Latest / Exit Algorithms / Turn Your Business Exit Into Generational Wealth | Jeff Condren (#41)
Transcript
- speaker-0: Welcome to exit algorithms, the podcast where we decode what it really takes to unlock growth, streamline operations, and prepare your business for a high value exit. I'm your host, Pete Vera. And today I'm excited to introduce our guest, Jeff Condren. He's a certified financial planner and senior vice president at Mesero Wealth Management, Barron's top 100 RIA firm with over $11 billion in assets under management. Jeff was named a Forbes 2024 best in state top next gen wealth advisor and has spent two decades guiding business owners and families through complex financial decisions. Jeff, so excited to have you. Welcome to the show. speaker-1: Yeah, thanks for having me. I'm looking forward to it. speaker-0: Yeah, absolutely. I think it's useful to start off. Do you mind sharing a bit about your background? I your whole, you know, from where you went to school and your whole career, what led you to Mizzouro? speaker-1: Yeah, absolutely. So I grew up in Cincinnati, Ohio, came to school in Chicago, in the business school. I'm ⁓ son of an accountant, but knew in high school I did not want to do accounting, but I ⁓ knew liked business. And so ⁓ went to the business school. During college, got an internship at a large financial services firm, very happy with that, was there for a number of years in a few different roles. Left that industry for two years to go into consulting. I had a great experience, but consulting and sales are two very different worlds. about 11 years ago, I joined Mezzerro and had been with the same team, working with the same ⁓ and clients these last 11 years. And so as part of it, we work with a lot of business owners. And so I think that's what we're here to talk about today. speaker-0: Yeah, absolutely. That's audience. And of course, they make few ⁓ pivotal financial decisions I'm sure we'll talk a lot about. How ⁓ about we start maybe, what are some of the biggest ⁓ financial mistakes you business owners make as they scale? speaker-1: Yeah, I think one of them is, especially as they scale and then they look to say, well, hey, look, my exit may be coming, is they treat things almost like a transaction versus, hey, this is a multi-year planning event. So as they're scaling, they're taking those opportunities to say, hey, we're gonna expand, we're gonna acquire a business. They realize it's not a one and done type situation. They're looking three, four, five years ahead going, well, hey, if we do this, this is what it could mean. They're looking at their projections and valuations. But when they go to make the exit, they go, well, this is just a transaction. This is a one-time thing and we're done. When in reality, it's the same sort of multi-year planning. Some of the best exits need at least 24 to 36 months. If we can get longer than that, then there's more planning, less hasty decision-making that goes into it. so when they, how do I wanna say this? Their biggest error is, technical, it's not technical, it's not planning far enough in advance for the decisions they're looking to me. speaker-0: Mm-hmm. Got it. Yeah, so not planning far in advance. So say they do come to you three years ⁓ from their exit. What would you look at to help them prep? speaker-1: Yeah, there's a lot of ways. would think an ideal situation, we have more than three years. I would say if we can get four to five even, that's even better because then we can really take a holistic look at everything. And then no decisions are being made kind of knee jerk reaction style. So we'll look at the tax strategy of the company. Are they an S corp? Are they C corp? You know, what's going on? Is this small business stock involved? There's different estate techniques. So we'll bring in a state planner. We have someone at measure who can help with some of this as well. We'll look to see if different trusts make sense. Are they going to do a, you know, retain trust? Are they going to do any sort of charitable giving, those sorts of things? And we kind of have all this pre-sale gifting strategies in mind. And then are they going to, sounds kind of silly to say this way, are they going to remain a resident in that state when they sell or are they going to kind of preemptively move to another state where maybe the taxes, and so we can talk through the pros and cons of some of those decisions. There's also, that gives us time where we can look to say, okay, well, we think we're going to get 7 million, but the owner thought they were going to get 10. Okay, well now we can identify some these valuation gaps. And now it's not a, you know, I'm upset that I'm not getting the value I want and go, okay, what's it gonna take to get us there over the next four five years? We can then look at them and say, is this enough? know, what is the, what is enough for the exit? Is seven million enough? Maybe they don't, they just had 10 in mind, but really seven's a good number. And then we can start to get some of those insurance things in place. Maybe a lot of stuff was handled by the business that's not going to be on them personally. A lot of the asset protection, again, kind of going back to some of that trust stuff go through and say, hey, look, you know, what do we need to do? When does it need to be done by? Is this a pre-sale? Is this a post-sale decision to be done? Even two or three years, there's still a lot of that that can be done. Obviously, a tighter timeframe. Some of the due diligence side on what we do and getting them ready for a wealth standpoint is going to be a little quicker. because it's now, hey, this is 24 months from now. So decisions needed to be made a little bit faster, but we can still go through and do some of the trust stuff, look at what the valuations are. Does it make sense to do it this way? It doesn't make sense to do that way. just decision-making is a little faster and sometimes that's not always the best way to handle things. speaker-0: Yeah, that makes sense. Definitely takes time prepare for ⁓ a big event in their life. ⁓ On the ⁓ side of things, what would you ⁓ to see in a business? Are there some best practices that owners can implement before even ⁓ think about speaker-1: Absolutely. Yeah, I think some of it is what really kind of separates those who build the multi-generational wealth versus like ⁓ a one and done, if you will, is there's a few things. The ones who are able to separate their identity from the business makes a huge difference, right? They hire leadership before they're quote ready, right? A lot of business owners, especially if it's first generation have that, this is me, this is my identity, this is who I am, this is what I do. ⁓ And it's hard for them to let go of that. But if they can start to separate out a little bit between, know, hey, this is the business and this is me and who I am and what I wanna do, it really helps. And it also makes bringing in, especially if a family wants to keep it to be a multi-generational, it helps allow that second generation a chance to kind of come in. They look at things and, you know, kind of along the same lines, you know, key person risk. If they're the sole owner, sole everything and they die, then what happens to the business? If they can start to realize, hey, listen, I want this to continue on beyond me, beyond today and say, well, hey, listen, I maybe need to get, whether it's outside family, whether it is family, I can't be the big risk to the business. Again, that goes back to three, five year conversations of, who do I want that person to be or who do I want that management team to be? Is it internally? Is it externally? know, internally family members, externally business management kind of things that can help look at things. They start to delegate real authority as well. Once they to have that separation, they can say, well, I want to focus on this or I want to do this part of the business. I can have others handle these other parts of the business. And then what they'll start to see is that some of the businesses, some parts of the business at least can run without them over, without their oversight, if you will. And so when it's not entirely dependent on the founder, things start to work a little bit better and it like starts to last longer. The other thing I would start to say, and we'll kind of talk about this maybe at the end as one of my best advice, if you will, is they start to diversify before the thought of the liquidity event comes into place. What I mean by that is it's not uncommon for the business owners we work with who have like, especially their entire net worth into the business, maybe their house isn't or a car isn't kind of thing. but basically everything else is. And so if they can over time, slowly move some of their assets outside of the business, that kind of helps as well. And that will also help if there's disruption in the industry, if there's family conflict, I mean, on the financial side, if there's market cycles, right? If everything's tied up into the business and something goes south with the business and ⁓ gonna go south for them as well. But if they're able to kind of like get some of that concentration outside of the business over time, I'm not saying Hey, sell half the business in one year and half the next, but like, if we can take one to 2 % a year and move it outside the business over 10, 15, 20 years, that suddenly becomes significant kind of thing. And it's some of the other things, right? They think long-term, they don't think short-term. They're looking at building a culture. They're looking at who they want the next generation to be. Where a lot of people get in trouble is that lack of succession planning. And some of it is some of the best business owners are the ones. who do do it themselves and are reluctant, but if they can start to get that idea that this is going to be a longer term and I need to take these steps, then the business can really bloom and grow and be a multi-generational family business. speaker-0: God, I love that answer. Thank you. A lot of useful nuggets there. And I love the emphasis on identity as well. I think that's really important. There's a lot of case studies, examples of business owners that just, they're not really ready to sell mentally. speaker-1: Right. No, absolutely. Well, and some of the two is they have almost, if it's a first generation business, they view themselves, no matter how big the business might be, they view themselves as a small business. And it's a mindset of, you know, this is my company, this is mine, this is me, this is, you know, kind of thing. They need to kind of shift that mindset set, if you will, if they want it to be multi-generational to be like, this is a family enterprise. This is something that is going to be around for long periods of time. And that shift needs take into things like governance, board structure, tax plan. I mean, like there's a lot of things that go into it. So again, two to three years, if we look at the exit is great, but really it's the five or 10 before that, that, are they, do they have good governance? Do they have good reporting structure? Do they understand, you know, their EBITDA and what does it mean and what that means to their net income, how that could grow, how that could change, you know, they kind of, lack of a better word, professionalize it before they have to. And if they do, then it's going to be one of these. this business is going to go on for a long period of time. If they don't, then it might be a one and done type generation or maybe a second generation and done because they focus so much on what's my company and this is it. And this is my identity kind of thing. speaker-0: Yeah, that definitely makes sense. on the topic of what do with the business proceeds, how do you recommend business owners when they sell? Where do they put that money to make it last create ⁓ that general wealth their goal? speaker-1: Yeah, so one of the things we do, especially if we have the time is we love to talk scenarios with clients on, you okay, your life, your personality, your everything was this business. It's not going to be now going forward. We're going down the sale and this is it. And so we talked to them about what are their goals, what are their wants, what are their needs, that sort of thing. And I don't always like using this example, but I can't think of a better one. Sometimes I refer to as just the simple bucket strategy. You know, hey, let's think about buckets, right? Let's silo some things real quick. can't we risk? What is, I want to continue the lifestyle I have. I don't want to be forced to sell anything if there's a downturn. For some people that might be six months of living expenses. For some people that might be two years of living expenses, right? But there's some part of it that we don't want to risk. And we need to know, you know, that's our bedrock. That's our foundation of our, we never want to have to, we always want to have to, we always want this and we never want to lose it. Then that next step is kind of, okay, what's the risk or what are the known planned future expenses. So maybe like, listen, six months after we sell the business, I want to take a trip around the world. I want to buy that second, third home, or I want to help a kid or grandkid with their home or the wedding or whatever that is. Great. Okay. When is that? That's one year. That's three years. That's five years. Great. Let's plan for that money so it's readily available. So when that time comes, again, we're not forced selling when it comes to whatever the market's doing in that situation. Then that last is really a Hey, this is the long-term growth. This is the opportunities to capital. This is the multi-generational generation skipping type things. How much is that? What are you looking to do? And for a lot of clients, those buckets, what goes into them varies a lot. For some people it's like, listen, I've helped my kids enough. I want to either have the no risk and the long-term. There are other people that are like, listen, we don't have a lot of lifestyle spending. That bucket's gonna be pretty minimal. but we really wanna emphasize the multi-generational, the long-term growth for generations to come. Let's build that bucket up and great, from there, then we start to have the conversation of, what does that look like? What does that mean for our investments? Are we looking into just public equities? Are we going into private equities? What does that mean? Do they understand the illiquidity of it? Different illiquidity than a business, if you will. But then we have to be careful with it too, because there is some overconfidence that comes into play. of, I don't need to worry about this. I don't need to force out. I've been through market cycles with my business. I can get through this too. And it's like a little bit different this time, right? Like don't have that overconfidence. Sometimes also that lifestyle creep kind of comes into play. Great, now I have all this money. Now I can do whatever I want. We want to be mindful that, yes, you have worked hard and you want that trip or that home. Like, yes, but let's be mindful of what we're trying to do. then... some of the family, extended family kind of coming in, if they know that you've sold a business and know what you've gotten, well, hey, can you help me? Can you help do this? Can you help do that? It's like, it's hard to say no, but you just have to be mindful that if you say yes, they're likely going to continuously come back kind of thing. speaker-0: Yeah. All very important to consider. Are there any tax strategies you recommend as far as what to do with the sale proceeds? know, there's options to be paid out over time from a business sale versus all lumped sun. I'm curious to hear your thoughts on that. speaker-1: Yeah, so this is one of those where we would want to get the estate planner involved as well. So we're making sure we have things kind of understood and we know what's going on. It also kind of depends on what they're, how the deal has been structured. ⁓ they getting a one-time payout? Are they getting a multi-year payout? it one of those, hey, it's gonna be paid out over five years and they to be part of the business for so long. So when you talk with them about like, hey, here are ways to minimize taxes and what might be owed. There are things where ⁓ different trusts can definitely help. protect those assets, especially again, if family comes in, creditors come in after death and they know you have these assets. Again, is something Mesro sells, but we wanna make sure they're covered, because maybe the business was paying for their insurance over time. we definitely talk different strategies, grant to retain annuity trust, charitable trust, like if they wanna donate during their lifetime, but make sure the assets. get back to the family at their death or vice versa. They want to give to the family now and at their death, it goes to charity. It's kind of what their wishes are and what they're looking to accomplish. Once we know that, then we'll build a liquidity framework for them and say, okay, based off what you heard, this is our recommendation. And again, having a few years to go through things helps because you go, you know what? I thought I wanted that, but really what I'm looking to do is this, or that's not enough for the next generation. I want to get more to them. Okay, well. Are you willing to take less? Are you looking to do something else? And so there's a lot of trusts that come into play. then there's always some insurance policies. I'll use an easy one, know, a second to die life policy as an example that, ⁓ hey, that's something we look to buy because the family wants to take on some certain expenses now, but they want to make sure the family members, the next generation gets so much when they pass. Again, we'll through the cost of buying it. What does that look like? Any sort ⁓ of... risk mitigation, you will, overall, whether it's through trust, through insurance, through the actual investment themselves are things we talk through. And each one's a little bit different. Unfortunately, with a lot of financial planning, there is no exact answer. There is no right or wrong answer. And so sometimes it is a, how does the client feel about paying the tax? How does the client feel about paying the expense? They like it, they don't like it. Okay, well, let us adjust and go from there. And again, that's why having a few years to go through the different ideas. helps first, okay, hey, we're 12 months out, we're doing this. It's like, well, you may not have the time to get the trust structure you want. The valuation's already been established, so we can't give ideas to maybe help grow it. conversation's already had, ⁓ now just focused on making sure the deal is done and ⁓ the after-tax proceeds going. ⁓ speaker-0: Yeah, got it. makes sense. ⁓ definitely depends on the individual. There's no one size fits all. speaker-1: Right, absolutely. speaker-0: Yeah, the farthest away from the exit you can plan, the better. speaker-1: Absolutely. even if they, you know, let's just say they think they're more than five years out and they go, well, I don't think I'm ever going to sell. Going through the practice and the steps may just bring ideas up and let things come up. I've never met with a business owner where we've had these conversations ago. That was a bad meeting to have, you know, I told you was never going to sell. It's like, great, but we helped you identify this or we showed you that, Hey, you actually can live off what you think. You know, it gives them ideas that maybe they otherwise wouldn't focus on. So rarely have I had like a bad meeting. You still benefit from all the planning that goes in with our conversations. They may never thought of different trust structures for the family. Maybe they thought, that's not enough for me. I'm not a Rockefeller. I'm not a Morgan. I don't have that kind of money. Why do I need a trust? And then we walk them through the examples and they go, okay, great, something to consider, especially if we do go down this path. Three years, four years later, they go, hey, listen, we talked about this. Does this still make sense? Great, here's the estate laws that may or may not have changed. Here's the limits that may or may not have changed. Let's update it and let's have a conversation from there. So. speaker-0: Yeah, definitely. Yeah, it makes sense. say, ⁓ back to the buckets, let's the owner's bucket is that multi-generational wealth, and they to make it last, ⁓ have a What are maybe some ⁓ big ticket business owners should focus on to do that? ⁓ mentioned a trust. speaker-1: Right. Yeah. Trust are obviously the biggest thing. When I think a big ticket, I think more on the expense side of things. Like what's going to be the expense that disrupts the plan that we're looking to do. So they say, yep, I want to have this long-term growth. I'm focused on the next however many years and then multi-generational. Oh, but I'm to go buy a Porsche. Oh, I'm going to buy a new home and I'm going to pay cash or I'm going to go do this. And it's like, okay, that wasn't part of all the conversations we've had prior to this. This is not going to change our plan. Not that plans can't change, they obviously can, right? We never go in and say, well, here's your one plan and we can't deviate from it. But it is though, it is that lifestyle creep that sometimes we have to warn clients about like, hey, you thought you were gonna need, I'll make it up 200, 250,000 from the account over the years, you're trending at 400, 500 over the last three years. So we either need to adjust how we invest so we can continue to meet these needs, talk about why we've had some of the expenses. they, know, what was the one time to help a house? It was a one time trip for the entire family. It was a one time, it's like, that's fine, but if we're gonna continuously have one time expenses every year, then we need to plan for that. And so that's where I get kind of worried with some of the clients after they have these exits is those things that they never thought they could do that now they're doing and they're not just doing it one time, they're doing it multi-times. And they kind of focus on, or I should say maybe they don't focus on developing the financial literacy for their next generation because what happens is their kids and grandkids now see, oh, well, we can just do this. We can do that. And so they're now of the mindset of, of course we can afford all of this. They kind of ignore the trust or the governance structure that had been put in place. And then they avoid having those difficult conversations of, listen, you know, we thought we're going to be able to give X to the next generation or whatever, but you know what? We're actually going to change our mind or we're going to do something else or we're to give it to charity, you know, or. you thought you were gonna get 5 million next generation, we're gonna get each of you only a million and what, know, so they kind of hide those conversations. Those are the things that can really disrupt things from a planning perspective. But where trust and things along those lines come into play is it puts a structure around it. So hopefully they don't deviate too far from it. So, hey, this trust is established for the grandkids, for their college and after college, if they reach a certain age, they're allowed to use it for these purposes. Great. Well. You have a trustee monitoring it saying, well, hey, this isn't one of the purposes of it kind of thing. there is some structure to help kind of keep guidelines or parameters. So no one's just invading the trust for whatever expense they need, if you will. speaker-0: Got it. Yeah, I love that perspective. Makes sense. ⁓ the tax advantages of a trust, it's also ⁓ mechanism to control spend. speaker-1: Right, exactly, exactly. so, you know, it is one of those, like I said, especially if we think multi-generational, you know, there's going to be family conflict. Not everyone's always going to agree. There's going be market cycles. So the more often and frequently you can talk and have it be a, I don't want to say conflict, but a family conversation of here's what we're doing. Here's the plan. Here's the path. Here's how next generation kids or grandkids, if they're old enough, if you will, are going to be a part of things. helps avoid any, I didn't know that, or why are you doing this later kind of conversations. And so we know there's going to be bad years in the market. But we can get around that and talk to them about like, well, hey, listen, we built for this, we're structured for this, this doesn't change the long term goal, but a family conflict, a divorce, poor succession planning, reactive decisions, not investing, know, those can destroy things in a much different way. speaker-0: Yeah, totally. It makes a lot of sense. sides of the coin, right? Saving and spending. I wanted to also, going off a little bit off script here, ⁓ but my research, I noticed you're really involved with some philanthropy organizations. And I was curious, you know, one of things we always talk about just how to sustain yourself too, to be able to sustain growth in your business. Maybe if you could share a bit about how you manage your time to be so productive. speaker-1: Yeah, I mean, with myself, thankfully, the nonprofit I've been associated with is in town as well. A lot of their meetings, majority of their meetings happen to be on weekends. I have a great team here at Mezro who's able to support me. So when the time comes and I do have a meeting, whether over Zoom or in person, one, it's not far for me to go, but two, I know I have a great team who's gonna support me and do all that. And this is something I talk with business owners. It's what are you gonna be after the business kind of thing? How are people gonna know you? What are you looking to do? Music education for me has been an important thing in my life and my wife's life. And so our kids, the ⁓ older two have also had music, but it's something that we can get behind and support. Everyone's gonna have something a little bit different that they wanna support and do. But that's some of the conversation with the family. Hey, listen, we're going this philanthropy, this charity is something we're gonna do, whether it's nonprofit with music, whether it's a high school, college, grade school, whether it's religious organization, whether it's a cancer organization or whatever, right? ⁓ What's your identity? How are you gonna be remembered after the business kind of thing? And it is one of those where again, it kind of takes that time where they go, well, I don't know, we've never thought about it, or maybe we've only ever donated because the business was in this type of industry, so we only donated to these, but we've always had a passion for this. Great, like is there an existing organization you can be a part of? Can you join? Can you donate? then, know, going back to some of the structures, there might be a ⁓ donor advised fund that the family's using if there's a concentrated public stock. Hey, listen, are we structuring, giving some of that to the organization? What does that mean? What does that look like? But me, it is a balancing act. ⁓ The work-life balance is always a struggle. ⁓ Three who are heavily involved in sports and other activities plus the nonprofit comes and But again, great, great support with my wife and then the team here at Mezzer who were able to make sure that we're all aligned on what we're trying to do. Doesn't mean the calendars don't get mixed up from time to time. a bit of a headache, we're able ⁓ work through that. ⁓ speaker-0: Yeah, I love that. I recently listened Arnold Schwarzenegger's biography, well, kind of self-help, Be Useful, you've dealt in one. he ⁓ talks about too, like ⁓ philanthropy, it's important to start doing like yourself, like before you retire, right? So yeah, really cool. Yeah, know we're coming up on time here shortly. I want to give you the floor if you could just give one practical tip for owners trying to build wealth for the long term. speaker-1: Yeah, it sounds so silly to say, and this is something not specific to just business owners and kind of any client I work with is pay yourself first. And I don't mean like a literal paycheck. I mean, think about setting up a monthly transfer of some kind to a retirement account or an investment account of some kind and treat it like you would a non-negotiable expense. Like, so if you are a business owner, hey, this is just like my payroll. This is just like my rent. This is just like the taxes I have to pay. Do it and again, going back to the earlier part where I kind of said, hey, listen, if we can do a small amount of this over long periods of time, really adds up. ⁓ you think about it, the business is just one asset. Long-term can be built by owning multiple assets, whether you're working on it or not. So if you're consistently contributing to a investment account of some time and those assets appreciate, hopefully just like the business is appreciating, then you have, if you have two different assets growing. and that consistency of regularly contributing, even if it's once a year, you know, but hopefully it can be more often. That consistency will beat the timing in the market. So there's always people who come to me and go, hey, is now a good time to get in the market? And my answer is like, well, when are you looking to need the money? Well, I don't need it for 20 years. Then don't worry about today, next week or next month. You know, over a 20 year period, you're going to be great kind of thing. ⁓ I need it next week. Well, leave it as cash then, right? Like don't look to invest that kind of thing. But if you do pay yourself first and you do have that long runway, It's kind of almost one of those you'll forget about it because you're going to be so focused on the business. And then this way too, you're not trying to move money in and out of the business to help pay for things. just like, hey, listen, this is something for me, my family or whatever it is, this is going to be aligned with other goals I have. So again, the business will continue to grow because if the business valuation, when you look to sell, isn't where it is or isn't where you'd like it to be, well, you saw this other asset of money, this other bucket, this other investment vehicle. that now you have some options to do. Well, hey, do I need to take some of this, put it back into the business, look at things? And hopefully over a long period of time, like I said, you have multiple assets then. speaker-0: Wow, yeah, really good advice. Thank you so much for all the insight. The listener's definitely gonna get a lot out of this. Great. Yeah, where can they find you easiest, speaker-1: Yeah, so our Mezzuro website's always the easiest. That's M-E-S-I-R-O-W.com. There's a little About Us page and you can find my information with my phone number and email. speaker-0: Awesome. Yeah, I'll leave that in the show notes. Thanks for coming on the show. speaker-1: So Jeff, thanks for having me, Pete. Take care.