Latest / Exit Algorithms / Tax-Efficient Exit Planning and Wealth Strategy for Business Owners with Ken Himmler (#32)
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 P Vera. And today I'm joined by Ken Himmler, a wealth, a personal wealth strategist with over 40 years experience, helping individuals and business owners make smarter decisions about money, retirement and long time, longterm security. Ken has been seen on TV shows like the Wall Street Journal, NBC, ABC, as the author of multiple high selling books, spent a decade as a host of the Money Talks radio, is a renowned public speaker delivering talks on retirement readiness and wealth preservation. Ken, super excited to have you on the show. Welcome to the podcast. speaker-1: Thanks for having me, Pete. I just gotta convince my kids to give me that kind of intro every morning. speaker-0: sir. Yeah, it's a it takes a little bit of research, you know, especially with your your resume, there's so much to include, try to try to pin it down to a paragraph. speaker-1: That's what happens when you get old. The resume just gets longer. speaker-0: Yeah, absolutely. So yeah, for listeners that haven't heard about you before, do you mind sharing a bit about your background? Maybe some key moments in your business journey. speaker-1: Yeah, well, originally I just fell into a financial planning position back in the early 80s because I'm old now. it was one of the first three financial planning firms in the country and know any different, but was able to get a mentorship program in there. And that particularly worked with a lot of high net worth clients. mean, today, those clients are probably in their billions of dollars. Back then, it was in the 50, 70 million dollar range. So it was still a lot back then. And this firm was multi-discipline. So I was able to learn tax planning, trust and asset protection, M &A procedures, because we did a lot of M &A work for a lot of the business owners. And of course, tax-efficient exit strategies. And after about nine years, I left there, hung my own shingle. You're young, you're hubris, you got a lot more confidence and sense. And it was a lot harder than I ever anticipated. What I learned is that in order to get the right outcome, you got to bring all the people in together. You what happens most of the time is business owners, they'll go and see their attorney, then they'll go see their CPA, then they'll go see their financial advisor, and no one's talking. the business owner is supposed to be running the business, but they're not supposed to be the financial expert. But because everybody's in different offices, they're supposed to be communicating, right? But they don't, we all know that. And so you get this very inefficient plan. And then what ends up happening is business owners, don't sell soon enough because they don't know how much they could sell for. They don't know how to tax efficiently exit. They don't know how to combine their business sale into their personal financial plan. So that's really what I learned day one. I didn't know there was any difference until you get out on your own and said, man, this financial world, it's like a hand grenade going off the fragments everywhere. So that's... kind of where I came from and haven't changed much of the operational culture in that we want to bring everything under one roof so that all the different disciplines are arguing it out together. speaker-0: Got it. Yeah, I love that. Makes sense. Yeah, absolutely. Like they need to talk to each other because especially huge events like a business sale or retirement, there's kinds of factors that need to play in ⁓ and need to know ⁓ what other is thinking to plan a proper runway, right? ⁓ speaker-1: Right, right. And it's also making sure that the business owner has a good bead on what they're really going to get and why they could maybe retire or sell a lot earlier than what they anticipated. A lot of times they just say, well, I can sell for 10 million, but then I got to give, you know, 3 million to tax. I get 7 million. So I'll just keep beating it out. Well, what if they could sell for 10 million and there was no tax? Or what if they could sell for 10 million and a million attacks? Maybe they could sell quicker than what they originally anticipated. And what I found is that in the CPA world, lawyer world, because it's so fragmented, there's no one there giving them ⁓ &A structural advice. They're doing deal advice. the lawyers are looking at the ⁓ &A deal and saying, what can I do to protect you and get your interest? The CPAs are going, now, once you sell, here's how much tax you will pay. The advisors are over here dealing with their personal financial stuff, but no one's connecting all the different pieces. speaker-0: Got it, yeah. what are some common planning You mentioned taxes, are there any other things that are frequently the effectiveness financial planning? speaker-1: Well, think, you know, obviously I think what happens is business owners try to sell without a lot of ramp up time. And if they could move back and say, Hey, maybe one to three years and three years is a prime number because at that point you can put the right organizational chart into place. You can create the right tax structures. You can create the right transition plan, the right leadership, because a lot of times what happens is, as you know, business owner sells and the buyer says, well, I want you for three years as an earn out. Well, that's generally not what most business owners want to do. And they get to that mental choice of selling. You don't want to stick around for three more years. And the sales depended upon the earn out. So if they would just take maybe two to three years in advance, we get people that call us and go, yeah, I want to sell in six months. Say, well, you know, here's the problem. You know, your org charts a mess. Your P &Ls aren't categorized the right way. You have no tax plan, so yeah, you can sell, but you might get 40 % less than had you planned a little bit earlier. speaker-0: Got it. Yeah. So, so waiting till the last minute is probably number one on the list. speaker-1: Terrible idea, yes. speaker-0: for sure. So you recommend about three years is a timeline for ⁓ business owners to sell. speaker-1: Yeah, typically I say three years because it's going to take you a year to find the right leadership and reorganize the org chart so that when a buyer comes in, you can get a higher valuation because you're showing that you're not the guy. You're not the key person. You got to remove that key person discount. And that takes at least three years, least a year to find the right person. Cause you know how that works. Six months in, you find you hired one person. They're the wrong person. You got to hire another person. So give it a year to find the right person and then another year to get them integrated and take over the leadership. And then now you've got that one year to start searching out the right deals. speaker-0: Yeah, it makes a ton of sense. Yeah, eliminating the key man risk. are there any other things that increase value in the business that might take a ⁓ long time besides dependence? speaker-1: I think the other factor is obviously depending upon what kind of industry you're selling, you've got market risk, you've got commodity risk, you've got location and regional risk. Those are pretty much uncontrollable things based upon what you're in. But you can control the finances, you can control the EBAC, the earnings before owner's compensation. You can control a lot of those things. You can control the benefits, the taxes. If you can get that EBITDA higher because of a good tax plan, then you're gonna get a higher valuation. So what a good buyer is gonna do, a good buyer is gonna come in and they're gonna look at all the inefficiencies. And they're not gonna tell the seller the inefficiencies because that's where they're gonna make the delta and the leverage, right? So any private equity is gonna come in and they're gonna say, hey, if we cut these three people out, we replace them with this person, we change this technology, we can have this much more EBITDA, this much more growth. Well, why doesn't the business owner hire somebody three years in advance to do all those things and then just sell at a much higher rate than taking the lower rate from the private equity, the venture capitalists, because they're recognizing all the weak points. speaker-0: Yeah, got it. Yeah, that was huge. As far as, yeah, you know, and a lot of business owners have so much of their retirement savings, all of their assets, their net worth is almost like all tied up with their business. Do you have a recommendation for business owners that are basically in that situation? speaker-1: Yeah, just don't do it. you know, it's the same old investment strategy of anything. Don't put all your eggs in one basket. And business owners, they have this ⁓ exuberance of confidence that shouldn't be there. It's because a lot of things you cannot control. Look at what happened with COVID. You had these great growth businesses and within six months, they're shuttering their doors because it's something that's out of your control. So. You know, there's the, I think it's called the pumpkin plant, Mike Mahakowicz or something like that. And it's a great book because he talks about paying yourself first and take the money off the top of the business and invest it elsewhere. Well, most business owners don't do that. What they do is they'll look and go, Hey, I got 30 % growth on my marketing spend or my ROAS. So what I'm going to do is I'm going take all my profit and I'm going to reinvest it and get a high ROAS. And then that'll make the most amount of money compared to that paltry 11, 12 % rate of return I can get on the SP 500. Problem is you're still putting all your eggs in one basket. It's asymmetric risk because it's tied up in that one single asset. Doesn't make sense. It's not smart. So, and then you get the diversion. get the, know, most entrepreneurs are the shiny object in the grass and they do one thing and then they want to start another and they want to start another. And I tell them, focus on one single thing that you can make great and sell it for a boatload of money and then go do the second thing. speaker-0: That makes sense. Yeah, shiny object syndrome is real. Yeah, where should business owners invest their money? ⁓ a good place or do you recommend they just have it their sum in their savings account? speaker-1: Well, setting aside, obviously it depends upon how much they have, right? If they're starting off, something like a Betterment where it's just a pre-planned robo-advisor that splits it up between indexes. Because the problem is with that shiny object, when people start talking about individual stocks or options or structured notes or those things, literally that's a full-time job. And a lot of business owners, they start diverting themselves into learning that versus their business. And that's not the game because that's again, a shiny object that they get distracted with. They got to focus on their business. So if it's something where they don't have a lot of money, then something like a betterment where it's pre-planned, rebalanced automatically, it's a no-brainer. Now, if you are talking about some of the doctor's offices that we work with, they have excess of two, three million dollars a year. Well, we're not going to stick them in a betterment. speaker-0: Mm. speaker-1: is gonna require a much higher level structuring. But again, a lot of business owners that have done a good job at keeping expenses low, sometimes they undervalue the value of that financial advice because they'll say, well, why should I pay that guy 20 grand? Well, if that guy can save you 60 in taxes, pay him the 20. That's how you do it with employees. You're gonna hire somebody for 60 and hopefully their revenue per employee is 100. more you can increase revenues with employees, keep that 30-40 % ratio, you're growing EBITDA. speaker-0: Yeah, yeah, that's smart. I love that. And yeah, I love the thesis of just having an integrated team, CPA, advisor, insurance agent. How do you, ⁓ and ⁓ if business owner has ⁓ one doing each of these things, a state attorney giving them some advice, their CPA, other advice. Is there some key questions they should be asking to confirm the team is coordinated? speaker-1: Well, I would like to tell you that there is, but I tried to run that model for 25 years. ⁓ 2014, I ⁓ my original, ⁓ not my original, I worked for a firm. They bought me out. I started my own firm for 25 years. And though I know what I know, I was still not successful in the way I wanted to be trying to coordinate lawyers and CPAs because they're in their own office. They're on their own Island. And it's very hard because You know, if you're running a business, the CPA is always telling you what you should have done. The lawyer doesn't, is not expansive into tax law. They might be good with corporate law contracts. They might be an ⁓ and A, they might be liability, but typically they're not rounding everything into the tax structure of the business. So I don't know if there's any answers because I don't feel like I was successful at being able to bring outside CPAs and outside. advisors and outside lawyers into one group where they all communicate on a regular basis. of those business models that you see with law firms and CPA firms is transactional. Meaning, I you ⁓ X of hours for this contract, let me know when you need anything else. It's not very proactive versus reactive. speaker-0: That makes sense. really isn't much of ⁓ a solution there. speaker-1: Well, there are, you know, there's family offices you you look at like a Goldman Sachs, you need $25 million to walk in the door and you have everything under one roof. And that's a great thing. If you have the 25 million, we serve a little different crowd. We serve between two and 25 million. And offer that same family office experience. but, ⁓ you know, always tell clients it's a lot like baseball, right? When you're in little league, you get the quality of a little league coach. You move up to high school, you should hopefully have a better coach. Move up to maybe college, division one. Now your coaching is a whole different level. You go to the pros, whole different level, right? What I find a lot of times is business owners, they start with one coach and then as they grow their business, they stick with the little league coach. A little league coach, you you can't just throw a little league coach into D1 or pros. They grow into that position. But I, so I find a lot of times business owners They have to evaluate the level of their coaching and upgrade as they upgrade. Don't stick with the old coach. speaker-0: Got it. Yeah, makes sense. It's totally different strategies, right? Depending on the level of business that you're at and the team size, amount of revenue, et cetera. speaker-1: Right, right. speaker-0: Yeah, I'd love to get into a little bit more deeper on taxes. I know you're an expert in that area. lot of small business owners I talked to, you look at their tax return and it shows ⁓ less profits ⁓ their ⁓ &L. It's really common, I'm sure you're well but when they go up to sell, that can reduce the ⁓ value of business. ⁓ depending on the buyer and the bank looks at, they ⁓ tax returns over financial statements. Do you have any recommendations around taxes? speaker-1: Yeah, I think if we really clarify that and said, you know, if a business owner is really doing good tax planning, they shouldn't be showing a lot of profit. So when you go to sell, remember that it's always the leverage of the buyer to say, well, I'm not going to offer you that much because that's not what your tax returns share. That's just a P that's that's private equity venture leveraging. That's a buyer leverage. So what I always tell business owners to do is do a recast. Do your P &L, do your tax return, on the taxes. Because nothing better than just more money in your pocket. And if you're legally reducing the taxes, try not to make your tax returns look better so you're paying more tax. That's the old banking issue. People will come to me and say, well, I don't want to do that because then I won't show a profit and I can't borrow money. Then you're dealing with the wrong lender. Because a smart lender will look at ⁓ everything. if you're moving, like let's say, you've created a C Corp as an operating company and an S Corp a holding company and an S Corp as an operating company and selling the S Corp and the or a bank or the buyers of the bank are going to look at that S Corp and say, well, that's terrible. You have no income there. You know, we're not going to offer you as much. No, you, you have to look at the whole picture. So I'd say the first sign is when you go to sell, if somebody's saying, Yeah, we're gonna go off your tax returns to say, sorry, I'm moving on to somebody that is gonna look at the whole picture, not just the tax returns. speaker-0: Yeah, that's a good perspective. I think it comes down though to being to prove the profits, like documenting those add backs. And sometimes ⁓ that can be or take a backseat to getting the business, keeping the business running. speaker-1: Yeah, I mean, if you recast any P &L, it should be what would a buyer be buying? So if you're paying for an RV and you're paying for travel and you're paying for, I don't know, whatever it is, you have to be able to show that segregation in defined manner on your P &L and then show a recast showing, hey, if you buy this, you're not buying that expense. You're buying this product with this cashflow as long as you can do that, but a lot of times what business owners do is they have terrible bookkeepers, they have terrible CPAs and just gets mixed in together. And a lot of owners don't even know how to segregate it. like, I don't know what I spent where over the last five years. so that's books and records, what we call the bars, books and records that is ⁓ critical to valuation profitability. speaker-0: Yeah, got it. Yeah, that makes sense. especially, it goes back to the planning ahead at least three years, a minimum have very well documented system in your finances ⁓ before sale, at least three years. For that as well. speaker-1: Right on. speaker-0: Yeah. You know, another big theme of this podcast is technology and AI. I'd love to hear are you using AI in your business? speaker-1: Well, believe it or not, we've been building our own and we've used some off the shelf products like, you know, from our CPA practice, we use the Intuit product called ProConnect. They've done, they've made a reasonable gain in the AI space, but nowhere near what the capacity is. But you know, you look at these bigger companies whether it's, ⁓ know, eMoney, Right Capital, Intuit, Orion, any of those bigger companies, They're so far behind the eight ball with AI, but it's reasonable to expect the bigger the battleship, the harder it is to turn. And you're talking, you know, 10,000 employees. And now we're talking about overlaying AI on top of this massive product. It's not going to happen fast. So we looked at it and said, could we be more nimble and get a product out the door that does the same thing as an Injuit product, but we can do it in a 10th of the time and what we have. So I do believe that, you know, we've, we've now built AI products to do Roth conversion analysis, investment analysis, ⁓ &A analysis, tax analysis, and those programs, I'll take ⁓ a section. It may take us four to six hours to do a proper Roth conversion analysis because there's a lot of moving components. We do it now in AI in under 10 minutes. Wow. So it is incredibly powerful. I feel like we're on this new precipice of, you know, when computers were invented, it was like the whole world changed. And for us, the way we're using AI, literally the whole world has changed. speaker-0: Wow. Yeah, incredible. Insane. yeah, that makes a lot of sense. Do you have an in-house coder software developer that's helping you? Yeah. speaker-1: Right. the nice part is we're able to, with our existing team, we're able to actually real life beta test it. Instead of beta testers, we're testing it live time and seeing not only what the algorithms and the LLMs are returning to us, but we're also seeing how it interacts with the clients. And we're making revisions of clients as well. I like this or I like that, or I want to see it this way. We can immediately do it. Try doing that with Intuit, speaker-0: incredible. Yeah, you can play out scenarios a lot faster that way. Right. Yeah, the other side of that is where do see it going in the future? AI, technology, how you see it impacting your business or ⁓ just in general from your perspective? speaker-1: Well, I can see AI pretty much taking over 90 % of all the grunt labor that our team goes through. Every calculation, every workflow process, we've even got it now where we have an AI avatar that does our interviews. And you would not know it's an AI. It literally converses like human to human. though it's disclosed at the bottom when we start it, And some candidates, you watch the video of them being interviewed by this AI avatar, and they'll look and go, are you AI? don't even know because it's ⁓ realistic. So ⁓ think, you know, going forward, it's really going to be humans overseeing the interaction of AI in humans ⁓ humans interacting with humans. speaker-0: Yeah, that's crazy. It's already at that level. Yeah, and with AI agents as well, there's all kinds of applications ⁓ it's going to either reduce all busy work or just over ⁓ certain tasks speaker-1: Yeah, right on. speaker-0: That's exciting. Yeah, I'd love to give you the opportunity. was looking, you have a few books ⁓ right? What ⁓ kind some of the through line maybe of your latest book, ⁓ One Wealth Map, right? speaker-1: Yeah, so I'm writing a new book called One Wealth Map and it's a continuation of the total retirement freedom that I did back in 2016. But it really encompasses more of the macroeconomics that have changed since 2016 because they've been massive since COVID. We've seen a complete shift in the workforce, the complete shift in affordability of housing. I look at my kids in their mid 30s and you look back in the 90s and it's five times more expensive per capita dollar earned to buy a house today than it was back then. So I'm looking at all these different dynamics trying to help people really understand that you have to use ⁓ and automation, which is tough as somebody's maybe in their sixties now and they're technologically adverse to new things. But without that, the ⁓ choices are thousand times more choices than they were 30 years ago. And unless you have the computing ability to narrow and parse down all those choices, good percentage, statistical chance, you're going to make a bad decision. One Wealth Map is really talking about how to bring that all together ⁓ help by pairing humans and AI together to make better decisions. speaker-0: I love it. Yeah, what a relevant topic, in the next few years. Tesla's ⁓ Musk's and there's other companies there ⁓ building similar products. it's an exciting, time. speaker-1: Absolutely. speaker-0: Yeah, I was curious, you you get so much done in the day of a business you're running. You're writing books also and getting on shows like this. ⁓ do you structure your day? speaker-1: ⁓ we wrote an app, we wrote an app called one life map. I use that every morning and it structures out everything from my meditation to my calendar, to what we call time inventory so that it will map out the ⁓ of each item and pre block that on my calendar. So I'm fully embracing the idea that the AI can do that a lot faster and smarter than I can to fit a lot more efficient things. And so it's again, it's not. so much about the number of things that you can do in a day, it's the efficiency of the things you are doing. if you have either a lot of assistance or you have AI help, you wanna measure, am I gonna spend this hour? Well, how efficient is that hour? Not, can I get more stuff done in the hour? But what is the output ⁓ that hour? And if I can rearrange my calendar into the highest output per hour, then I'm gonna have the highest and go end game. speaker-0: Yeah. Wow. I love that you developed an app around that idea. Man. Yeah. No, incredible. And you have a, you know, an exercise routine you implement in your, in your week. Is it like preset? speaker-1: Yeah, I'm an early riser, 430 at the gym by 5, 530, two hours in the gym every day, seven days a week. About the only times I miss is, you know, if there's a major family event or a traveling, but, you know, I go in and I've done it for so long that it's just habit. I don't think through it a lot. It's like today's shoulder day, today's by day. I go through it and I'm listening to audio books. I'm educating myself during that time. And then I jump on cardio for an hour, hour and a half and I got my computer, everybody walks by me looking at me like I'm a crazy person. But you know, I can get an hour, hour and a half cardio in and sit there on the laptop and get so much done because there's, it's all pure focus, right? Nobody's knocking on my door. Nobody's calling me, chatting me, texting me. It's just pure focus. So I get more done at the two hours in the gym than probably most people do in four to six hours in an office. speaker-0: love that. Yeah, multitasking, but you when you're exercising, it's not taking that much brain power. I bet get through probably almost a book a week just doing that on audiobooks, right? speaker-1: ⁓ yeah, easily. Yeah, and I found these new condensed summary books on YouTube and they're fantastic, right? Because not one to sit there and listen to a six hour audio book, but if somebody can condense it into the bullet points in 30 minutes, I'm all about that. speaker-0: Yeah, that's awesome. I just started using Blinkist, which shows, I don't know if you've used that app before. speaker-1: No, but I'll look into that now. speaker-0: Oh yeah, it's great. I do one, you know, get a book done every night on that. It's the same thing, it summarizes it in the 15 to 30 minutes. speaker-1: Yeah, that's great. That's great. speaker-0: But yeah, it's been an amazing show today, Ken. I always ask guests this at the end. What's ⁓ practical tip a business owner can implement this week? speaker-1: One practical tip. Plan, plan, plan, right? Failing to plan ⁓ to fail. speaker-0: Well said. Yeah, absolutely. great. Where can listeners ⁓ you easiest? speaker-1: Just on YouTube, YouTube handle is One Wealth Map. And there are shows that go up there that are more technically more talking about how to improve tax returns or business valuations. Not a lot of fluff ⁓ not really probably the channel for everybody unless you're really interested in learning how to do things versus being pumped up. speaker-0: Awesome. Great. Yeah, I'll leave that in the show notes. speaker-1: Okay. speaker-0: Right, thank you for your time, Ken. speaker-1: All right, take care.