them.
• 5:48
  SPEAKER_00: Um and when we have these agreements, we oftentimes see them in a shareholder agreement or even a whole separate document or uh operating agreement for an LLC, those sorts of uh documents, the organizing documents of the of the entity.
• 6:05
  SPEAKER_00: So if you don't know where you have one, if or if you have one, go look in one of those places.
• 6:11
  SPEAKER_01: And it's super common where people won't understand or they'll actually have references to behaviors or triggers or processes in multiple locations.
• 6:20
  SPEAKER_01: Um and your counsel will have a recommendation around whether it's a standalone document, or as you point out, incorporating it into an existing document.
• 6:28
  SPEAKER_01: Um, you know, that's an endless discussion to have with your attorney or legal counsel.
• 6:33
  SPEAKER_01: Um but yeah, typically um I like to see it as its own standalone agreement so that we can pull it out and look at it.
• 6:40
  SPEAKER_01: Um, but incorporating it into a longer operating agreement that incorporates other behaviors like distributions and shareholder decisions and other things is perfectly appropriate.
• 6:49
  SPEAKER_01: It just depends on your process and structure.
• 6:52
  SPEAKER_00: Gotcha.
• 6:53
  SPEAKER_00: And how does a buy-sell agreement fit in with your wealth management uh advisory?
• 7:01
  SPEAKER_01: I mean, I kind of alluded to it.
• 7:03
  SPEAKER_01: Um, when we build in a wealth management process, we're very concerned about building a process that is resilient to surprises.
• 7:11
  SPEAKER_01: So, you know, an ownership interest in a non-public company is a concentrated position.
• 7:18
  SPEAKER_01: And if the vast majority of your wealth is in that single concentrated position, from our perspective, it's relatively fragile to lots of different surprise types.
• 7:27
  SPEAKER_01: And so if I'm building a financial projection that assumes investment performance over a single concentrated security, like the roofing company that you own, I'm gonna freak out and worry about the binary events like somebody dies, somebody becomes disabled, and I projected it worth$10 million and now it's worth zero.
• 7:46
  SPEAKER_01: So I get very worried about those surprise events, like if you accidentally got eaten by a pterodactyl, that would be risky.
• 7:58
  SPEAKER_01: And again, the recommendation is you don't have to be faster than the pterodactyl, you just have to be faster than your buddy.
• 8:04
  SPEAKER_01: So outrun the pterodactyl, that is fine.
• 8:07
  SPEAKER_01: But as we build financial projections to say how is this business going to play a role in your future and achieving your goals, we have to build a projection with some assumptions and then we have to stress test it.
• 8:17
  SPEAKER_01: We have to stress test that financial projection in all the different ways that a plan can be affected by surprises.
• 8:25
  SPEAKER_01: So as we look at that, it's very similar to if you are lucky enough to be an early employee at Apple, that's great.
• 8:34
  SPEAKER_01: You might be worth$10 million all in Apple stock, but that's all$10 million with one company.
• 8:39
  SPEAKER_01: And the greatest companies in the world sometimes do find themselves in a different situation in the future.
• 8:45
  SPEAKER_01: And now you have a concentrated position and an ill, you know, in a security.
• 8:49
  SPEAKER_01: So no different than whether it's publicly traded or privately held.
• 8:53
  SPEAKER_01: If your wealth is tied up in a single asset, one building, one company, whatever it is, we want to understand what are the risk management pieces that we can put in place.
• 9:04
  SPEAKER_01: Just like you might, if all of your wealth was in Apple, you might consider options or other tools to put components in place to protect you from a downside standpoint.
• 9:14
  SPEAKER_01: By sell agreement is a tool that a business owner could use to provide a hedge underneath the value of their current operating business to make sure that there's some clarity long term when surprises creep in.
• 9:28
  SPEAKER_00: Right.
• 9:28
  SPEAKER_00: And I think it's interesting that the way a wealth advisor will treat a ownership of a business is is as an equity.
• 9:39
  SPEAKER_00: It's an equity security that they own.
• 9:42
  SPEAKER_00: Just like they have, you know, from a capital allocation uh standpoint, just like they may have publicly traded equities, this is also a non-liquid, non-public equity that has exposure to the market in similar ways, oftentimes.
• 9:57
  SPEAKER_00: So you have to think about it as gosh, I have a lot of my capital, a lot of my wealth focused in one area, first off, in equities generally, and then in this one position specifically.
• 10:12
  SPEAKER_00: And most people don't think about their business as an equity.
• 10:16
  SPEAKER_00: I think that's very interesting.
• 10:18
  SPEAKER_01: I think that's helpful to often think about your overall net worth, right?
• 10:21
  SPEAKER_01: If you were to map out, most investment advisors have some fancy, colorful graph, a pie chart of your net worth, right?
• 10:29
  SPEAKER_01: If you imagine your pie chart.
• 10:31
  SPEAKER_01: Um for many business owners, if you put the equity value or the fair value, right, attach some planning value to their business and put it into the pie chart, and you make that color yellow, you tend to see what I call Pac-Man investment diversification.
• 10:50
  SPEAKER_01: That one piece just looks like a Pac-Man eating everything else.
• 10:54
  SPEAKER_01: You're worth$14 million, but 10 of it is one position.
• 10:59
  SPEAKER_01: It's illiquid, not publicly traded, and fragile not just to the normal equity changes of interest rates, GDP, global dynamics, political dynamics, competitive dynamics, every stock in the entire world is all exposed to those.
• 11:15
  SPEAKER_01: But under a certain threshold, there's some fragility that creeps in around people, customer concentration, shareholder issues, and other dynamics that make that pie chart uniquely fragile, even beyond, you know, if somebody came to me and their entire net worth was tied up in, you know, pick your favorite company.
• 11:37
  SPEAKER_01: You know, it's October 2025 as we we we record this, you know, maybe it's today it's NVIDIA, right?
• 11:45
  SPEAKER_01: And and you're worth$15 million and it's all NVIDIA, that still gives me hives that it's all one company.
• 11:51
  SPEAKER_01: As lovely as I think the operating team is at NVIDIA, their opportunity in front of them, their ability to generate cash flow and use that to grow and entrench themselves from a competitive positioning standpoint, it's still a company, right?
• 12:04
  SPEAKER_01: And so thinking through hedges and protections and things that you might do to try to diversify away some of that risk, should you choose to, we want to think through that in a non-publicly traded, especially lower middle market company, very hard to diversify away some of that until we start to think about liquidity tools.
• 12:24
  SPEAKER_01: Um, so the buy-sell agreement tends to be one of those easy places from a risk management standpoint to say of all the things that could go sideways in your life, what can we put in place to try to hedge or reduce or mitigate some of those risks?
• 12:38
  SPEAKER_00: Exactly.
• 12:40
  SPEAKER_00: So what's a what's a misconception that some of your clients have about buy-sell agreements?
• 12:47
  SPEAKER_01: Yeah, I mean, I think buy-sell agreements, uh, you know, the first misconception that we come across super common is that they just don't exist, right?
• 12:55
  SPEAKER_01: That they're not aware of them, that that what is the importance?
• 12:58
  SPEAKER_01: Why would I have it?
• 12:59
  SPEAKER_01: Especially early in many business owners' lives, we love everybody.
• 13:04
  SPEAKER_01: Like everybody's getting along.
• 13:06
  SPEAKER_01: Why would there ever be disagreement?
• 13:08
  SPEAKER_01: Doesn't this just take care of itself?
• 13:09
  SPEAKER_01: Doesn't this just happen?
• 13:11
  SPEAKER_01: Um, so the first misconception is just going without.
• 13:14
  SPEAKER_01: Um, the second misconception tends to be from my perspective that the value of an enterprise, the value of a business is a relatively easy thing to establish, and my CPA can do it.
• 13:27
  SPEAKER_01: And so it's very common that we'll see business owners ask their CPA, who may have all the skills and capabilities and resources in this area, but coming up with a simple, easy CPA-based formula or number to help inform the discussion is very limiting and can often lead to very surprising and damaging outcomes.
• 13:51
  SPEAKER_01: The third misconception tends to be a process that doesn't review it on a regular basis.
• 13:56
  SPEAKER_01: Very often, you need to just bring it out, review it, and understand.
• 14:00
  SPEAKER_01: Imagine triggering this document.
• 14:01
  SPEAKER_01: Go through the gamification of the process.
• 14:04
  SPEAKER_01: We've triggered this document, what are we doing?
• 14:08
  SPEAKER_01: Right?
• 14:08
  SPEAKER_01: So back to our pterodactyl issue, right?
• 14:11
  SPEAKER_01: If you and I were in business together and the pterodactyls showed up, and because today was leg day, you outran me and I got eaten, what are we doing today?
• 14:21
  SPEAKER_01: Right?
• 14:22
  SPEAKER_01: And it could be anything.
• 14:23
  SPEAKER_01: It could be, do I have the passwords?
• 14:25
  SPEAKER_01: Am I the only one on the payroll system all the way through to, you know, there's now an interest that flows through to my estate pan that goes to my wife Jessica?
• 14:35
  SPEAKER_01: Do you really want to be in business with Jessica?
• 14:37
  SPEAKER_01: And is there a fair process in place for us to make that from both our perspectives?
• 14:42
  SPEAKER_01: Right?
• 14:42
  SPEAKER_01: If I'm dead, is my wife taken care of?
• 14:45
  SPEAKER_01: And if I'm dead, are you taken care of?
• 14:47
  SPEAKER_01: And do we have a good solid set of written instructions that are clear to everybody about how that process?
• 14:53
  SPEAKER_01: So very common that you ask the CPA and they'll give you a number or you'll put it in there without a lot of thought and support, and you won't review it again.
• 15:01
  SPEAKER_01: Um, and so very often it can be surprising when it comes back.
• 15:04
  SPEAKER_01: So those tend to be the big ones that come up.
• 15:06
  SPEAKER_00: Gotcha.
• 15:07
  SPEAKER_00: Well, and I tell you what, the um first off, I think I'm safe with the pterodactyl anyway, because you're taller than I am, and you're closer to his clause.
• 15:14
  SPEAKER_00: That that that's my theory anyway.
• 15:16
  SPEAKER_00: The uh the other piece though is going off of the uh the valuation, obviously, which which I care deeply about, um, but but you know, how often to to take take that out and look at it.
• 15:28
  SPEAKER_00: And you you actually even mentioned uh sustainability.
• 15:31
  SPEAKER_00: You know, it's it helps you think about emergency planning, sustainability of your business, what happens if somebody's not there for any reason, but what what happens?
• 15:41
  SPEAKER_00: Uh but going off of the valuation part of buy sells, I mean you you already uh alluded to having somewhat arbitrary metrics or somebody's heard something and we should have you know three times multiple of something in the buy-sell agreement, and that'll be that'll work.
• 16:02
  SPEAKER_00: Um I do see that all the time as well.
• 16:06
  SPEAKER_00: Uh what I have an answer, certainly, but what what would your answer be as to how to best define how you would value the business in one of these triggering events?
• 16:19
  SPEAKER_01: Yeah, I mean, I I think um having been through enough disputes and surprises and litigation and and harrowing stories of you know, something bad happens and nobody's got clarity and it just doesn't play out to everybody's benefit.
• 16:36
  SPEAKER_01: Um, I've come to appreciate what I call value now value regularly process.
• 16:42
  SPEAKER_01: Um and so this is this is what I believe and I recommend as much as it feels challenging.
• 16:48
  SPEAKER_01: And I'll I'll go back to um, you know, most of us have come across Zillow and have pulled our house up and looked up, look, looked it up on Zillow and thought, well, my house is fill in a blank, more than that, less than that, right, different than that, doesn't incorporate everything that's unique to me.
• 17:06
  SPEAKER_01: And that's where I find it's it's helpful to draw comparisons around using a basic formula, book value, multiple of revenue, multiple of earnings, whatever earnings means, it's not specific enough.
• 17:19
  SPEAKER_01: Um, and really get to, from my perspective, a valuation process that attempts to establish an arm's length value.
• 17:28
  SPEAKER_01: What would a willing buyer pay for your business if you were a willing seller, everybody had access to full and complete information?
• 17:36
  SPEAKER_01: What is the actual sale value that we're likely to get if we box this up in a healthy fashion and sold it to somebody else?
• 17:44
  SPEAKER_01: I think for many business owners, when you talk through that process, what is the third-party likely sale value of your business?
• 17:53
  SPEAKER_01: If we can use that as a baseline to handle a transaction among shareholders that we trigger, somebody's died, somebody's become disabled, we have a disability, you know, a departure.
• 18:03
  SPEAKER_01: If we use that as a standard, I think that most will agree that tends to be a fair number.
• 18:10
  SPEAKER_01: There's a fairness that's established there.
• 18:13
  SPEAKER_01: So a you know, a fair market value standard, you're more fluent in the terms that you would apply to this.
• 18:19
  SPEAKER_01: So I'll invite you back in to use these, but the arm's length transaction, willing buyer, willing seller with full and complete access to information, nobody's compelled to take action on the transaction.
• 18:31
  SPEAKER_01: And then from there, applying a reasonable application of whether it's a majority interest or a minority interest, I do prefer that if somebody's a minority shareholder, that that gets addressed with a discount.
• 18:44
  SPEAKER_01: Um so that process to try to approximate without going through the process of selling the company is what I love to have a professional hired to do.
• 18:56
  SPEAKER_01: And I love that uh, you know, my preference, my recommendation, the best practice is that business owners and shareholders experience that process while everybody's alive.
• 19:06
  SPEAKER_01: And that process itself, going through that process with a trained professional, often uncovers things that are surprising, where people didn't think about from an opportunity standpoint when it does come time to handle the transaction, there's things that are unique to your business that might help or hurt your valuation.
• 19:23
  SPEAKER_01: So the valuation process itself, I find is super valuable for everybody.
• 19:27
  SPEAKER_01: As much as it feels like a tax or a fictional expense or something that, you know, from a compliance standpoint, you know, I do I have to, um, you know, there's a lot of that resistance, but the valuation process, I think the first time you do it, um, I think is super helpful.
• 19:44
  SPEAKER_01: And then to do it on some regular basis, so value now, value regularly, two to three years or after a big change in the business.
• 19:52
  SPEAKER_01: So, like I was doing work for a client, they had a big concentration with one customer, that customer was lost, unfortunately.
• 20:01
  SPEAKER_01: And so rather than waiting for the two to three year process, after a year or so of a of adapting and normalizing, value it again relatively soon.
• 20:10
  SPEAKER_01: So on a regular basis, value that so it's never too far, and then your gamification, if you will, of pretending, okay, now that we have it valued, and here's our number, and the process itself is memorialized in our agreement, what if we did trigger the event?
• 20:28
  SPEAKER_01: Given the most common and likely scenarios, how is the business and the fellow shareholders going to survive what is outlined in our agreement?
• 20:37
  SPEAKER_01: Is it supportable?
• 20:38
  SPEAKER_01: Is it reasonable?
• 20:39
  SPEAKER_01: Do we feel like we can accomplish this process from a cash flow standpoint?
• 20:44
  SPEAKER_01: If we are triggering this event, um, regardless of what other additional tools you might have in place to help support it.
• 20:50
  SPEAKER_01: Insurance is a common question.
• 20:52
  SPEAKER_01: Do we buy insurance associated with the buy sell agreement?
• 20:55
  SPEAKER_01: Where do we buy it?
• 20:56
  SPEAKER_01: How do we buy it?
• 20:57
  SPEAKER_01: Um, recent support Supreme Court case associated with insurance and how that structures and how to think about that.
• 21:06
  SPEAKER_01: Uh, but that process, my preference, my recommendation as I think about it, you know, um, I think about securities, whether private or public, the price that I see for a security is the last transaction.
• 21:20
  SPEAKER_01: That's very easy for me to see what Apple traded for three minutes ago, right?
• 21:25
  SPEAKER_01: Or 90 seconds ago.
• 21:26
  SPEAKER_01: I know exactly what if I had to sell it today, what I would get by and large.
• 21:30
  unknown: Right?
• 21:30
  SPEAKER_01: For a closely held or non-traded product, you got to try to approximate the market of what a willing buyer and willing seller in the marketplace would choose to pay for the asset.
• 21:42
  SPEAKER_01: Um, not that you would be willing to accept it, but as a planning consideration, memorialize the process that you're going to follow in the agreement.
• 21:50
  SPEAKER_01: You know, and this is where working with council and valuation professionals, how should it be written in the agreement?
• 21:56
  SPEAKER_01: You know, industry designations, preferences, key terms.
• 22:00
  SPEAKER_01: Terms that are critical to reference in terms of whether, as I mentioned in my discussion, a discount is going to apply, full fair value, fair market value, all of these are triggering terms that, if you get right, really reduces the range of potential disagreement.
• 22:16
  SPEAKER_01: Because it unfortunately, when a triggering event is taking place, it's very often taking place at a time when people are not getting along.
• 22:24
  SPEAKER_01: And you can save a great deal of expense.
• 22:28
  SPEAKER_01: And this is hundreds, if not millions, of dollars in litigation over a careless use of terms or terminology that could have been a couple hundred bucks to fix and a couple of thousand dollars of regular valuation experience.
• 22:43
  SPEAKER_00: Well, and don't undersell us.
• 22:44
  SPEAKER_00: I mean, we're we're we're fairly uh fairly expensive.
• 22:47
  SPEAKER_00: But at the at the end of the day, though, I I completely agree.
• 22:51
  SPEAKER_00: And actually the first time you should be talking to a valuation person is you know, just just buy an hour working with your legal counsel setting up that document to make sure that the the wording is correct.
• 23:03
  SPEAKER_00: And I do that all the time.
• 23:04
  SPEAKER_00: Where, you know, it sometimes, you know, depending on who it is, I'll I'll just uh you know give them some uh some insights without you know without uh setting up a charge code.
• 23:13
  SPEAKER_00: But um, but at the end of the day, really, it's not that not that complex, but there are each word is important because a lot of those words are terms of art in in that in that arena.
• 23:27
  SPEAKER_00: Um and there's there's a lot of little things to think about, like you said, discount identifying whether there has to be discounts or you specifically are not for some reason.
• 23:36
  SPEAKER_00: And that that's okay too.
• 23:37
  SPEAKER_00: You can define it any way you want, just define it.
• 23:40
  SPEAKER_01: Um for your listeners, have you talked through like just take a term like earnings?
• 23:46
  SPEAKER_01: Like how many different ways could you take the term earnings?
• 23:50
  SPEAKER_01: I mean, do you want to count them?
• 23:52
  SPEAKER_00: Uh no, I I can't because everybody has their own can have their own definition.
• 23:56
  SPEAKER_00: I mean, just as you're speaking, there's a dozen that are popping into my head just now.
• 24:02
  SPEAKER_00: Um, all of them could be theoretically termed earnings.
• 24:07
  SPEAKER_00: Uh, so you can't say we're gonna do three X times earnings.
• 24:11
  SPEAKER_00: Okay, and which period?
• 24:12
  SPEAKER_00: Okay, and beyond that, you know, is it are we gonna do an average?
• 24:15
  SPEAKER_00: Are we gonna do look forward?
• 24:16
  SPEAKER_00: Are we what what are we gonna do?
• 24:19
  SPEAKER_00: And you don't have to go into all that detail in the agreement.
• 24:23
  SPEAKER_00: What you have to do is talk it through such that I have seen some formulas that are so well done that they basically replicate what I might do as a valuation person, but don't bother.
• 24:38
  SPEAKER_00: You give it to the valuation person who is is going to go through their professional standards, which they know you don't know.
• 24:48
  SPEAKER_00: Um sometimes actually the the sometimes a guy like you would know, sometimes a uh you know a good corporate attorney will know, but that's still not the same as getting somebody who's doing it all day long every day the same, you know, the same way through the same same standards.
• 25:04
  SPEAKER_00: I definitely agree.
• 25:05
  SPEAKER_00: Um getting it referenced to a real valuation with real professional judgment is is important.
• 25:14
  SPEAKER_00: And then as you go along, especially if things are kind of going along well in the you know the track that you want them to go, you don't necessarily have to do a full valuation all the time.
• 25:24
  SPEAKER_00: You know, one of the things that you know I've certainly done with clients is just that'll help make sure that their life insurance on each other do the cross insurance, not owned by the company, uh, because of that Supreme Court uh decision that you were referencing earlier.
• 25:39
  SPEAKER_00: Um the uh that that's not legal advice, by the way.
• 25:43
  SPEAKER_00: I'm not a lawyer.
• 25:48
  SPEAKER_00: No tax or legal advice here.
• 25:50
  SPEAKER_01: But we could talk about cross-purchase versus entity redemption versus you know, uh, you know.
• 25:56
  SPEAKER_00: But we won't ask John for that, right?
• 25:58
  SPEAKER_00: For for his professional advice at that point.
• 26:00
  SPEAKER_00: Everybody, I want to take a second here to share something about who we are and why we make this show.
• 26:05
  SPEAKER_00: You're probably here because either you or a client of yours is thinking about buying or selling a business, bringing in investment, or planning an eventual exit.
• 26:14
  SPEAKER_00: And that is why we call this show Max Value.
• 26:17
  SPEAKER_00: We provide you with information and insights about how to maximize the value of your business.
• 26:22
  SPEAKER_00: Our team at Town Advisory guides business owners through the crucial, often once-in-a-lifetime opportunity to exit their business.
• 26:28
  SPEAKER_00: We use our trademarked exit builder program to help business owners prepare early, protect the value they've built, and obtain maximum value through an exit.
• 26:37
  SPEAKER_00: And the secret is our clients define what value means to them.
• 26:40
  SPEAKER_00: Taking the right steps now can make all the difference in creating a successful outcome for yourself, your family, and your work team.
• 26:47
  SPEAKER_00: If you think you're ready for the next step in understanding and increasing the value of your business, make a comment, send me a message on LinkedIn, or send me an email.
• 26:55
  SPEAKER_00: All those links are in the show notes.
• 26:57
  SPEAKER_00: But but point is, um you could adjust it.
• 27:01
  SPEAKER_00: You know, hey, we need more insurance now because our business has done better and therefore we need to be insured for more.
• 27:08
  SPEAKER_00: That sort of thing needs to be done on a somewhat periodic basis.
• 27:13
  SPEAKER_00: And there are bigger businesses that I work with that we value them every year just because there's a lot of interested parties, you know, the ownership pool is bigger, people just need to have this benchmark.
• 27:24
  SPEAKER_00: So there's all there's all sorts of reasons um that it can go bad if you don't have it.
• 27:32
  SPEAKER_00: Uh one one of them is value doesn't always mean the same thing.
• 27:38
  SPEAKER_00: So if it depends on what the triggering event is, right?
• 27:41
  SPEAKER_00: So if you uh somebody's getting a divorce, one of the shareholders gets a divorce, the way that divorce court, family law court, values the business may not be and probably isn't at all the same as you might do it for your buyout, your buy-sell agreement.
• 28:00
  SPEAKER_00: So your buy-sell agreement might say this your piece is worth a million dollars, but the family law court says no, it's worth five million dollars because they do it very differently.
• 28:09
  SPEAKER_00: For example, they don't use discounts hardly at all, or at least you know, in in California in uh the uh this venue.
• 28:17
  SPEAKER_00: Uh on the flip side, you can again define your buy-sell any way you want, and especially if it's not something that triggers all the time your estate valuation.
• 28:30
  SPEAKER_00: Say you die, unfortunately.
• 28:33
  SPEAKER_00: Your estate can be hit with a bill for the fair market value of your business interest, even if you guys have decided, well, for whatever reason, we want to do this as a a bargain type purchase.
• 28:50
  SPEAKER_00: You know, we're just gonna look at the balance sheet and take take our take our equity and we're gonna go off of that because it's something that we can all agree to.
• 28:58
  SPEAKER_00: Pluses and minuses to that, the plus is it's easy.
• 29:00
  SPEAKER_00: The bad part is now you probably owe you know some some estate tax, or you you at least have the potential to owe some estate tax on a dollar amount that you're not recognizing from the the buy-sell agreement.
• 29:11
  SPEAKER_00: So okay, that was that was a big chunk.
• 29:16
  SPEAKER_00: Um well let's let's talk about you know the language structure and funding.
• 29:21
  SPEAKER_00: We've already talked a little bit about the language, being specific about that.
• 29:25
  SPEAKER_00: Um, but but funding in particular.
• 29:28
  SPEAKER_00: Uh, this is kind of you know your your wheelhouse.
• 29:31
  SPEAKER_00: Uh, when a client asks, hey, what do I need to do to make sure this is funded?
• 29:37
  SPEAKER_00: What what are they talking about?
• 29:39
  SPEAKER_00: How do you make it happen?
• 29:40
  SPEAKER_01: Yeah, I mean, back to my concern if I'm doing a cash flow projection about your retirement, right?
• 29:46
  SPEAKER_01: And you've got your goals and objectives, we're looking at your resources to accomplish those goals and objectives.
• 29:51
  SPEAKER_01: We build a projection of you sailing off into the sunset, and then we start to stress test.
• 29:56
  SPEAKER_01: And in the stress test, we go back to well, this is Pac-Man investment diversification.
• 30:01
  SPEAKER_01: We got a single concentration.
• 30:03
  SPEAKER_01: If something happens to that, how does the future look?
• 30:06
  SPEAKER_01: And if it doesn't look great, what sort of interventions or processes or procedures can we put in place to put a uh a wedge underneath that plan to try to provide some downside protection?
• 30:17
  SPEAKER_01: By sell agreement is an important tool to have a written set of instructions so everybody knows what's going to happen, and then run the cash train associated with what we call funding it or putting some tools in place.
• 30:30
  SPEAKER_01: And funding a potential future buyout could come in a bunch of different forms.
• 30:35
  SPEAKER_01: It's very common for counsel and advisors to think about insurance products.
• 30:40
  SPEAKER_01: You know, what is the lowest cost solution associated with funding the most common and most severe?
• 30:47
  SPEAKER_01: So we think in terms of frequency, severity, those combinations, you know, the financial outsized, you know, so severity of the issue, the frequency and how it combines, and then thinking through a budget range of as a percentage of enterprise value, what should I think about in terms of the expense associated with funding or preparing for the funding?
• 31:09
  SPEAKER_01: Um, and it it depends on each institution and the risks that the individuals are taking on and how unique the individual is to the value of the business.
• 31:18
  SPEAKER_01: So, you know, I I'm working on a situation right now, it's a lovely business, it's worth somewhere in the range of$15 to$20 million.
• 31:25
  SPEAKER_01: There's two primary shareholders.
• 31:27
  SPEAKER_01: It is not at the place yet from a maturity standpoint where if one of them died, uh, that the business could continue.
• 31:35
  SPEAKER_01: Both are very important to the operation of the business.
• 31:38
  SPEAKER_01: Now I have another company where the owner and the operator of the business spends very little time operating the business.
• 31:45
  SPEAKER_01: The clients don't call him, they call the team, the banking isn't really personal guaranteed, right?
• 31:51
  SPEAKER_01: There's lots of independence from the value of the business to the owner.
• 31:54
  SPEAKER_01: If the owner died, there may be very little value change that takes place.
• 31:59
  SPEAKER_01: So as we think through the severity of the change associated with the D's, one of the shareholders dies, gets disabled, departs, in some fashion triggers this process.
• 32:10
  SPEAKER_01: For some of the departure style triggering events, it can be very hard to pre-fund or prepare for that.
• 32:18
  SPEAKER_01: Um, you could, in theory, earn profit, pay taxes, leave it inside the company and accumulate a fund to be ready just in case.
• 32:28
  SPEAKER_01: Uh, but in terms of the opportunity cost of those funds, it tends to be more worthwhile to either distribute it out to shareholders to build reserves to prepare for surprises, or to use those after-tax resources to grow the value of the enterprise.
• 32:42
  SPEAKER_01: So pre-funding in terms of setting aside resources just in case.
• 32:47
  SPEAKER_01: Um, so most of the time I tend to think in terms of the risks that are efficient from a protection or insurability standpoint.
• 32:55
  SPEAKER_01: So life insurance, disability insurance tends to be the most common places that we look at.
• 33:00
  SPEAKER_01: Um, it's very common for people to start with life insurance, despite the fact that I'm the most freaked out and worried about a disabling condition.
• 33:09
  SPEAKER_01: So it depends on the nature of the situation.
• 33:12
  SPEAKER_01: It can be very frustrating.
• 33:14
  SPEAKER_01: Part of the challenge with my fear is disabling conditions are more frequent, and some of those conditions are also very severe, and severe in a bunch of different ways.
• 33:25
  SPEAKER_01: To the individual who suffered a disabling, a total disability, very severe for them, but also for the business.
• 33:32
  SPEAKER_01: If you imagine, again, you and I are in business together, you haven't gotten eaten by the pterodactyl, but you've been clipped.
• 33:38
  SPEAKER_01: So you've been clipped by the pterodactyl, you did a pretty good job, but you weren't perfect, and you're, you know, having trouble getting all the way back to work on a full-time basis and may never be able to get back to work on a full-time basis.
• 33:51
  SPEAKER_01: Back issues, challenges with coordination, whatever it doesn't.
• 33:54
  SPEAKER_00: It's really hard to do evaluation without arms.
• 33:57
  SPEAKER_01: So well, so you've lost your arms, right?
• 34:00
  SPEAKER_01: It finally costs you both an arm and a leg.
• 34:02
  SPEAKER_01: So as a business owner, when do I stop paying you?
• 34:07
  SPEAKER_01: I very hard.
• 34:08
  SPEAKER_01: So disabling events are very challenging, but because they are also more frequent than a death, right?
• 34:15
  SPEAKER_01: Uh, what used to kill us doesn't kill us anymore.
• 34:18
  SPEAKER_01: It only maims us.
• 34:19
  SPEAKER_01: So disabling conditions are much more common and the amounts tend to be very similar.
• 34:25
  SPEAKER_01: So the premium expense associated with funding or insuring for disabling conditions tends to feel expensive, right?
• 34:34
  SPEAKER_01: If we're whatever it is, three to six times more likely to become disabled than to die, then the premiums are probably three to six times higher.
• 34:44
  SPEAKER_01: So uh it tends to be helpful to think in terms of am I going to allocate a budget?
• 34:49
  SPEAKER_01: Is it 1% or 2% of enterprise value is going to be the annual expense that we're going to spend to try to put a hedge in place from an insurance standpoint?
• 34:59
  SPEAKER_01: Take that budget and see what we can afford.
• 35:02
  SPEAKER_01: And then again, game it out, right?
• 35:04
  SPEAKER_01: If we have a disability policy that affords us to buy a$2 million disability benefit that pays to a shareholder to complete or support a transaction, what does it look like?
• 35:15
  SPEAKER_01: So, like if our business was worth, I mean, we're really good at what we do, and our business is now worth$14 million, right?
• 35:23
  SPEAKER_01: And you're disabled, no arms.
• 35:26
  SPEAKER_01: So our valuation process and our buy-sell agreement establishes fair market value.
• 35:30
  SPEAKER_01: We're 50-50, so no discounts are going to apply.
• 35:33
  SPEAKER_01: We've established this value, we had this disability policy.
• 35:36
  SPEAKER_01: What we decided from a funding standpoint was a$2 million policy.
• 35:40
  SPEAKER_01: So that benefit finally triggers, typically after 12 months when disability policies trigger.
• 35:46
  SPEAKER_01: So I get a$2 million disability benefit to use as part of the down payment on the$7 million that I owe to you.
• 35:54
  SPEAKER_01: Now, I buy out your piece.
• 35:57
  SPEAKER_01: I now make all of the distributions that you used to make.
• 36:00
  SPEAKER_01: So that should help me finance the residual$5 million.
• 36:03
  SPEAKER_01: But that's the gamification we got to think through.
• 36:06
  SPEAKER_01: I got to hire a replacement for you.
• 36:08
  SPEAKER_01: I gotta the business may reset where some of your clients stop calling because they liked you more than me, which I would fully expect most clients would like you more than me.
• 36:18
  SPEAKER_01: Um, but that's the funding discussion is to think through what are the insurance products available, are we insurable?
• 36:25
  SPEAKER_01: Because there are going to be health questions that may come up as part of this process, and come up with what is an efficient cash flow drain.
• 36:33
  SPEAKER_01: Because again, this is an expense that stands between business revenue, profit, and things that we want to do, right?
• 36:43
  SPEAKER_01: Whether it's$50,000 a year that we can't spend on new employee or marketing or distributions to buy a building or all the other lovely things that we want to be able to do, insurance stands in the way of that.
• 36:57
  SPEAKER_01: So we want to buy the most efficient, least you know, frictional component that will give us a good shot at completing the process to everybody's benefit.
• 37:10
  SPEAKER_00: Absolutely.
• 37:11
  SPEAKER_00: And it it definitely comes to how do you want to use that cash, right?
• 37:16
  SPEAKER_00: I mean, just to bottom line it.
• 37:18
  SPEAKER_00: The the different triggering events can lead to different outcomes, as as I think we've really kind of said it a couple different ways a couple different times.
• 37:29
  SPEAKER_00: Um, and you were certainly referring to it there.
• 37:31
  SPEAKER_00: I mean, you you may need a you know life policy for a death.
• 37:36
  SPEAKER_00: You may need long-term disability.
• 37:39
  SPEAKER_00: In the case of a divorce, you don't need any of that, but you may need a you know spousal waiver, you know, those sorts of things that, you know, hey, that this is now your problem.
• 37:47
  SPEAKER_00: You you fund you know the the buyout of your spouse's interest, etc.
• 37:51
  SPEAKER_00: etc.
• 37:52
  SPEAKER_00: So um the it's not even within the funding side, that it's not one size fits all, it's not all insurance.
• 37:59
  SPEAKER_00: Um, oftentimes there's you know a bank involved, etc.
• 38:02
  SPEAKER_00: etc.
• 38:02
  SPEAKER_00: Or maybe hopefully people have sufficient assets outside that they could handle all or most of it uh themselves, and that becomes very particular to the situation.
• 38:14
  SPEAKER_00: So when we're talking about this issue, this buy-sell issue, you know, we we've we've talked you you've mentioned that it's sort of like a prenup or a post-nup, depending.
• 38:28
  SPEAKER_00: So thinking about that analogy, I mean it comes down to how do you, and do I, get people who are happy and get along uh to actually seriously think about the these outcomes, and they're all bad, right?
• 38:44
  SPEAKER_00: At least in a sense, you know, they're emotionally bad uh outcomes, death, disability, departure, etc.
• 38:49
  SPEAKER_00: etc.
• 38:50
  SPEAKER_00: How do you encourage people to do this?
• 38:53
  SPEAKER_00: It's very much like estate planning in general, right?
• 38:55
  SPEAKER_00: Like nobody wants to think about their own death or anybody else's death, but this is sort of a the death of a business, so it's kind of like business estate planning in a sense.
• 39:05
  SPEAKER_01: Yeah, I mean, there's a lot of different ways, depends on the receptivity of the individuals involved, um, in terms of receptivity and and the eagerness to move forward.
• 39:17
  SPEAKER_01: I tend to start with my concerns, right?
• 39:20
  SPEAKER_01: In terms of this is when we build a financial plan of you accomplishing your goals and objectives, these are your goals and objectives, right?
• 39:27
  SPEAKER_01: And and the process that I follow.
• 39:29
  SPEAKER_01: What are your goals and objectives?
• 39:30
  SPEAKER_01: What are the resources available to accomplish that?
• 39:33
  SPEAKER_01: Let's build a visualization of your resources, accomplishing the goals and objectives, then let's stress test, right?
• 39:39
  SPEAKER_01: What we know for sure is that surprises will happen.
• 39:42
  SPEAKER_01: What we don't know is what surprise is going to come up, right?
• 39:46
  SPEAKER_01: And everybody who has been around long enough has experienced a stock market value change 2001, 8, 9, 01, 02, 03, 2022, right?
• 39:57
  SPEAKER_01: February, March of 2024.
• 39:59
  SPEAKER_01: Like there are surprising changes in the value of assets all the time.
• 40:04
  SPEAKER_00: I I was hoping you're gonna go into the future and start predicting.
• 40:07
  SPEAKER_01: But that's for our next episode.
• 40:11
  SPEAKER_01: Um, but in in the process, I think you can get people to start to nod and agree that surprises happen, right?
• 40:19
  SPEAKER_01: And the opportunity, the encouragement for me is that not that I just make you resilient to surprises, right?
• 40:31
  SPEAKER_01: So in investment language, uh, we can build things that are resistant or robust to surprises.
• 40:39
  SPEAKER_01: And that's definitely a very good first step.
• 40:42
  SPEAKER_01: But wouldn't it be great?
• 40:44
  SPEAKER_01: Wouldn't it be great if it's not just resistant to a surprise, but it actually profits and benefits from the surprise.
• 40:53
  SPEAKER_01: So in investment language, you know, um, you're probably uh a Nassim Taleb reader, the black swan, or or um, you know, he's got a series of books that he's written, and this really influenced my idea and image and understanding of building optionality or protection for people's wealth.
• 41:13
  SPEAKER_01: Um, but if your wealth is currently fragile, you know, generally what I encourage owners to think about is what's the opposite of fragile?
• 41:23
  SPEAKER_01: And for most anti-fragile is the answer to that, right?
• 41:28
  SPEAKER_01: Yeah, we we no, we you know, I mean, it we had to invent a word, right?
• 41:35
  SPEAKER_01: The the if it's fragile today, most of the time we think the wine glass, when it experiences a shock, its value goes down because it's been destroyed.
• 41:44
  SPEAKER_01: Our first sense is the improvement is we can make a wine glass that when the shock happens, it at least doesn't break, go down in value.
• 41:53
  SPEAKER_01: But what if we could build the wine glass such that when it experiences the shock, it transforms from crystal to gold, right?
• 42:01
  SPEAKER_01: It improves or increases in value as a result of the shock or the surprise.
• 42:06
  SPEAKER_01: So that's my hope for every client that I work with is how do I get them to the point where their process improves their ability to react to surprises?
• 42:16
  SPEAKER_01: So, Mr.
• 42:17
  SPEAKER_01: Business Owner, you know, investment process, estate planning, tax planning, whatever it is, you have a very concentrated position in a single asset that I don't have a lot of tools to help you plan around.
• 42:31
  SPEAKER_01: But let's play this out.
• 42:32
  SPEAKER_01: Like, what happens if your fellow shareholder dies?
• 42:35
  SPEAKER_01: How does this play out for you?
• 42:37
  SPEAKER_01: Because I'm not sure this projection happens in the way that we imagine, right?
• 42:41
  SPEAKER_01: Or if something happens to you, how do we make sure that you and your family, your charities, the things that are important to you, get the resources that you hoped they would achieve?
• 42:52
  SPEAKER_01: And it may be that again, you've created the resources that even if the business value went to zero, you're gonna be fine.
• 43:00
  SPEAKER_01: Then we don't need to invest a lot of expense in the process.
• 43:06
  SPEAKER_01: However, you may still want to, right?
• 43:09
  SPEAKER_01: You have a kid or somebody who's like a kid in the business, you'd like that to six successfully transfer to them even if you weren't around.
• 43:18
  SPEAKER_01: And it's not to take care of your family, but to make sure that your work family is cared for.
• 43:25
  SPEAKER_01: So there tends to be a lot of ways to come at, hey, I'd like you to spend whatever the number is for attorney, review and update and get some recommendations.
• 43:35
  SPEAKER_01: The best practice I'm gonna recommend that you invite a valuation professional into your process.
• 43:40
  SPEAKER_01: There's another bucket of expenses.
• 43:42
  SPEAKER_01: So now I'm writing checks and spending your money, and people are frustrated with me, like a state planning attorney, business attorney, CPA, we need to do tax planning.
• 43:51
  SPEAKER_01: I got a valuation professional.
• 43:52
  SPEAKER_01: Like John, I thought my planning fee with you was high enough, but now you're spending me money on other professionals.
• 44:00
  SPEAKER_01: But I think if we lay it out as a process of things that we check off over time, um, it tends to be doable and achievable.
• 44:07
  SPEAKER_01: Hey, in 2026, 2025's over.
• 44:10
  SPEAKER_01: In 2026, we're gonna have a group meeting with your business attorney and we're gonna plan this out.
• 44:17
  SPEAKER_01: You know, what's the document?
• 44:18
  SPEAKER_01: How does it look today?
• 44:19
  SPEAKER_01: Key items that we're gonna address.
• 44:21
  SPEAKER_01: And as part of that process, we're gonna make sure that we secure evaluation professional, we talk through why and in what form, what's the value of that expense to you.
• 44:29
  SPEAKER_01: We're gonna, 2027, we're gonna review again your estate plan.
• 44:33
  SPEAKER_01: 2028, we're gonna do right, process this out so that as we care for these families long term, you know, again, these aren't my plans.
• 44:42
  SPEAKER_01: What I hope and and what keeps me up at night is the things that we talked about.
• 44:48
  SPEAKER_01: We just know surprises are gonna happen.
• 44:50
  SPEAKER_01: They're gonna, there will be the reason that it makes us laugh, you know, pterodactyl risk management, be ready.
• 44:57
  SPEAKER_01: It could happen.
• 44:58
  SPEAKER_01: Like we don't know where the surprise, we have seen so many surprises over the last 20 or 30 years, pick your investing horizon, that we didn't see coming, right?
• 45:07
  SPEAKER_01: Or enough of us didn't see coming to get to the point that a little bit of margin of safety uh sounds like good advice.
• 45:16
  SPEAKER_01: So I I have yet to say somebody, you know, tell me no outright.
• 45:21
  SPEAKER_01: Um, people generally start subac on all the expenses and try to find the most efficient way forward, um, which is totally prudent, right?
• 45:29
  SPEAKER_01: Is is if you did everything they recommend, you'd have no money left over to eat.
• 45:34
  SPEAKER_01: Like we gotta, there's a balance here to some degree.
• 45:37
  SPEAKER_00: Yeah, absolutely.
• 45:39
  SPEAKER_00: Well, so explain explain this pterodactyl thing, this pterodactyl risk uh that you know we've we've been kind of jokingly mentioning the the whole podcast here.
• 45:48
  SPEAKER_00: Um, you know, in our in our uh prior call, we were, you know, I was noticing that on your on your cup you had uh you had a cool logo.
• 45:56
  SPEAKER_00: So t tell me about it.
• 45:57
  SPEAKER_01: Yeah, I mean I um as we talk about you know providing excitement and motivation for individuals to tackle projects that aren't very fun to talk about, um I often will bring up the idea, you know, what happens if you're eaten by a pterodactyl?
• 46:13
  SPEAKER_01: And the first thing people do is generally laugh or they look at me funny, like, how do you spell pterodactyl?
• 46:18
  SPEAKER_01: Um but it tends to loosen the mood and set it aside as something, you know, sort of a little bit lighter to hold.
• 46:27
  SPEAKER_01: Um and so um, you know, I think about an idea or a concept or you know, an example company.
• 46:35
  SPEAKER_01: Imagine there is a company out there that provides pterodactyl risk management services, right?
• 46:41
  SPEAKER_01: And and what would happen to them?
• 46:43
  SPEAKER_01: It's mom and dad, some kids in the business, they have a couple of lines of business.
• 46:48
  SPEAKER_01: Um, you know, one is education, right?
• 46:51
  SPEAKER_01: Be ready, it could happen.
• 46:52
  SPEAKER_01: The other is remediation services or tools, so special umbrellas to protect yourself from the pterodactyls that come.
• 46:59
  SPEAKER_01: And you know, the third might be, you know, uh eradication, right?
• 47:03
  SPEAKER_01: You find that there's a pterodactyl living in your, you know, your chimney, and so you need to hire somebody to come in.
• 47:08
  SPEAKER_01: So it was just this idea that continued to percolate in my mind that for many of us, we have to confront these hard issues.
• 47:18
  SPEAKER_01: And how do you make it interesting and fun and create a case study around it?
• 47:23
  SPEAKER_01: So I have this idea of pterodactyl risk management and and be ready, it could happen.
• 47:28
  SPEAKER_01: The next surprise that comes up, you know, we're not really gonna see coming, and it's gonna take a sideways 30 to 50 percent in some capacity.
• 47:38
  SPEAKER_01: Um, and how do we, you know, build a process that's not just resilient but anti-fragile to the to the surprise?
• 47:46
  SPEAKER_01: Um, so that's where it crept into my language, you know, pterodactyls and them flying around and and you know, thinking through that process.
• 47:54
  SPEAKER_01: It provides a context for the different triggers for surprises that can come up in a in a financial plan or a projection or a a process that somebody's trying to execute to reach a result or a goal, that we don't know what it's gonna be.
• 48:10
  SPEAKER_01: Um, but if we can be, you know, build in some, you know, some margin, some capacity, a felt sense of abundance from the the friction of surprises.
• 48:22
  SPEAKER_01: We see this in all sorts of ways, right?
• 48:24
  SPEAKER_01: The capacity for banking, right?
• 48:26
  SPEAKER_01: When bank issues come up, you need some margin of resilience so the bank isn't you know calling your loan in times of economic turmoil.
• 48:34
  SPEAKER_01: You need some you know, capacity there, economic downturns, tax surprises, political surprises, geopolitical surprises, and then the surprises nobody sees coming, you know, COVID.
• 48:45
  SPEAKER_01: Um, you know, there's all sorts of things, the underlying instability regarding the housing crisis and how that crept in to end everywhere.
• 48:54
  SPEAKER_01: Uh, nine 9-11, and then there was 9-11 hangover, and then you know, there was a series of events that tech bubble, 9-11, uh 9-11.
• 49:03
  SPEAKER_01: I mean, there's all sorts of surprises that creep in.
• 49:06
  SPEAKER_01: So pterodactyls is something that I like to use as a way to lighten the mood and talk about this process um and think about the advantages of building in resilience.
• 49:16
  SPEAKER_00: Absolutely, absolutely.
• 49:18
  SPEAKER_00: The um I think it's uh certainly the the term I've used a lot is you know, like a little little truck hits you or you get hit by the bus or whatever, right?
• 49:28
  SPEAKER_00: Um maybe maybe I'll start using a dinosaur related uh metaphor instead because that is fun.
• 49:35
  SPEAKER_00: Uh my five-year-old self would not let me live if I didn't point out that that what you got on the mug is a pteronodon.
• 49:44
  SPEAKER_01: Oh, see, this is what happens when you spend$30 on fiber.
• 49:49
  SPEAKER_01: Yeah, pteronodon, not a pterodactyl, huh?
• 49:53
  SPEAKER_00: Sorry, man.
• 49:54
  SPEAKER_00: Just all right, I gotta say it but pterodactyl is much more fun to say.
• 49:58
  SPEAKER_00: Um, absolutely.
• 50:01
  SPEAKER_00: Uh the um yeah, uh thanks for sharing that.
• 50:07
  SPEAKER_00: That that's that's that's fun.
• 50:08
  SPEAKER_00: That's fun stuff, and I think any any way to start the conversation with somebody is is a benefit.
• 50:16
  SPEAKER_00: At the very least, they need to be aware that there's a there are things here.
• 50:20
  SPEAKER_00: You are going to leave your business as a business owner one day, and so is your partner, so is your ten other shareholders, whatever.
• 50:29
  SPEAKER_00: At some point, it happens.
• 50:32
  SPEAKER_00: And at that point, what is going to happen to you, your business, your partners, your maybe some maybe you've died and the people you leave behind.
• 50:43
  SPEAKER_00: So all of those things need to be considered, and you know, John, you're you're a great guy to talk to about those uh those outcomes, and you know, I can I can talk to people about that as well.
• 50:55
  SPEAKER_00: So that's all the hard ones.
• 50:57
  SPEAKER_00: I have no no more hard questions for you.
• 51:00
  SPEAKER_00: Uh just but I do have a couple of uh get to know you questions.
• 51:05
  SPEAKER_00: Cool.
• 51:06
  SPEAKER_00: So tell me something that's not on your website or on your LinkedIn.
• 51:11
  SPEAKER_01: Well, I think most people would probably appreciate that I'm pretty nerdy, um, but they may not know how nerdy I am.
• 51:19
  SPEAKER_01: So you'd have to go pretty far into the web searching process to uncover that I was a band, a combo band and choir geek.
• 51:29
  SPEAKER_01: So my one claim to fame is uh I have played the harmonica in a performance on the Sydney Opera House stage.
• 51:41
  SPEAKER_01: Wow.
• 51:43
  SPEAKER_01: That's my that's that's my one uh John O'Trivia question you can you can dig.
• 51:48
  SPEAKER_01: So when I was in high school um here in the Bay Area, the high school choir was very competitive, run by a very successful choir director who wanted to compete.
• 51:57
  SPEAKER_01: And there was a Pacific Rim group of high schools that got together every year or so.
• 52:02
  SPEAKER_01: And so um in my senior year, that competition was in Sydney, Australia.
• 52:07
  SPEAKER_01: And so we traveled as 17, 16, 17, 18-year-olds to Sydney, Australia, and one of the songs was a beautiful arrangement of Home on the Range, and the uh choral arrangement included a little bit of a harmonica accompaniment.
• 52:22
  SPEAKER_01: So I got to Woo.
• 52:28
  SPEAKER_00: That's awesome.
• 52:29
  SPEAKER_00: Okay, now I I don't feel so bad about my uh paleontology uh little comment there.
• 52:35
  SPEAKER_01: We're in the we're in the same tribe, kid.
• 52:37
  SPEAKER_01: I got you.
• 52:37
  SPEAKER_00: There we go.
• 52:38
  SPEAKER_00: All right, well, maybe, maybe in the same vein.
• 52:41
  SPEAKER_00: Uh, what are you reading these days?
• 52:43
  SPEAKER_01: Good question.
• 52:44
  SPEAKER_01: Um, so uh a lot of my reading sort of alternates between hobbies and fun stuff.
• 52:50
  SPEAKER_01: I mean, I um you know, embarrassed to say we're probably at the tail end of uh, you know, the eighth, ninth, tenth book in the Joe Ledger series.
• 53:01
  SPEAKER_01: This is my fun reading.
• 53:03
  SPEAKER_01: This is spies and people blowing up and you know weird, strange things happening.
• 53:08
  SPEAKER_01: Um, next up, uh, back to my nerd hobby is gonna be uh completing my third license in ham radio.
• 53:16
  SPEAKER_01: So if you're a ham radio aficionado, there's there's uh licenses that you have to pass.
• 53:22
  SPEAKER_01: And so I've passed two of the three, and I'm thinking I may try to keep the momentum going and complete the third.
• 53:28
  SPEAKER_01: Um, but I have uh you know time set aside to try to complete that.
• 53:32
  SPEAKER_01: But yeah, I alternate to some degree, and then I gotta stay current on changes.
• 53:37
  SPEAKER_01: There's always something new in the investment world, crypto, or you know, a few years ago it was cannabis companies or you know, private equity hedge fund, right?
• 53:45
  SPEAKER_01: There's all sorts of new and novel issues that come up that I gotta make sure that I'm current on.
• 53:51
  SPEAKER_00: Interesting.
• 53:52
  SPEAKER_00: I that ham radio uh thing is is hard.
• 53:56
  SPEAKER_00: I took the first one and passed it, but I was not gonna go any further than that.
• 54:01
  SPEAKER_00: The okay, so where can people find you if you want to be found?
• 54:07
  SPEAKER_01: Yeah, good question.
• 54:08
  SPEAKER_01: So I practice as part of a great organization called Summit Financial Base in San Ramon.
• 54:13
  SPEAKER_01: That's our global headquarters.
• 54:15
  SPEAKER_01: So summitadvisors.com.
• 54:17
  SPEAKER_01: There's 18 advisors there all working together to try to care for our clients, it's 40 employees total.
• 54:24
  SPEAKER_01: It's a lovely organization.
• 54:25
  SPEAKER_01: So summitadvisors.com.
• 54:27
  SPEAKER_01: Um, find me there on the list of advisors, click through to say hello.
• 54:31
  SPEAKER_01: Um, love to check in and see how I can help the community in any way possible related to the personal planning, financial planning, wealth management considerations that come up related to valuation and the valuation process, exit and succession.
• 54:45
  SPEAKER_01: It's such a lovely, fun, integrated conversation of you know, multidisciplinary professionals have to work together just because it gets so complicated.
• 54:55
  SPEAKER_00: Well, and I would encourage anybody to do reach out.
• 54:58
  SPEAKER_00: Um you're you've been extremely generous with your time uh generally, and of course, generous to uh come on to the podcast and you know talk about five cell agreements.
• 55:07
  SPEAKER_00: So thank you very much, John.
• 55:08
  SPEAKER_00: It's been a real pleasure.
• 55:10
  SPEAKER_00: Thank you.
• 55:11
  SPEAKER_01: Hey, it's John O'Day.
• 55:14
  SPEAKER_01: Before you go, a couple of additional disclosures.
• 55:18
  SPEAKER_01: I'm uh investment advisor.
• 55:20
  SPEAKER_01: I offer securities.
• 55:21
  SPEAKER_01: Those securities are offered through Raymond James Financial Services Inc.
• 55:25
  SPEAKER_01: member FINRA SIPC.
• 55:28
  SPEAKER_01: Investment advisory services are offered through Raymond James Financial Services Advisors Inc.
• 55:34
  unknown: Okay.
• 55:35
  SPEAKER_01: Summit Financial Group where I practice, Town Advisory Services Corp.
• 55:38
  SPEAKER_01: Ben Town and I are not registered broker dealers, and we are independent of Raymond James Financial Services.
• 55:46
  SPEAKER_01: The opinions that we shared are those of Summit Financial Group where I practice, mine, and Ben's.
• 55:53
  SPEAKER_01: And they're not necessarily those of Raymond James.
• 55:56
  SPEAKER_01: Every investor's situation is unique.
• 55:58
  SPEAKER_01: Facts and circumstances apply.
• 56:01
  SPEAKER_01: You should consider your own personal investment, goals, risk tolerance, and time horizon before making any in any important decisions, especially when it comes to investments.
• 56:10
  SPEAKER_01: Or selling your company.
• 56:12
  SPEAKER_01: Neither Raymond James of Financial Services nor an advisor like me, affiliated with Raymond James, can render advice on tax issues.
• 56:22
  SPEAKER_01: Those matters should be discussed with an appropriate professional.
• 56:28
  SPEAKER_01: This information has been obtained.
• 56:30
  SPEAKER_01: All best efforts have been used to try to develop reliable and accurate information to share with you as an educational resource.
• 56:38
  SPEAKER_01: And we still can't guarantee that the information is accurate or complete.
• 56:43
  SPEAKER_01: This is why you rely on talented professionals who understand your own personal situation and the facts and circumstances at the time that you're going through the process.
• 56:53
  SPEAKER_01: Because information can change.
• 56:56
  SPEAKER_01: The information we presented is for educational purposes.
• 56:59
  SPEAKER_01: It's hypothetical and is not the sole basis for any investment decision.
• 57:05
  SPEAKER_01: They're included for your education, and they don't actually represent any individual investment or investor.
• 57:11
  SPEAKER_01: So you've got to consult with the professionals that can help you in sorting through your actual decisions.
• 57:17
  SPEAKER_01: Thank you.
• 57:19
  SPEAKER_00: That's a wrap.
• 57:20
  SPEAKER_00: You've been listening to Max Value Podcast.
• 57:22
  SPEAKER_00: And if this episode provided any interesting information, hit that subscribe button, smash a like, and drop a comment below.
• 57:28
  SPEAKER_00: I'm bent down with Town Advisory, and I'll catch you next time.