Joe Seetoo - The Realities of Selling your Business in a Zero Interest Rate Environment

Time is precious and so are our pets, so time with our pets is extra precious. That's why we started Dutch. Dutch provides 24/7 access to licensed vets with unlimited virtual visits and follow-ups for up to 5 pets. You can message a vet at any time and schedule a video visit the same day. Our vets can even prescribe medication for many ailments, and shipping is always free. With Dutch, you'll get more time with your pets and year-round peace of mind when it comes to their vet care. 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. Their best tips, strategies, and precautions so you can be well planned. And don't miss our one minute exit coach tip of the day on exitcoachradio.com. And now here's your host, the exit coach Bill Black. Well, thank you so much for joining us today. You know, one of the things that we hear a lot from business owners is, you know, I, I hesitate to sell my business because I'm worried that I'm not going to be to be able to get the same return from the. After tax investments that I have from the sale of that business and that holds a lot of people back, you know, in this day and age, it's hard to get a yield out there on your investments in traditional investments. So, uh, so that's why we have today my guest is Joe Seto. From Morton Capital Management. He's a senior VP with that firm which operates out of Calabasas, California. And, and Joe is a partner and vice president with Morton Capital Management, which is a registered investment advisor, managing about 1.6 billion. In assets under management and as a certified financial planner and chartered financial analyst, Mr. Sto has 17 years of experience in developing investment strategies for affluent business owners and high net worth families. And today we're going to talk about the realities of selling your business in a zero interest rate environment. Joe, welcome to the show and thanks for joining us. Hi Bill, thanks for having me today. Uh, Joe, tell us a little bit more about Morton Capital Management. Help us get familiar with the firm. Sure, so Morton Capital, as you mentioned, we're a fee only investment advisors who are registered with the SEC, and so in that regard we're a fiduciary to our clients. We act in a fiduciary capacity. We're based in Calabasas, California, and we're and we've been registered with the SEC, by the way since 1983. Currently we have about 26 employees. We manage about $1.6 billion for approximately 800 clients. Uh, one interesting, uh. The tip or statistic is that, you know, Behns does a study of the top 100 independent advisory firms throughout the nation and you know I'm proud to say that we've been on that list for 9 out of the past 10 years. Most recently we're ranked number 32. 1 of the things I think that's a little bit different about our firm is that we've built a reputation as being a thought leader among the independent advisory community by utilizing really more of an institutional approach to our asset management. So specifically we incorporate niche strategies that go beyond just traditional stocks and bonds as you mentioned earlier. And it's so important today. I mean, I'm sure our listeners are aware of the fact that when you look at your bank yields, your money market yields, and your bond yields, you're not looking at very much these days, if at all. So it's really important now. A lot of people that are listening, Joe, are Business owners who are saying, well, you know, I'm, I'm hoping that someday I'm going to sell my business and if after the tax man's done with me I'll have a lump sum or maybe some installment proceeds to reinvest and there's a real problem for people that are looking at traditional. Investment strategies in that uh in that light today, isn't there? Yeah, absolutely. I mean, I think you, you know, you highlighted it a question that business owners do need to, you know, try and understand is maybe they're not better off selling in this environment. Perhaps maybe they're better off holding onto the business and waiting until perhaps yield is normalized at some point. The problem is that, you know, the Federal Reserve has been You know, and not just the Federal Reserve, but central bankers throughout the world have really, you know, depressed in interest rates to such a level to obviously stimulate economic growth for a lot longer than, you know, many had anticipated, and it's likely that rates will be lower for a longer period of time. going forward because when you look at the demographics of most developed countries and just the growth rates associated with them, they're going to be lower than they have been in the past during the 60s, the 70s, 80s, and the 90s. Mhm. So with that in mind, I mean one thing business owners can do is obviously try to uh drive the value of their business up as much as possible and get it into a position where it can run systematically without their full-time input, which is the dream of many, many of the baby boomers out there I hear right? they say just, just help me go from overtime. President to part-time chairman of the board or visionary or you know, help me get my life back and not do something foolish but like selling at a time when I can't get a very good yield or maybe the the values are depressed. So why is it important for business owners to do financial planning prior to selling their business and what steps can they take? Yeah, that's a good question. So I, I think that You know, when you look at Well, you know, oftentimes what happens right is business owners get so consumed with running their business, preparing for it to be sold, completing the transaction that they simply don't put in the time and energy. They don't have the focus to, to identify for themselves, well, what does this mean when it's all done, um, there is, you know, again, first and foremost, is tax mitigation important, uh, do the owners have a charitable inclination? Do they want the kids to be involved in the business? So all of these questions. Should be thought through right beforehand because there's a multitude of tax strategies, state planning strategies that can be utilized ahead of time so that you can maximize value for all parties involved, both for the business owner, for his family, for potentially the acquisition of the acquire of the company. Um, but beyond that, right, once you have this huge life changing event because their identities are so wrapped up in their business, you know, there's multiple things to consider, you know, for example, let's say now you have a lot of time on your hands. Well, assuming you're not tied up as part of the part of the deal, well, how are you going to spend your free time? What are the financial implications of this? For example, are you going to join a golf, you know, a golf club, a country club, you know, what are the costs associated with that? Do you really want to travel more? You know, many of the expenses that business owners previously ran through their company may no longer be tax deductible. So how is this going to impact their situation? Right, so these are the sort of things that I think that, yeah, exactly that they need to think through versus, you know, the mentality we constantly see is well I'll deal with that once I get the cash or I'll deal with that later and then after the fact it's like, OK, great, we've had we've had this transaction, you know, consummated and then they're left with like, well I kind of wish I'd thought through this prior to prior to the transaction occurring. So let's back up through that for example, I mean, let's be a little bit more specific about expenses that the business takes care of. We all know we all know, uh uh entertainment will slide on to the P&L, um, you know, sports tickets, maybe dinners, entertainment, some travel. What else? What are some of the other expenses that you see people forget about? I mean, look, everything from, you know, car leases to cell phones to, I mean, and part of it frankly comes down to and I've got to put a caveat out there. I'm not a not a CPA, but you know, depending on how aggressive they were being with, you know, personal expenses that they ran through the business, they felt comfortable running through the business though a variety of different things again, car leases, cell phones, a lot of travel, travel that may have been partially business but partially pleasure, they were able to write off a significant portion of. Um, those typically are the sort of things that you, you know, you'll see. And it may be, it may come down to financial obligations that they took care of through the business, like putting a kid to work to help pay for some of the things that they did, which may not be an option down the road, and they may have to come out of pocket for personal gifts or helping out in different ways. So you're right, there could be a lot of things. The point is, the point is. You think you get a certain amount of money in your W-2 salary and your your dividends maybe from your your S corp or your your LLC uh pass through, and then you spend that money, you think, boy, I, it doesn't cost us very much to live that'll be fine. think again, right? Because you really need to back into that and think of it and healthcare costs and all those types of things that'll come back. Yeah, that was just one that popped in my head you know your healthcare premium. Time is precious and so are our pets, so time. Our pets is extra precious. That's why we started Dutch. Dutch provides 24/7 access to licensed vets with unlimited virtual visits and follow-ups for up to 5 pets. You can message a vet at any time and schedule a video visit the same day. Our vets can even prescribe medication for many ailments, and shipping is always free. With Dutch, you'll get more time with your pets and year-round peace of mind when it comes to their vet care. And your insurance premiums that you're running through your company again, obviously with the rising care of health care costs, especially as people get older, that could have a material impact in their in their situation. So again, these are the sort of things you want to think through um before the sale. Now a lot of our listeners tend to be towards not the, you know, the larger businesses, but more the smaller businesses, and in some cases they may be thinking, well, what I really want to do is pass the business on to a child or key employees, keep the culture alive and continue to get um to continue to get some. Kind of cash flow from it, um, uh, how about taxes? How, how much can that play into when people say, yeah, I'm gonna sell it for $5 million for instance, if they are able to get an outside buyer to buy it for $5 million let's say, uh, what's the, what are the, the harsh realities of taxes on that amount? Well, that's again where you're going to really want to, you know, and I believe the Irish just came out with regulations in terms of limiting the amount of discounts associated with transfers, transfers and gifting, specifically more related to, I believe, the family members, and your question goes to maybe an outside buyer. But again, depending on is this person charitably inclined, there are tax strategies that could be used, for example, charitable remainder trusts or charitable lead trusts or even a donor advice fund. that maybe makes sense so that they're maximizing again what their goals are in terms of what this means for for them, right, what this means for their family legacy and ultimately how they can tie the sale of the business into the vision that they have for their life and the wealth that they've created. That's why it's paramount. You have your, you know, your CPA, your state attorney, and your financial advisor, and any other professionals that are going to be handling these assets post transaction ahead you get together together ahead of the sale and hash out what the patriarch or the CEO's vision is for for the future. That's great advice. So even if you, if you say, you know, I don't have a charitable urge anywhere, well, do you have a government urge? because maybe maybe the charity's going to put more in your pocket and do some more help for people that might put your name on a building, for instance. So think about it, you got to think about all these types of things. Talking with Joe Seto of Morton Capital Management. Joe, why you guys are talking a lot about alternative investment strategies today, and you've identified a niche in that area. Um, why is that? What tell our listeners what alternatives are specifically and why they're so popular today. Yeah, sure. So I'll just take a step back and give you a little bit. It goes a little bit deeper than that in in in the sense that my partner and the founder of our company, Lawn Morton, he founded the company back in 1981, really was a pioneer in the fee only world. Back then there really the idea of providing advice for a fee was really a novel idea. Now nowadays, you know, there's quite a few independent advisers, but back then there really weren't. Most advisors then were commission brokers who were essentially selling stocks or annuities or, you know, mutual funds and being compensated for it, and he felt that. You can't be objective if you are being compensated by the products you represent and then also the clients. You can't serve two masters. So again, I think the idea of being kind of a thought leader thinking outside of the box is just steeped in the in the firm's history and culture. He has been investing in real estate since the 1960s and really always felt like, look, when you build a diversified portfolio, it has to go. Beyond stocks and bonds, so that again that's steeped in our culture, not only myself but my other partners and really everyone here. We, you know, it's in our culture to think outside of the box to question kind of the standard models and not just follow the herd mentality. So when you look at valuations today on stocks and bonds, we feel that they are expensive and our job first and foremost we believe is risk management. Clients come to us. They have amassed a certain amount of wealth. Our job is to protect that principle and then hopefully grow it at a reasonable level of return prudently, so. Going back to your question on why are alternatives important, you know, let's just look at the the endowment models Harvard, Yale, Stanford. I think that they would agree with us when you say, you see, they only have about 5 to 10% allocated maybe to traditional cash and fixed income investments, 20 to 30% allocated to traditional stocks. The remaining 60 to 70% is allocated to a broader set of investments, i.e. what most people call alternatives. Now not all investors have perpetual time horizons like the endowments, but what you do often find is business owners, you know, have created wealth from their business. They have a desire to a desire to create a family legacy that goes beyond just the patriarch's lifetime. That makes a lot of sense. And when you talk about the big endowment funds, of course they're managing billions and billions of dollars, and you know, one of the problems is I think for a lot of people that they, they we were trained on, on the traditional 50, 50, 60, 40, 70, 30, you know, stocks and bonds kind of models for the common person. And the world has changed and again, like you said, the government and other influences are at work to keep interest rates low. For an extended period of time now because of the need to stimulate the economy and get more, more, I mean, obviously things aren't as good as as they're always painted because otherwise we'd see higher interest rates now. I mean, it makes a lot of sense, but so, so now that more and more, I mean if we look back 10 years ago, how would those endowment funds have structured that 60% to 75% and the 5 to 10% in stock cash and stocks? Yeah, I mean, you know, the reality is, I don't know off the top of my head, but I'm spitballing here that, you know, they probably would have had higher levels maybe in the more traditional assets because, you know, again interest rates weren't at all time lows. So it comes down to again, you know, I think opportunity set. I mean there's nothing we look if evaluations on Stocks and bonds were very attractive. We would allocate more and more to those asset classes that we have anything necessarily fundamentally against any single asset class. What I think one of the key drivers for us is just not to simply limit ourselves to what a traditional model might be. And again that comes back to trying to be a thought leader in the community. Well, it makes a lot of sense, and I think we're, what we're trying to do is open the eyes to the people listening that you need to, you need to be up with the times, you know, if this is what the big institutional investors are doing, don't you think they have the resources to figure all this stuff out and they, you know, so again, that's, that's what you guys are doing is getting people in tune, getting your portfolios in tune with what. The current realities are out there now, Joe, how can business owners or any investor out there generate sufficient income in this zero interest rate environment after they sell their business? What are some tips or ideas or precautions you can tell our listeners? Yeah, I'll give you a couple of things. One is, so again, it comes down to identifying first within a reasonable range what the needs are from these assets, OK. Certain asset classes that you know I would argue that anyone from a million dollars to, you know, on up could have a modest exposure to. You could look at real estate, OK, both on the equity side where you own the asset and you're receiving rental income. Now again, broadly speaking, real estate, which tends to have a certain level of interest rate sensitivity is high. Again, broadly speaking, so we are focusing on, and I would suggest that investors focus on subsectors of the market that are less sensitive to economic downturns. Right now, for example, one of the areas we have been very bullish on is student housing. Again, that's an area that we think that should we have another somewhat somewhat like a 2008 scenario should do reasonably OK. on the real estate debt side where you have loans that are collateralized by real estate. Those can be attractive. There are pools of diversified private mortgages that are in first position. You know, I wouldn't recommend being in second position. You want to be in first position, so you have the asset to collateralize the loan with a conservative loan to value ratio, right? So if there's a property that's worth a million dollars, maybe the general partner who runs this fund is willing to lend $500,000 against that property. Such that if they need to foreclose because the borrower is not keeping up with payments, you have adequate collateral to protect your principal. That's an example of something that again that is out there, um, where people get into trouble is if they, if they invest in a in a vehicle like this where they're in seconds, 2nd position, someone's ahead of you, or the loan to value ratios are high, let's say 90%, where you don't have enough collateral to cover in the case again of a default. Um, so these are the sort of things that will typically pay kind of high single digit returns, and we've been using and cash flows paid quarterly or monthly. We've been using these as a substitute for traditional bond exposure, so we've, we've and they tend to be shorter term loans anywhere from 1 to 3 years. So again, you want to stay broadly diversified though. A couple other asset classes maybe to go ahead and. No, no, go ahead, yeah, 22 other asset classes that maybe to consider reinsurance. Uh, this is an area Warren Buffett's made a lot of money in reinsurance. I think everybody knows his name. So there's certain subsectors of the reinsurance market. That can offer diversification benefits relative to traditional stocks and bonds. They tend to be structured as floating rate bonds. So if interest rates go up, you don't get hurt like you do in a traditional bond where the value typically goes down. So that might be an area to consider. They, they generally are going to get pretty good yields on reinsurance bonds, uh, and even diversified asset-backed lending strategies that might capitalize on tax liens or equipment financing or auto loans or medical receivables. So, um, I do want to throw out kind of a couple of caveats in terms of warnings because I don't want to make, I want to give a fair, you know, view of of the realities of this, so. The some of the biggest risks that you'll encounter here is if you're investing in a private partnership, you have the illiquidity of the partnership, right? You can't trade out of it the next day like you could a traditional mutual fund or a stock or a bond or an ETF. So that is something that the investors really need to understand. They also not only want to look at the liquidity terms of the partnership itself, but the underlying asset class, the assets that the partnership holds. What is the liquidity cycle there? So you want to make sure you get comfortable with that due diligence, due diligence, um, obviously because there is, there's not the same reporting requirements that you have for publicly traded securities. Investors need to be able to do their own due diligence in terms of not only the investment opportunity but the operational due diligence. So who's, you know, how's the cash moving. Um, you know, is there an independent auditor? Is there an independent administrator? Do the general partners have a lot of their own skin in the game? If you can't do the due diligence, you have to hire someone to do it for you and obviously a trusted source that you feel comfortable with. And then two other items to consider fees are generally higher, so you need to take that into consideration. Is it worth it? And then lastly, the tax reporting is done via K1 typically and so that may just be something you want to be, you know, conscientious of. Great. I've been talking with Joe Seto of Morton Capital Management. Joe, how do our listeners get in touch with you to talk with you about these very interesting concepts and ideas you've brought up today? Uh, they can get a hold of me directly. Uh, my, my phone number is 818. 591 621-9 or they can visit our website, Morton Capital.com or via email jc2@morton Capital.com. So listeners, your job is to is to build up your business and get the most value out of it and get it ready for a sale transaction at Morton Capital Management. Their job is to help you take that, take those proceeds, think about it early on, think about some of the best strategies you can implement, and then put your money to work because there's, there's no fun to be had when your. I is just sitting there not doing anything and it's very important these days to work with professionals that can help you get outside the box of traditional investments and and learn a little bit more about what's available in alternative strategies. Joe, thank you so much for joining. It's been a real pleasure having us or having you with us today, and I wish you all the best and I look forward the next time we speak. That sounds great, Bill. Thank you for your time. We're gonna take a short break, we'll be right back after this, so please stay with us. Business owners, if you came back from lunch and there was a resignation letter on your desk, which employee would you really, really not want it to be from? What are you doing to prevent this from happening? At Exit and Retirement Strategies, we design plans that attract, motivate, and retain key employees for a free consultation called Bill Black, the exit coach at 866-370-3774. Call today. Just thinking about what will happen to your business if you're gone keep you awake at night? Will you get the price you need from your business to carry you through retirement? The BEI Network of Exit Planning Professions is the world's leading advisor network with the power to help business owners transition out of business on their own timeline and terms. Ask your most trusted advisor to create a BEI plan for you, or visit us at exitplanning.com. That's exitplanning.com. Thank you for listening to Exit Coach Radio.