The Modern CPA Success Show: Episode 127

Adam Koós, Founder of Libertas Wealth Management Group, discusses the crucial aspects of financial planning and exit strategies for business owners. He and Tom explore the challenges of managing appreciated properties and delve into the concept of Delaware Statutory Trusts (DSTs) to defer taxes and transition from active to passive real estate management. The episode concludes with a discussion on the importance of financial recasting for business valuation, tax optimization strategies, and the critical role of CPAs in educating business owners on proactive financial planning and transition preparedness.

Intro (00:00:00) - Welcome to the Modern CPA Success Show, the podcast dedicated to helping accounting firms stay ahead of the curve. Our mission is to provide you with the latest and greatest insights on cutting edge tools, innovative marketing strategies, virtual CFO services, and alternative billing methods. Join us as we change the way people think about accounting.

Tom (00:00:22) - Okay. Welcome to this episode of the modern CPA Success Show. we've got a really good guest and a topic today. I am flying solo today. Adam Hale is usually my co-conspirator in this, and, he decided to abandon me today. So, we're going to make this even better. So. So, feedback can be all stars, and we'll just make sure that Adam knows that that's how things work. I've got another add another Adam here. Adam coaches my guest today. And Adam is the founder of Libertas Wealth Management Group. Adam, welcome to today's session. Yeah.

Adam (00:00:49) - Thanks so much. I think that he probably just saw there was another Adam and there's no room for two of us, apparently.

Adam (00:00:54) - I don't know, I think you're right.

Tom (00:00:55) - Yeah, I like that even better. So, since I didn't do a long intro, can you tell us a little bit more kind of career story and then Libertas a little bit about the services and what you do?

Adam (00:01:05) - Sure. Yeah. The career story. I want to make sure I'm, I'm not really good at being concise, so. Okay. You know, shut me up or cut me off if I go too long here. But my, my career story is kind of strange because I didn't, I didn't get in this business to do this for a living. I, I was going to school at Ohio State to be for pre-med. I wanted to be a trauma surgeon, and to make a very, very, very, very long story short, or shorter, my senior year had had a big thing kind of happened to me and my we'll call it my personal life and just kind of got derailed me, to be honest. And I just.

Adam (00:01:35) - For what? Just decided one day I just wasn't. This was, not, what, nine months before I took the MCATS, decided I just didn't want to go to school for seven more years, you know, in med school, surgical fellowship, all that fun stuff and called my dad, who was a optometrist, walking down Neil Avenue and on campus and said was terrified when he picked up the phone as to what he was going to say and just said, hey, you know, I'm I, I can't do it anymore. I'm, I'm changing gears here. And he goes, what are you going to do? And I said, I have no idea. You know, I thought the thought about something in pharmaceuticals, I mean, I don't know. And he says, what about being a financial advisor? I'm thinking, what in the world are you talking about? I took one econ class in college. You know, I'm like a, you know, at the end of the day, I ended up being a psych and finance double major, but, but he says, yeah, you've got that virtual stock exchange account.

Adam (00:02:21) - You're messing around with all the time and he's like, you're good with people, you know? And I think the world could probably use some people in the finance world that are better with people, not just good at numbers and so, I went to a, his advisor, his financial advisor up in Cleveland, Ohio, kind of listen to what he had to say. Still wasn't really sure and then, you know, knowing that there's and actually, this is a great audience to say this to, honestly, because the CPA world, I think the CPAs are probably looked at as one of the, the most ethical professions that there are out there. I mean, that's where when people want to turn to somebody they trust, I think they're CPAs probably first and maybe they're attorneys second, I would think, and so for me, my perception of the financial industry was one of poor ethics, conflicts of interest and it just kind of turned me off, to be frank.

Adam (00:03:08) - So, when I found out and I'm just going to say I started at Edward Jones, when I found out that they would make me work out of my home initially, that sounded terrible. and I was 21 years old when I started, so I didn't. I knew it wouldn't be easy, but what I liked about the arrangement was that I wasn't going to be on a sales floor, so to speak you know, I wasn't going to have some manager telling me I needed to peddle somebody, peddle all these stocks, you know, secondary offerings to people or, you know, selling these bonds that are syndicated through, you know, whatever the brokerage firm might be XYZ firm. So, they did. The training was wonderful I decided to try it out and see what happened, you know, and I did really well. I was a fast starter, when all their awards earlier than you're supposed to, got in office really fast, got an assistant really fast, and then, nothing against them at all.

Adam (00:03:53) - They're a great firm. I mean, if I had to do it all over, I'd start there again. but at the end of the day, I just really wanted to be able to have zero conflicts of interest I wanted to be able to help people with the kind of ethics that I, you know, believe in my heart you know, I need to practice with my clients and when I started my company. So, I started ten days before the World Trade Center went down and I was I the joke is I was 21, I was £60 lighter. I was trying to get people three times my age to trust me with their life savings, while the market's crashing precipitously. It was not easy.

Tom (00:04:22) - Perfect setup for launching your career, right?

Adam (00:04:25) - All right, great time to start. But if you make it through that, you're gonna make it through anything, right? So good point, Sarah. So, after I started my company in oh four, I was 25 years old. I did it just because I wanted to be able to do say right and practice exactly like I wanted to practice in a way that, as my dad put it, and the advice he gave me when I started my firm was just pretend like everything you do is tomorrow's front page and the rest will take care of itself.

Adam (00:04:45) - So, that's, you know, we're a fiduciary, you know, a true fiduciary. So, a Nap for registered fee only financial advisory firm, Central Ohio and we have two niche clients we work with. The first is business owners. We help them with everything. The things you would expect like their four one K's personal assets financial planning, retirement planning. But we also do a lot when it comes to exit planning, which we don't like the phrase because I'm sure your audience knows that when owners start talking about or when somebody says something about exit planning immediately, they're like, oh, I'm not I'm not ready for that. I'm not ready for that you know, they're 70 years old. I'm not ready for that you know, I'll worry about it when I get there. It's like when you when you get where, like 105 years old. So, people have a tendency to procrastinate and so, we call it business transition planning whether you're selling in three years or 13 years, treating it like CrossFit, you know, being ready for everything, and being ready for anything, I'm sorry, at any time.

Adam (00:05:34) - So, if you have, if you get your customer concentration taken care of now, if you get your continuity taken care of now, if you get, your risk management taken care of now, if you worry about profits, you know, the efficiencies within your, in your, brand and your, in your office, how they own.

Tom (00:05:53) - Or extract themselves from being the only one who can make the company profitable. Right? So, they can sell.

Adam (00:05:58) - Themselves out of the business. Not completely, but to a certain extent, then it will grow so much faster. It will be so much more efficient. The multiple will be so much higher, and you'll have a whole lot more fun, by the way, doing it. Everybody is in the right seat on the bus too, by the way. But anyway, yeah, so we do that It's one of our things we do, and then we help companies, you know, through the sale process and then we help them with the proceeds. Of course, when they ride off into the distance and the horizon on their, their white horse, their medical goals.

Adam (00:06:22) - Right. And then, the other thing we do is work with working professionals. We say so, it's a typically C-suite D-suite SVP, VP, executives, but other executives at companies that have complicated benefits programs, stock options are, is used, things like that. just helping them make work optional, just like the owners.

Tom (00:06:40) - That's great. That is really cool. Yeah. It's fun.

Adam (00:06:43) - I haven't worked in 23 years.

Tom (00:06:45) - I love it. And how large of a firm is it now?

Adam (00:06:48) - We're just right around 100 million in assets. And then we have a separate company called elevate the website's Elevateandexit.com and that's the exit planning business transition planning that we're doing with which I probably have a I probably do an eighth of it. You know what I mean. Its more team driven around people like you, you know, fractional CFOs, CXOs, CPAs, business brokers, business bankers and so on.

Tom (00:07:10) - Okay, good. Well, I'm hoping that we can give people some tips that they can think of on how they would advise clients, and probably also then help understand an area where they might say, no, I need to pull in someone like you and say, you know, I've got a client interested, but I can actually do it and let me take that next step that's in there.

Tom (00:07:26) - So off air, we chatted a little bit about many people work with clients who have properties that have appreciated, and they don't, and they don't really want to keep the property, but they also don't want to sell it because they're going to get nailed for taxes. And you had some ideas of what you might advise clients and that kind of scenario.

Adam (00:07:42) - Yeah, I mean, the, when and this can be people who own residential real estate. It can be commercial real estate, it can be an individual, a couple that just has 1 or 2 properties. It can also be a real estate investor that has several properties and again, it's commercial or residential and often oftentimes it's one of two things. It's either a, the owner of the real estate or the individual in question they're just tired of it you know, they're even though they have a property management company probably taking a, you know, taking a haircut and helping out with a lot of the intricacies. It's just it's just they're just not retired anymore.

Adam (00:08:11) - They don't feel like they're not working. And they're trying to spend those later years with their family, and they're just done, and you don't have to be retired, obviously. But, and then the other, the other group of people, I would say that we see this commonly with our folks that. They like doing it still, and they're fine with it and they might even be a little frustrated with the fact that their spouse and or children aren't interested and they're like, you know, we don't really want to deal with this when you're gone like, and half the time they don't want to bring it up, right. Who wants to talk about that end-of-life issues? And dad, we don't want your properties that you that you love you know, you've fallen in love with. These are your babies, you know. so those are the two groups of people. And the one way you can do things, which most people don't understand probably is just a simple 1031 exchange to another lifetime property, right? Yeah, that's the easy thing.

Adam (00:08:58) - But that doesn't solve the problem with what we call as the terrible T's or the three T's, like toilets, tenants and trash. Right? I mean, it does. It doesn't make you retired at all you know, all you just have is a new property with new problems. Right? Right. So, and again, nothing against real estate investing. I think I have yet to meet a wealthy individual that doesn't own real estate. I own real estate, you know? So, anyway, so with that being said to get away from what I call active real estate investing, which is owning physical property, whether you're managing the properties yourself or paying a property manager is irrelevant. But that's active management, it's you own the physical real estate. You can go down, drive by, touch it, you know, walk inside of it. It's yours. There's what's called passive real estate investing. And most of the time when people think of passive, they are immediately going to think of REITs, you know, real estate investment trusts.

Adam (00:09:47) - And they're going to think of like Simon Properties and these traded things on the New York Stock Exchange. I'm not I'm not talking about those things. What I'm referring to is privately held nontraded real estate through purchase through something called a Delaware statutory trust. So, we'll call them nontraded REITs for short and we'll call them DSPs for short just to make this faster. So, the way this work is there's several companies that offer them it's usually one property. Sometimes there's multiple but you as the investor, you have the choice between, you know, one property, multiple properties it could be hospitals, it could be sectors like storage units. It could be multifamily, single family. It could be anything. So, once you find a property or properties that you want to invest your money in, and then you have an intermediary, of course, you need to have an intermediary and we have one that we work with here in town. But there's several of course, I would recommend my guy, naturally.

Adam (00:10:43) - But, if, once you've identified that, like, kind property, that you're selling, then you can sell that property and you can 1031 into this passive investment, let's just call it a hospital anywhere in the country. You you've, defer the tech cap gains. So, there's no cap gains treatment on the, on the transition. And then what typically happens is, is it depends on the real estate in question. Sometimes these things will last for four years. Sometimes it's ten, you know, but we'll say the average is seven. and let's just say the individual in question who owns the real estate 70. And they're thinking, well, that's not going to help my problem and help solve my problem. Right? I'm on B 77. I'm probably going to be still around. You know, I'm healthy. Well, we just 1031 into another one. And you can keep doing this deferring the taxes. Your income by the way is now going to be passive income. No more no more terrible Ts yeah.

Adam (00:11:31) - You can I'd say a good expectation is you're going to get probably somewhere between 3 to 4% per year in passive income. And then, as you continue deferring those taxes and deferring those taxes to every REIT, you 1031 to in the future, you keep getting that income. While I mean, I'm not going to say they always appreciate, but we hope they'll continue over time. You know, they'll appreciate it in value. So, you're getting that dual growth and income that everybody wants from real estate. And then heaven forbid, something happens to you which we all die someday. Right? When we pass away, it all steps up in basis. So, now your kids don't pay any tax. As if you would have held the properties to your till your death, but you didn't have to deal with them and when you're gone, the kids don't have to deal with them you know, they don't have to deal with the, you know, the three Ts as well.

Tom (00:12:13) - Sure. It's a nice solution. 

Tom (00:12:15) - So, pardon my ignorance. You said an average of seven-year life at that point. The properties are sold that's kind of the average and then and then once that's done, you're getting your money back to then turn around and do it again. As you said, that's what ends the life of that.

Adam (00:12:26) - That's correct. Yeah. And it can be shorter it can be longer. and there's plenty of time. It's not like you're going to get hit with a letter one day and go, hey, you got 30 minute, 30 days, you know, I mean, it's, it's you'll know well in advance when it's time to start looking for another one and typically the company that issues these are don't think of it like a bank but think of it you know the DSPs that issue these non-traded you know private real estate companies they typically have others you know, so, you can stay with the same company, go to another company. it doesn't make a difference. Obviously, you're just looking for quality yield and appreciation of course.

Tom (00:12:56) - And when I'm purchasing, do I tend to know when I buy in that I think it will be about a seven year that's sort of the you get sort of like an investment manager kind of philosophy of, hey, here's what we're planning to do. Is that, is that a good analogy?

Adam (00:13:08) - I would say I would say that's a good analogy, I would, I but I would I would throw a caveat in that there was a time, after the last real estate market crash where we were all told it was going to be seven years, and then all of a sudden it was, you know, nine years, then it was 11 years. So, I mean, at the end of the day, as long as it's a good property, as long as it's appreciating the old, the old adage. Location. Location. so, you know, whether you're doing it on your own with the help of your CPA, with an advisor, financial advisor, wealth manager, you know, doing that diligence to make sure it's a good property, in question, you know, to do the 1031, I think that you're probably going to be fine, but it can be longer.

Adam 00:13:42  That's all I wanted to say.

Tom (00:13:43) - Yeah. And then are these marketable? If, you know, say it's going to 11 years, you know, like I really want out. This is something that you can sell your interest before the property sells.

Adam (00:13:51) - Yeah that's a great question. So, that is probably the big downside. Unlike your real estate that you own around the corner that you could put on the market with, and you could just sell it, you know, whenever somebody is willing to buy it. Right. these sometimes they have liquidity offerings. They're called tender offers. Typically. Sometimes they don't because, you know, you own the property with a bunch of other investors just like you. So, the only way to get money out of it is through the cash that's sitting there from the lease that's coming in, you know, or the leases. Right. And if there's not enough money to pay everybody, you know, they'll, they'll allow like a certain percentage per year, but they'd have to liquidate the whole property to get, you know, if people wanted too much.

Adam (00:14:25) - So it's definitely not as liquid the, and I guess that's the downside. It's you're giving up some of the liquidity you would have with physical property for the absence of the three T's, the absence of active management and the tax deferral forever with passive income.

Tom (00:14:41) - Okay.

Tom (00:14:42) - And could I spread that risk if I'm worried about getting locked in, if I own a lot of properties to buy multiple sites that are smaller, to say I don't put all my eggs into that one basket, would that be reasonable? I own 4 or 5 of these things in that way. I'm expecting most of them probably mature when I expect. And yes, some of them may be something different and I just have to I've minimized, or I've reduced that risk.

Adam (00:15:02) - That would be great advice. Okay, now if you have if it's a $100,000 profit, you know what I mean. Sure. You're probably not going to buy multiple I mean yeah, but if you if you the more money that you have the more the more value in the of the properties as a whole, as an aggregate then yes, 100%.

Adam (00:15:17) - That would be wonderful advice to spread it out.

Tom (00:15:19) - Yeah, that sounds great for a business owner who is amassed some wealth. And I can see that, children or maybe it's multiple children who say, I don't want I mean, it's nice. I'm going to inherit this portfolio of, you know, $5 million worth of property, but now you've got enough wealth. If it's multiple properties where you say that could be spread out, it's passive. This is.

Tom (00:15:39) - Heaven forbid, we.

Adam (00:15:39) - Have a, you know, another real estate crisis or maybe it's not so much, residential real estate this time around because, you know, it depends on the city you live in, of course, but commercial real estate, I mean, when commercial, when commercial, you know, companies sign leases, and we're talking about the big ones they're not signing leases for five years. You know, they're doing 15, 20-year leases. So, since Covid, there's still a lot of this coming yet where these leases are going to expire and the company is going to go into a whole hybrid, you know, they're going to go they're going to go back to work from home because they don't, they learned it.

Adam (00:16:09) - It's fine. It's going to work, you know and then a lot of these, mortgage debt for a commercial especially is held actually at community banks so, only 11 and I think it's either 11 and 13 or 11, 14%, maybe it was 11 and 12% respectively, held at the big banks and regionals the rest is way down here it's, so the risk is really not in the upper edge of the financial sectors. It's actually lower, much more local, if you will.

Tom (00:16:35) - Okay. Interesting.

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Tom (00:17:18) - You know, I've got a few clients who their approach, and I don't disagree with this, is they own the building in one company, the real estate, one company, the company in a different company structure. When they retire, they like the idea of keeping the building and keeping an income stream. So, I like I like your approach though, that they may get to a point of saying, okay, so let's say you're lucky and you retire when you're 65, but now when you're 75, you're having this issue where your kids are like, hey, you still own this real estate that sounds like a good second step to say you got an out at that time that maybe you didn't miss the boat when you sold to say I should have sold the company along with the real estate. Are you seeing that kind of thing of I'll sell the company, I'll keep the real estate for a while, and then I'll do the rest later on.

Adam (00:18:00) - Yeah. We have two clients, actually, just in the last year who both sold their companies ironically enough, they're both IT firms and initially they kept their properties. One of the, one of the couples, they kept all three of the properties they owned and initially took rent on them, and eventually they were just sick of it. They were just sick of managing even that. Like dealing with the little bit of business management that was left in their lives, you know, after working so hard for so many years. So, they're actually in the process of selling the third, right now actually, and then we have another client that sold last year, and they've kept there so far you know, I did the same thing. I have a separate company that owns my commercial property. and, you know, statistically, 80% of business owners' net worth is in their company. And if they own real estate, that number could be even more skewed. Right? So, I think that it's a huge, hugely beneficial strategy to keep those two things separate, especially when you get close to selling or at least dealing with, you know, transition planning, exit planning.

Adam (00:18:54) - So yeah.

Tom (00:18:55) - That makes a lot of sense. So, in the work that you do, you're focusing on business owners, but you're doing both the personal and the business guidance. Mainly it sounds like mainly the personal, like you've got this asset. Let me help you when, when this sells, when it generates some kind of net activity, some kind of cash activity.

Adam (00:19:13) - That's like, when it comes to owners, what we're doing with them is we have one of two engagements, we'll call it. it's either a purely I don't want to call it retail, but purely retail relationship where we're helping them with them for one day, we're helping them with their personal assets. We're helping to educate their employees. You know, they're participants in there for one day. and then when they sell that, we're helping them manage, you know, the proceeds of the sale. Yes. However, there's another piece in there. and it just depends on when we meet the client, like, for, there's been I don't know why lately, there's been a few companies that they just got to us too late.

Adam (00:19:47) - And we weren't able to do any planning. They're just like, hey, we're selling. Yeah, we're selling you know, we're not. We're not going to do any planning. We're just selling. So, in that case, there wasn't as much advisory work being done. Planning work being done but if we meet a client who is within, say, 2 to 3 years or more of selling, or the desire to sell, we'll say we have a 12-step process that we take them through. That starts with just, you know, figuring out where their pain points are or as we like to joke, where their baby’s ugly and then, you know, step two is kind of going over stake, over alignment, looking at, you know, what have you done so far? How close are we? And then looking at, okay, here's the here are the problems that we have. You know, from call it 1 to 12. Let's not worry about the botTomsix.

Adam (00:20:27) - Let's focus on these top six that are going to really move the needle from the standpoint of absolute value enterprise value, or multiple. And then step three and four is the retirement plan for the owner and spouse, which is what's this company needs to be worth. So, you can ride off into the sunset and never have to worry about running out of money. And then steps five through 12 are all things like, you know, continuity planning, risk, risk management, customer concentration, stakeholder alignment. it just goes on from there. So, we're doing at the end, we basically build a plan for them to increase the value of their company, decrease, increase efficiencies, decrease the time they have in the business, make it more worth more money to a buyer and then increase the multiple as well through some intangibles. And then the implementation of that plan goes to an implementer like, honestly, someone like you, it'd be a fractional CFO that would help actually sit in the company face to face, you know, doing working with the owner executives and so on, implementing that plan and, and moving it forward.

Adam (00:21:23) - And then I kind of I'm not really there during that process as much, except just to clarify points within the plan but then at the end, obviously, we're there as well.

Tom (00:21:33) - Yeah.

Tom (00:21:34) - This is great. And I'm thinking there's likely a relationship that we can have in doing this because when we onboard new clients, one of the things we go through, we say we do a risk assessment, but it's a couple of meetings and it's touching on a lot of the really high points. Dave, who is our tax director, will lead this. So, part of it is tax. Like had you kept up on your task taxes. Do I see risk there, but have you put in place things like buy sell agreements, operating agreements, insurance to support those and often and we're saying, hey, we're not trying to sell. We're just trying to say, hey, these are things you really should have in place. Yeah. What we often don't have then then we don't provide that for them. So, then being able to hand off and say, here's an expert who can help you with some of those things, and a lot of them import and they love when they can work with like a well.

Tom (00:22:17) - Command office where that's under one roof loaf. Yes, I can help you get that buy sell agreement in place and help you do that part. Plus, if there's insurance to support, I can help you with that. And if you're running your business like a lifestyle business, we want to switch to an asset. What does that look like in your right? That's where we can help them actually operationalize it, but you can help them with here's what that looks like. If you're trying to get money out of this in 15 years and that's your sell plan.

Adam (00:22:41) - Yeah.

Adam (00:22:42) - And in the interest of full transparency, you know, I'm acting as an advisor, a planner. I'm charging a hard dollar cost monthly for 12 months. If it's more than one owner, it's a little bit more. But I'm not actually doing the buy sell. I'm kind of advising on it. We would outsource that to an attorney, of course. Just like, you know, we would outsource the transition plan implementation to a fractional CFO like you.

Tom (00:23:04) - Okay. Yeah.

Tom (00:23:05) - That makes sense. Yeah. It takes multiple people to get that done. But you can imagine often we run into yeah, we often run into a bit of an edge of yes, you should have that, I can tell. You should have that in many people saying, do you trust someone who can do that and be able to have that hand off? Sure. Really helps because they would like us involved to help with that and not just say, sure, go, go find a lawyer and do this stuff that's good for your businesses. Not the best solution to give to them.

Adam (00:23:28) - Totally agree. Yeah.

Tom (00:23:30) - So, when it comes into exit planning, what is some of your advice? If someone's getting close and they're worried about the tax impact of this kind of I'm going to get some kind of money coming in and I'm really worried and having planned, what are some of the things that you're saying? Here are some strategies to consider.

Adam (00:23:46) - I'll bet I'll back up first.

Adam (00:23:47) - And before I talk about the taxes, which are hugely important, obviously, is to talk about some another intangible that I think a lot of owners miss when they're preparing to sell, which is something called recasting, recasting anybody in, you know, in your profession, CPAs, they probably know what it is but to the layperson or the newer CPA, you know, recasting is like, for instance, I have, not to not to flag myself for an audit here, by the way. But, you know, I have one of my cars in the business. You know, I mentioned earlier, I, you know, my commercial real estate well, I'm a tenant, one of the tenants in that office, and I pay my self-rent, and I can get really confusing to somebody who doesn't understand all that but I also go out for, you know, dinners and pay, you know, use the credit card, the company credit card for it sometimes, you know, and so there's all these things that we spend on within the business that maybe are technically personal expenses or could be coded as personal expenses, let's just say.

Adam (00:24:42) - Yeah. So, when an owner is preparing to sell and really, at least I would say at least a year before, if not two years before or more is even better to go through their books, with a fine-tooth comb. I'm talking, like, as fine as you can find and get every expense that you could possibly think of that's in QuickBooks and get it out of the business. If it was something that wasn't business related, because that's going to immediately increase the value of the company on an absolute basis. So, the, you know, you've got to come out. That's an easy one. Real estate has got to come out, that's an easy one. Your salary, you're not going to be there anymore that's going to come out. So, those are the easy ones. But it gets tough when you start thinking about you know, what about your Netflix bill? You know, what about your house cleaning? you know, there's a lot of expenses that are in there that are kind of there in there for all the right reasons, and they should be, but they need to come out when it's time to sell, because from a buyer's perspective, they're not going to have those expenses.

Adam (00:25:36) - So if you don't take them out, you're cheating yourself. When it comes to taxes now, toward the end, especially if we have like two, three, four years, which is optimal, we can start talking about installing if they haven't already obviously A41K. Most companies at that point probably have some sort of company retirement plan that offers tax deferral. On top of that, we can start talking about profit sharing. Profit sharing helps to reduce our tax bill, of course. but once we get there, we kind of get in trouble. And we're a lot of deductions. I mean, I can't count the number of times we've had business owner clients say to us, you know, I'm actually not my for one k, we're doing this for-profit sharing you know, we're donating money to these places. Like, what else can I do? I'm getting destroyed you know; I'm getting absolutely destroyed and decimated by the IRS. And it's like, well, make less money, right? So, there are other things you can do, but, when you're later in your career, that's the sweet spot.

Adam (00:26:27) - It's like the sweet spot of the baseball bat, because now we can install something called a cash balance plan, let's just say, and we can use that cash balance plan, which has to be contributed to over five years you know, that's the rule. So, if you're one year within retirement, you can still freeze it after the fact. And there's ways that you can get around the five-year rule, but you're only going to contribute, say, over 1 or 2 tax years if you do it that way within one year of selling. So, within three years of selling, you might be able to get the prior year's contribution in before your tax filing deadline this year plus the next three years and maybe you sell in January, and you get another year in and so you can get five. Let's just hypothetically speaking and cash balance plans, they're calculated a lot of a big part of the calculation is based on your age. So, the closer you are to retirement or being done with this, the more you can put into it.

Adam (00:27:14) - And you know, we've seen cash balance plans where they're going. You know, two $300,000 per year per tax year is getting deducted on a pre-tax basis, which is ridiculous. especially when you're trying to get that, you know, get that capital to look, you know, like a smaller number. Of course. Yeah. And then the reason I mentioned selling in January is because is, if you sell in December, you're going to owe the cap gains tax you know, if it's cap gains, by the way, you're going to owe it in April of the next year if you wait till January to sell. Now, you got you just bought yourself an additional 15 months before you have to pay the tax and what we like to do is we take the tax money, the money that would be otherwise owed in taxes, put it in a separate account earmarked for tax. And then we right now, just with interest rates being what they are, I mean it's been easy. It's like shooting fish in a bucket.

Adam (00:28:00) - We're just buying 1.1-to-3-month, four-month, six months treasury bills. paying 5.35.4 5.6%. Now of course we had to pay tax on that too but at the end of the day, we're kind of we're taking that 21% cap gains and we're squeezing it. Right. Yeah. so anyway.

Tom (00:28:17) - That's a really good idea. So, when you mentioned the recasting, the business, let me loop back that for a second, because often buyers will say, hey, help me understand what are the seller's personal expenses that are going through the business. I want to account for that, and it sounds like you're making an argument as saying, hey, you're better off just getting them out of the business than coming back later and saying part of these expenses. Let me just tell you, this is the amount that's in there. What's your thought of the kind of a tradeoff between one of those two things?

Adam (00:28:42) - Sure. Yeah, I think that I think that you can you don't have to take them out and, you know, run your business at the highest tax consequence possible.

Adam (00:28:50) - But for the sake of putting together the indication of value or the valuation, I think that they have to come out on paper, not literally in that tax year, but on paper they have to come out okay.

Tom (00:29:00) - Yeah.

Tom (00:29:00) - So at least being identified I think makes a lot of sense yes, it's funny, I've seen some of my owners be really sensitive and maybe it's because we do taxes, and they're worried about tax frauds probably too strong but that but they're like none of this. This is all valid business. And you're like, this is good to be describing that. When you took a vacation with your wife, you called it a board meeting and called that. You want to identify those things so that you can say, hey, that stuff that would come out if you're a buyer saying you're not going to have that kind of expense repeating, but it's been sort of a funny conversation of people not wanting to sort of fess up those things and say, no, I'm really clean.

Tom (00:29:33) - You're like, in this case, I want you to share that dirty laundry, if that's what it looks like. That's right. It benefits.

Adam (00:29:38) - You. I like to tell them, like, I look around like this and I like, look, there's no mix there's no cameras, there's. There's no metaphorical swinging light bulb. You're not changing the table. You know, it's a safe space. We're good. Yeah.

Tom (00:29:48) - Yeah. That's a that's a great point to have in there. Yeah. Cash bounce I'm curious. The, we did have a previous person on and one of their measures when people said kind of by my making enough money to do a cash balance plan, his point was, if you have about an extra $100,000 a year that you could take out and put toward retirement, that's a good you're big enough. It's going to make enough difference. What's your feeling on that is sort of a rough measure.

Adam (00:30:12) - I completely agree with that rule of thumb. I mean, I don't like I don't think that when you're dealing with taxes and money, you should ever have rules of thumb, right? Because you got to be careful there.

Adam (00:30:19) - But yeah, I mean if we had to, you know, put a line in the sand somewhere, I think a hundred grand and more makes sense. Yeah. But when we're talking about companies that are getting close to sale, it's usually it's usually going to be a bigger amount.

Tom (00:30:29) - Yes. Yeah.

Tom (00:30:30) - And when you people, when people look at the limits of like the 401 K max and the max is for IRAs, cash balance pens go way above that. In the couple that I have done, the owner gets by far the majority, much more than a profit-sharing plan 100%. So that's kind of a nice one of saying you're not getting all of it, but you're able to contribute. In your example, you contributed $200,000 to your retirement and you wrote it off. And look at just what happened to your retirement balance compared to, you know, the amount you can put in for 400 K, it's a really nice option for people to think of.

Adam (00:31:00) - And then after it's done, when you're done, you sold the company, you paid your taxes, you're all finished.

Adam (00:31:05) - Let's just say your cash heavy, you know, let's just say you've got cash that's just sitting. Now, we're not talking the money that you put in the cash balance plan, but cash, and you can live off that cash for a year or two. Now we can start talking about doing Roth conversions with the cash balance money and or the 41K. Well, you know, keeping your money under a certain, you know, your income under a certain tax bracket. Using that income you make, your income is essentially just your cash, which means there is no taxable income. Put off your Social Security till later, which means you can make more obviously. Yeah. So, there's all kinds of things you can do to optimize.

Tom (00:31:35) - Yeah. That's great. What a great way to be looking forward. And we talked about this a little bit before we started. Many people think that they don't need to start talking about exit planning retirement, all that kind of stuff until they're getting close. And you were even.

Tom (00:31:49) - I guess I'd like you to just make the comment. What was your comment about people being sort of taboo, that’s why they don't want to talk about that.

Tom (00:31:55 with.

Tom (00:31:56) - That sort of age wise, that people don't like to talk.

Tom (00:31:58) - About that my.

Adam (00:31:59) - Experience and honestly, it was, the statistics are the things that really made me so angry about this because, let me let me take a step aside and just kind of share personally. I've got a great business. I'm very happy. I'm very fortunate. I don't I always say I haven't worked in 23 years like I did when I started. You know, when I started the episode. I love what I do every day I wake up. I cannot wait to go to work. It's a problem, honestly, because I also love my family, and I love spending time with them. But when you love everything, it's kind of hard to hard to draw lines and. Yeah. but anyway, I, I, I feel like, you know, all of us, every business owner has been through great times, and they've been to really, really tough times.

Adam (00:32:35) - I mean, times like, I'll never forget, times early in my career when I didn't tell my wife, but I came home and I'm like, I put my book, my stuff down, and I'm looking around for things I can sell on eBay to pay our mortgage.

Tom (00:32:47) - You know? Ouch. Yeah.

Adam (00:32:48) - I mean, just the stress to, you know, not being able to sleep at night you know, I never had a panic attack and I literally one night, like, during about the same time period, I'm laying in bed talking to my wife. We're talking about money. And I get up out of bed and just kind of out of the blue, and she thought it was weird. And I walked outside, outside the room and she says, are you okay, babe? Are you okay? And I had to put my stand up, my hands on the wall because my heart rate was through the freaking roof. I was having a panic attack.

Adam (00:33:17) - I didn't know it at the time, but I was just freaking out, you know? And it's just money's a tough thing. It's one of those. And so anyway, my point is that we've all been through really great times, but we've all been through really, really tough times. So, when you understand the statistics. So, every. Listening to this. Watching this, every one of your owners that you work with. You have to get these numbers out to them. And there's only three. 80% of I mentioned earlier 80% of companies net worth is in their business. I think most people probably would agree with that 80%. Another 80% of companies do not sell. They dissolve. They just go away. And that that made me so angry when I thought about all the time, I've spent the blood, the sweat, the Twitter, the tears, trying to sell things on eBay to pay my mortgage. You know what I mean? To think that in the end there would be nothing for my family.

Adam (00:34:04) -Yeah, all the work I've done right. And here's the last stat of the 20% or so that do sell, 75% sell for less than market value. So, to get back to what your question was, the what's happening is people are put it off, they're busy. They're busy and their business, they're busy making their widget, selling their service. They're doing really well at it, you know, and they think I'm going to sell someday. You know, like, I don't have to do that now. I'm not going to I'm not going to plan for this now, you know, because I'm not ready to sell yet. I'll sell what I'm ready to sell and before you know it, it's like, divorce happens. A disagreement with a partner, disease, you know, cancer of dementia. Alzheimer's. Parkinson's. I mean, any kind of end of life or near end of life, ailment that might just cause things to go downhill and all of a sudden, any of these things start happening, and now you're selling your business at a fire sale because nobody's going to run it like you do.

Adam (00:35:00) - And especially if your business includes licenses like CPAs. Not to, you know, my business, my industry. I mean, my wife can't just walk in and start doing what I do for me while I'm gone or while I'm unable to work. So, yeah, procrastination is a huge problem. But the bigger problem is the lack of awareness, of the need for owners to start planning now, whether that's whether you're selling in three years or 13 years, as I always say.

Tom (00:35:22) - Yeah, yeah, I you make a compelling case and of your 12 steps, a lot of it is here's how to run the ones you described, how to run a good business and some of it deciding upfront, is this a lifestyle business or are you building an asset and just recognizing, okay, if you are really saying I'm building an asset to build, what are the things you would be doing differently? And they can probably name a lot of those things. Customer concentration, spending too much money, having a unproductive team.

Tom (00:35:47) - Not if all these things you're saying, let's dress it up, you're going to make more money, you're going to run the business better. All these things that you can do that take time to do and getting those things laid out so that you have this good transition and.

Adam (00:35:57) - Some stuff.

Adam (00:35:59) - Yeah. Retention bonuses I mean.

Tom (00:36:02) - All those kinds of things that you do. And yeah, I'm sure it is a huge thing to procrastinate, but what a feeling of relief. If you feel like you've got some of that stuff, put in place, even just my business is running better. Even if it's not, I know what the next step is going to be. That would help. But if you really did say, I've got this plan for what it's going to look like, what a wonderful thing to have.

Adam (00:36:21) - The only analogy I have that speaks to everybody on the face of the planet, whether you're in this situation or not, you'd like to be. And that is that once you've gotten to a point in life and eventually people, most people take longer than they'd like to.

Adam (00:36:32) - But once you've gotten to the point in your life where you're paying yourself first, whether you're a businessman or not. By the way, this is for non-business owners and business owners. Whether once you're paying yourself first, once you're putting what you're supposed to be putting away for yourself on a pre-tax basis and do a for one day putting money into a Roth IRA, putting money to a brokerage account, saving for whatever the amount is you want to save for your kids, for college. And you've done all those things, and you're and you've done your financial plan, and you know exactly what you need to be doing and you're doing it. There is nothing like spending money after that. And the most guilt free way possible. And I say that as the analogy, because there's nothing like doing a business transition plan, implementing that plan with somebody like a CPA or a fractional CFO or CXO, and then being done with it and going, man, like, I have nothing to worry about. I, a competitor can come to come to my door next Monday, offer me a price I can't refuse because it's worth what it is now.

Adam (00:37:25) - And I could sell if I wanted to. Or I could say no. and that competitor is not going to show up or a VC. A buyer is not going to show up if your business does if your baby's ugly. Right. So, you're getting ready to do anything at any time and by the way, by doing that kind of planning, now you're going to make so much more money. The value of your company is going to grow faster, and you're going to have a lot more fun. I mean, it's just the fact.

Tom (00:37:46) - It's a great point. Just this morning, I met with a father and son who have a company, and 2 or 3 years ago, the father essentially transitioned the operational part to his son. And he the father still runs another business. But he's told me recently my definition of retirement, I think he's 66 years old, is I can take 1 or 2 weeks off and just go somewhere with my wife and the companies can run. And so, at the moment he's continuing to work.

Tom (00:38:09) - But exactly what you just said, Adam. They've got a company willing to buy them and they're very relaxed about it. They said they're going to come in with an offer. We've got some exciting things in front of us, and if it's a great offer, we will probably sell or this is no fire sale if they come up with that offer no harm, they just need to make a decision because we got things to do and move on.

Adam (00:38:26) - Yeah.

Tom (00:38:27) - And I think it was what a great position. I would hate for him to be had he not made those plans to be saying, I've got to get this thing sold in the next 3 or 4 years because I can't continue working 60 hours a week and this offer sucks, but I'm going to take it because I want to be out and I'm just like, man, the difference of that kind of relax. Like you said, he works when he wants to work and is having fun at the moment, which is just I'm so excited for him.

Adam (00:38:49) - Yeah. Like living vicariously through him, right? Yeah, we've got to. And the opposite happens more often than the good stories and again, this is because it's because of this lack of awareness. Like people aren't talking about this stuff unfortunately. And but like we've got a situation right now I'm going to be very careful how I explain it, because I don't want them to listen to this. And. Anyway. But so, the situation with a company, that’s small and they want out in six months, 6 to 12 months, and which means there's no time for planning. Like, there's nothing I can do for them anyway. So, you know, we introduce them to our business broker, our business banker, our corporate attorney, a fractional CXO and, you know, the married couple, they're, you know, she's like, I'm good with what we would get for it. What it's worth right now just to just be done, you know? Right. He's like, nope, I want I want 10 million for it.

Adam (00:39:46) - And we're like, it's worth maybe 3 to 4.

Tom (00:39:49) - Oh boy. You know and a big gap there. We're.

Adam (00:39:51) - Selling it. It's like look could it be worth three could it be worth ten if we did plan for two years like if we did a plan and an emergency plan, I'll call it we are just grinded through it and 4 or 6 months and then somebody like yourself or another, you know, another company that goes in and actually implements that plan with them and say another maybe 12 to 18 months then maybe we could get the for the 4 to 5 up to like 7 to 8, which is a big jump, by the way. I mean, it's a huge jump. But without that planning, you know, a key executive is leaving. Yeah. and they don't they don't want to replace that person before they sell.

Adam (00:40:28) - I mean.

Adam (00:40:29) - It's just. Yeah, I mean, it's I guess if we were to throw another, another potential pitfall in here, it's that, you know, disagreements between owners can also be spouses, I suppose, you know.

Tom (00:40:40) - Yeah.

Tom (00:40:40) - And that's sad. It's sad when you're holding out the very simple analogy is right. I want to sell my card that's worth about 20. And I'm like, I'm not selling this thing unless I get $40,000. And most people in the simple words are going to look and go, you're not going to get that. That's not going to happen. And you could do some things to make it better, but that's a big jump to just sit there and look at it that way.

Adam (00:41:01) - Right. It's your baby not there. Your baby. So, what you need to do is make your baby look so good that the potential buyer is like, okay, I'll buy that baby, you know?

Tom (00:41:10) - Yes, exactly. Yeah. Oh, this has been so enjoyable and it makes me think, you know, as we work with companies and we work for the company, but it's usually one, two, three owners and you've got to really have in what they want to get out of it, which is what you focus on.

Tom (00:41:26) - But it's easy. If I work with someone for a long time to sort of lose sight of, okay, remind me you said you want to sell this thing in ten years. Are we taking the steps so that it's sellable? Or have I also just dove in? So, dive so far into your business, and I'm also just in the weeds and no one's pulling back and saying, hey, remember how we said we had to five x revenue, and we had to increase our profitability and stuff to make this thing attractive? We're not doing it.

Adam (00:41:50) - Yep. You got to break those big steps into smaller steps, into smaller steps, and they got to take action and that's where somebody like a fractional CFO is so crucial because most companies don't have the time to do it. I in fact, the analogy I always use is it's like if all of us at some point in our lives probably want to either lose weight, that's probably most of us. Get in shape or, you know, gain muscle or whatever.

Adam (00:42:12) - And so we go to the gym, maybe we hire a personal trainer, we talk to the dietician, then they give us their like, here's what's wrong, right? Here's our list. Here's what you need to do. here's how you need to work out. Here's how often you need to work out. Here's your cardio. Here's your lifting regimen. Here's your diet plan. And then they take it home and it's like, I'm not doing this. Yeah. And but a personal trainer is like the CXO, right? Yeah. The personal trainer comes in and goes, look, we're going to do this. I got you right. I'm going to hold your hand. Right. I'm going to help you through this. We're going to do this together, and we're going and we're going to succeed together. And that's where I think that, you know, you got to have accountability and you got to break those things down into little bite sized steps so that you can kind of keep moving forward and keeping the momentum going, because somebody can listen to a podcast like this and get all pumped up.

Adam (00:42:55) - But, you know, let four hours go by and the phone rang 20 more times. You know, two staff asked you a question and your spouse are asking you, are you coming? Or when are you coming home for dinner? and it's forgotten tomorrow, right?

Tom (00:43:08) - Right, right. Yeah.

Tom (00:43:09) - And in accountability I think is good and your point, your analogy to exercise, because people get a lot farther by doing little bits every single day consistently take those baby steps and five years later, you're in shape. You're much better off than going and killing yourself once a week, or maybe once a month and some, you know, grueling workout that doesn't really get you into the in shape. So having that person saying, hey, here are your 12 steps. We're going to worry about certain ones later. We're going to take these things, but you're going to be amazed if you look back years later at what we got done, because we did the pieces along the way.

Adam (00:43:41) - I'm stealing that.

Adam (00:43:42) - That's good. I need to add that. Add that to my analogy.

Tom (00:43:44) - Well, you opened it so, you know, you brought it up for me and this has been really enjoyable. Any closing thoughts about kind of how people should think about this with clients or winded transition? Anything else? This has all been really valuable.

Adam (00:43:58) - Thanks for asking the open ended question, because I was hoping I was going to get the opportunity to just say that the reason I'm even doing this, the reason I'm hanging out with you today, is I'm honestly I just want I'm so passionate about this that I'm just trying to get the word out I'm just trying to get good owners thinking about it, to educate them. Yeah. We want to get down into specific strategies and give away as much free advice as we can. But, you know, nobody ever got in shape. You know, listening to a little bit of advice on YouTube, right? So, I mean, you got to actually put it into action.

Adam (00:44:23) - So the only other thing I would say is to every CPA on this call, you guys, I mean, you are the hubs of business owners and, and you know, you are the personal trainers, when you think about it, or at least, you know, you know, you own the football team, so to speak, and you got all these other owners in the NFL, and, you know, those are your, your, your clients. So, all I would do is I would ask that you, you know, take this information and that you spread it around as much as you can, teach people, share it with them, just ask questions. You don't have to be the expert, there's experts out there doing this stuff. I don't know how to write a buy sell agreement you know; I got a guy named TomBush that'll do that. I don't know how to broker a deal. I don't know how to find buyers. I mean, I don't even have the software to do that.

Adam (00:45:04) - I have a business broker that does that. I don't I value; I do company valuations like we do indications of value. That'll get us about 90% there. Like it's not going to be a it's not going to be a, you know, a 12-month process where we're getting down to the penny. But if we did that it'd be wrong tomorrow anyway by the way. Yeah, but we're getting we're using private deal data. Public deal data. We're looking at your peers' multiples. So, I mean all these things, people need to be thinking about it now and not waiting until it's too late. So, wait until you step on a landmine.

Tom (00:45:33) - Yep.

Tom (00:45:34) - Well, in our show notes, people have contact information for you at home, so if they want to reach out to you personally, they can and say, hey, I've got a client that I would like you to talk to or things like that, that's exactly how we will plan on using you, as we'll get to a point of knowing what they need and pass them over to the expert, which is what I'm planning on doing.

Tom (00:45:50) - Sounds good. Great.

Tom (00:45:52) - Thank you very much. This was really enjoyable.

Adam (00:45:53) - Thank you. Thanks for having me on. It was a lot of fun.

Tom (00:45:55) - Yeah.

Outro (00:45:57) - Enjoy this podcast? Visit our website Summit Connect to get more tips and strategy for achieving Modern CPA firm success. We are here to be a resource in this ever changing industry.