Eric Brotman - Things to do BEFORE an Exit Event to Make Sure You’re Ready​

It's true that some things change as we get older, but if you're a woman over 40 and you're dealing with insomnia, brain fog, moodiness, and weight gain, you don't have to accept it as just another part of aging. And with Miti Health, you can get help and stop pushing through it alone. The experts at Mitty understand that all these symptoms can be connected to the hormonal changes that happen around menopause, and Mitie can help you feel more like yourself again. Many healthcare providers aren't trained to treat or even recognize menopause symptoms. MIDI clinicians are menopause experts. They're dedicated to providing safe, effective, FDA approved solutions for dozens of hormonal symptoms, not just hot flashes. Most Importantly, they're covered by insurance. 91% of MIDI patients get relief from symptoms within just two months. You deserve to feel great. Book your virtual visit today at joinmidi.com. That's join MIDI.com. Hi everyone, it's Bill Black, the exit coach from the Exit Coach Radio show. You know, one of the biggest questions I get on the show is what exactly goes into a business exit plan and when should I start creating mine? Well, I always tell people that the best time to start was 5 years ago, but the next best time is now because you never know when you might need it. So we put together a free report that describes what an exit plan is and what you should know. You can get it free by texting exit plan with no spaces to 442-22. That's exit plan to 44222. Again, text exit plan to 44222. Welcome to the Exit Coach Radio show, the show for baby boomer business owners who are looking for cutting edge information as they plan their 3 to 10 year business succession and exit. Every week we interview top professional advisors for their best tips, strategies, and precautions so you can be well planned. And now here's your host, the exit coach Bill Black. Well, hey everyone, thanks so much for joining me today. My pleasure to have you with me. I have a great lineup of guests today, and we're going to get right into it. Uh, my first guest today is Eric Brotman from BFG Financial Advisors. BFG Financial Advisors is a comprehensive financial planning and wealth management firm working with multi-generational families across the US. So here's something to think about. Someday, you know, if you're listening to this show, your goal is to exit your business, maybe create a pile of cash. Cash. Now you need to know how to manage that money so that #1 you create income for it to replace the income coming from your business. #2, that it doesn't all get lost due to lawsuits or bad decisions and that's where people like Eric come in. So Eric, welcome to the show. Thanks so much for joining me today. Oh thanks Bill, glad to be here. Eric, I've given a little intro, but if you would please let our listeners know a little bit about you and your background and how you came to start BFG Financial Advisors. Sure, I would love to. I have been a certified financial planner practitioner since the late 90s and actually started a practice in the mid 90s and in the early 2000s it became time to launch a consultancy of my own and I launched a firm as a sole proprietor and really got the The business owner urge and the entrepreneurship urge. So subsequently we've grown to 20 employees, 8 financial advisers. We're managing close to half a billion dollars for multi-generational families around the around the country, and it's been a, it's been a labor of love. And you know, you talk about exits. I started my own succession plan in my late 30s, so I, I, I agree with you. There's no, no, never too early to start. Right, right, yeah, the best time is 5 years ago, but the next best time is now, and a lot of people are wondering right now, you know, maybe I'm of the age or maybe it's just time to start thinking about winding down, and there's a lot of decisions to make depending on what your facts and circumstances are, right? But there are, and you do want to plan in advance. I mean, I like the idea that you give a 3 to 10 year runway. I think they're all unique, um, but at the, at the end of the day, um, most of the time business owners, particularly successful business owners, have a significant net worth, and a terrific. Balance sheet but can be sometimes a little cash poor and have issues with liquidity and with diversification and with preparation from a tax perspective and there's a lot to think about before you have a major capital event in advance and throughout the process. Yeah, it's not, it's not as easy as cashing in or rolling over your 401k or IRA account and waiting for the Social Security checks to roll in. Those are all nice events as well, but you have to figure out how to monetize that business that you've been putting your heart and soul in for so many years. So today we're going to talk about things to do before an exit event to make sure you're ready. And Eric, what are some of the steps that business owners can take in advance of in advance of a potential exit? The first thing you want to do is make sure that your financials are clean. A lot of business owners have a tendency to use their P&L or their business as a personal piggy bank sometimes, and it's real important not to do that and to have clean financials and to anticipate that you may need 3 to 5 years of financials to share with potential buyers, whether they be internal or external buyers. So make sure you've got any of the fluff out of there and make sure you're you're treating this like you were a stockholder in someone else's business rather than you were looking at it as your own, your own sandbox, so to speak. So begin with your financials, make sure they're clean. Beyond that, start thinking about what a what a buyout might look like. Is there an internal succession plan? Do you have people in your organization who could legitimately not only run the business but afford to buy it? And if not, are you looking at private equity? Are you looking at venture capital? Are you looking at a roll up to a, you know, to some entity that holds many firms like yours or businesses like yours and start to determine who the potential suitors are based on the value of your company? I also suggest doing business valuations regularly. I think like any stockholder, if you own stock in IBM, you'd want to know what the IBM stock price was before you did a major transaction. You want to do the same thing with your own stock. I think it's valuable to have an idea of what your stock is worth, even if you're the only shareholder. Those are three great areas of tips. The first off clean financials and fluff. You know, a lot of owners tend to underpay themselves and then try to take the money out through dividends and things like that, especially if it's an S corp, and then they might have other people on the payroll that are in the family that might not be participating. Is that an example of what you mean by cleaning up the fluff that might be on the financials? Absolutely. I mean, if you, if you have family members who are in the business legitimately and are working there, that's one thing. But to put your your spouse or or a couple of grown kids on the payroll to try and do some family tax planning, really it's, it's fine if this, if that's what you're going to do long term. But if you're looking for an exit event, the buyers don't want to see that. They want to see that this has been run and that they can consider buying that just like they consider buying shares of a of a common stock elsewhere. So it's real important if you have family in the business, that's great, and if you have a 2nd or 3rd generation who could potentially be involved in running the business as a 2nd generation, that's terrific too. But in the absence of that, I would avoid using the payroll, you know, for that kind of personal planning. Yeah, that's a good point, and I think a lot of people say, well, you know, when it comes time we'll have the accountants recast it and figure it out, but it doesn't really instill buyer confidence, which is what I think we're talking about here is making sure, you know, if you're looking at it from a buyer's perspective, it's like, well, if they're hiding that, what else is going on here, right? I think that's true, and I also think to say, oh, we'll get there when the time is right, you know, sometimes these things hit like, like a lightning bolt. Sometimes you get an offer that's somewhat unexpected and you don't have 5 years to plan for it, or sometimes something goes on in your life, be it an illness or a family issue or other things that that causes you to speed up your own process. And if you, if you need to have 3 to 5 years of clean financials, you don't want to find out that you need to be out in 6 to 12 months for health reasons and then try and go back and redo that. It's just not tenable. Also, in this day and age, it's a really good tip in this day and age you're probably not the only contestant in the beauty contest, right? They're probably looking, if they're looking at you, there's a lot of other, there are a lot of business owners who are reaching the age where they're saying I want to make my way out. Now I don't know what you've heard where you are, but what we hear out here in California is that 8 to 9 out of 10 businesses that go to a business broker or an M&A advisor don't end up selling because something's not right. Either the value's not right or the financials don't look right, or the company isn't poised for sale. Is that what you're finding as well? I think some of that is industry specific. If if you're in certain sectors, it's a little bit easier to have to have a look under the hood, so to speak. In the personal service or you know, the financial service sector, certainly where we spend a lot of our time right now there have been far more buyers than sellers. For many, many years and so the value of some of these companies has, has been spiraling upward, which is delightful. But to your point, with a bunch of boomers starting to think about how do we want to exit, the shoe's going to be on the other foot quickly, and I think COVID has pushed that forward. Some of the, some of the current events have pushed that forward. And so when you start to see a ton of sellers and it becomes a buyer's market, yes, there are other folks who could be invited to that party. And if there are 10 to choose from, you're going to pick the cleanest one and the one that promises the best ROI with the least hassle factor on the way in too. Great point. One of the other points that you made is be clear on the people, and I find in a lot of family businesses I've heard from a lot of the next generation folks, the sons and daughters out there that, you know, everybody assumes I want to take over this business, but nobody's asked me how important is communication way up front with those potential buyers if it's an insider transition. There's nothing more important than communication, not only up front but all through the process, you know, if you have a son or daughter who might be interested in taking over the business, you first have to determine a, are they interested B, do they have the skill set that they need and what are their blind spots? You know, a lot of times 2nd generation family businesses tend to do OK. They don't usually do as well as the 1st generation. Third generation family businesses, they fail, and they fail because you reach a certain level of success where the, the, the buyers or the next generation comes in and feels like it's an ATM machine. And at some point they lack the skill set and they don't, they don't thrive. Now there are certainly examples where that's not true. There have been some great success stories, but For the most part, if you think this is going to be a family transition, you need to not only communicate with the son or daughter or other family member who could be the suitor, but also with your other family members, because if you've got 3 kids and one of them is going to potentially take over the family business, you're going to have some very interesting conversations about equality or equity in various estate planning considerations or value and That creates a good way to ruin Thanksgiving dinner for the whole family if you guys don't communicate in advance. I was going to say that the benefit of family business planning is happy Thanksgivings. The third thing that you mentioned in there was having frequent valuations. When you talk to business owners and they haven't had a valuation, do you find that they think the business is worth more than it really might be to a buyer or in the, in the market? Almost all the time. In fact, think of it like a homeowner. Homeowners feel the same way. They always think, Well, this is what comps are going for in my neighborhood, but mine's the nicest, you know, or, or we've upgraded the most. Business owners feel the same way, and whether you're in medicine or or in personal service or in manufacturing, there's always this tendency to overvalue your own enterprise, especially if you started it. If it was your baby all along. You're going to place a value on it that is greater than just the financials. Um, you're not thinking eba da. You're thinking this is my life's work, this is, this is what I have to show for my entire adulthood of effort and so you're naturally going to overvalue that at least in your mind. So let's move on to post exit. What are some of the mistakes that you've seen business owners make after their exit events, and how can they be avoided or minimized? I think the first thing is that they fail to take into account the incredible tax burden that comes with some of these transactions, depending how how the business is valued, how much is considered goodwill, if they have any basis in the business, and so forth. So to me, planning for that begins the year before. If you own a business where you have the ability to be virtual, for example, and you live in a high tax state. And there's no physical plant there. You may want to move before you do a transaction. You may want to try and avoid some of the high tax state income taxes that come from a deal like this, and that may or may not be possible depending on the industry you're in. We certainly know folks in the private equity space that do that, and that can make sense. The other thing is people fail to set aside the money that they're going to need for taxes, and they have a tendency. They have a tendency to be overly conservative then with some of the resources that have come from the business and a lot of times it's because the ATM has stopped, the paycheck, the distributions, they've all stopped and so you have a tendency to have this pot of money. You're very nervous about it in many cases you're afraid to deploy it because you don't want to lose it because this is the biggest financial event in your lifetime, and for most it's the only one. And so there's a tendency to be overly conservative and at the same time not to prepare for the impact of taxes or inflation. And so there's, there's a lot of coaching and consulting that goes into that conversation with the business owner on the back end as well. Yeah, that's a great point. It's really important for people to kind of imagine into the future what it's going to look like and know what their examples are for people that have been running a business for a long time and maybe have been, as you mentioned, cash poor, all of a sudden now when they have cash, they may be surprised at what the environment looks like as far as the investment world and choices and options that they have to look at today, right, cause it's changed a lot. Obviously interest rates are very low, so they need probably need to look at. Some different asset classes than maybe they're used to. No question about it, it's very tough to find yield today, and there are not a lot of benefits to taking excess risk when you're looking for yield today. But you know, people hear numbers and they feel like big numbers, and whether it's a million dollars or $10 million or $100 million whatever you wind up netting after taxes using a 4% rule of thumb, and we can debate whether that's the right number or not, but it's an easy one for today. If you have $10 million after your event and it's and everything's been paid for, that sounds like a lot of money until you realize it's $400,000 a year. And a lot of these business owners are used to making a million dollars a year and $400,000 a year is a massive pay cut. So, so it's not as much money as it sounds like, particularly if half of it's gone to the government before you even get to use it. Really, really good point. You know, it's, it's very important to have someone you can trust and talk to about all of these issues where, you know, someone that really gets to know everything about you and your background and your family and your goals and all of these types of things. And now you have another term that I think is intriguing. It's called graduate into retirement. What does it mean when you encourage people to graduate into retirement? Uh, thanks for asking. That's a great question and one I get asked a lot. I believe the definition of retirement needs to be retired. It's, it's, it's frankly outdated because to retire is to retreat or to disappear, um, and it makes you immediately irrelevant. And I don't know that many people who go from working 50, 60, 70 hours a week to watching daytime television and playing golf every day. There's only so many courses. There's only so much to do. So we encourage people to look at the retirement event not as the absence of work, but as the absence of needing to work. So when you've reached financial independence and you're working for fun, Rather than because you need to make ends meet, it's a different feeling psychologically, but it doesn't mean you should be sitting home. You know, that's a time to find your, your passion, find your why, become mission driven, and do the things that make you happy, whether they be for money or not. Um, it gives you an incredible, uh, opportunity to reinvent yourself just like you would after getting a graduate degree, for example. You're now, uh, a 2.0 version or a 3.0 version of yourself. And instead of retiring and disappearing, you get the chance to amplify and to use the wisdom and experience that you have, whether it's in consulting or volunteerism, the nonprofit world, the public sector, whatever, whatever floats your boat, but do something and be moving towards something and grow. into something rather than shrinking away. Now Eric, you have a podcast called Don't is it called Don't Retire Graduate, is that right? Yes, don't retire graduate. And tell us a little bit about what you do. What do you do on the podcast and how do our listeners listen to that? That's great. No, we, we, we post a new episode every Thursday and the podcast Don't retire graduate every other week we have a guest on for an interview, and sometimes it's a professional adviser who's helped people do this. Sometimes it's someone involved in financial literacy or financial freedom or financial therapy. We've interviewed some amazing folks who really get this. We've interviewed folks in their 80s who were starting companies, which is very inspirational and a whole lot of fun. And then the alternating weeks, we do something called office hours, which is where we collect questions from listeners. And we answer them so that there's an opportunity to start opining about some of the big things, whether it's something technical like reverse mortgages or debt issues or whether it's something more about what's more important than money and legacy planning and how do we want to be remembered. So that's pretty neat. The website is don't retire graduate.com. You can also go to BrotmanMedia.com. We have a bunch of resources and a book by that same name is coming out this fall. So September 15th is the target date, but COVID has, has messed with the publishing world a little bit. So we're shooting for that and we'll see. But this fall, that book will be out and it'll become an online course by year end which will allow financial literacy education and a bunch of exercises to help people get get inspired about the next chapter of their lives. So here's an idea, listeners. If you want to learn about some of these issues, all you have to do is go to the website BFGA.com, BFGA.com, and you'll find out not only about BFG financial advisors but all about the podcasts, all about the tremendous amount of tools and resources that are available just right off the website. There you'll be happy you went there just for the education of going to the website. But it sounds like there's a lot going on and you're very active in helping your clients and your firm's clients develop knowledge so that they can act appropriately. Eric, and I applaud you for that. Tell us a little bit about a little, we got about a minute left. Tell us a little bit more about your firm and 20 advisers. You must be very proud of your of your people. Well, I certainly am, and we actually have 8 financial advisers, 20 total personnel. So, but, but nonetheless, our advisers, we have a great amount of diversity in terms of the backgrounds and the types of advisers we have because we believe that every family is so unique that we want to try and speak the same language. So we have millennial advisers, we have Gen X advisors, we have Boomer advisers. We don't have any Gen Z advisors yet, but we know they're on the horizon here. So we want to make sure that we have folks who can really with whom our clients can identify. We also do something that most firms don't, which is we collaborate on every plan. So if you're a client of the firm, you have 8 financial advisers looking at stress testing and opining things that could be done in your plan. So it gives you an incredible amount of resources there, and I think it's one of the things that makes us unique, we all of our deliverables are uniquely ours. There's nothing prepackaged whatsoever. Fantastic. It's a great resource. It's been great to talk with you, and I took a whole page full of notes. I hope our listeners did too, and I wish you all the best success in what you do. It's very important work, and I thank you so much for coming on the show today and joining me today, Eric. Well, Bill, I appreciate the opportunity and it's been great visiting with you, and I wish you continued success as well. Thank you for listening to Exit Coach Radio. It's true that some things change as we get older, but if you're a woman over 40 and you're dealing with insomnia, brain fog, moodiness, and weight gain, you don't have to accept it as just another part of aging. And with Mitty Health, you can get help and stop pushing through it alone. The experts at Mitty understand that all these symptoms can be connected to the hormonal changes that happen around menopause, and Mitt can help you feel more like yourself again. Many healthcare providers aren't trained to treat or even recognize menopause symptoms. MIDI clinicians are menopause experts. They're dedicated to providing safe, effective, FDA approved solutions for dozens of hormonal symptoms, not just hot flashes. Most Importantly, they're covered by insurance. 91% of MIDI patients get relief from symptoms within just two months. You deserve to feel great. Book your virtual visit today at joinmidi.com. That's join MIDI.com.