It's More Complicated Than You Think

A recent guest pointed out that about 70% of business owners looking to sell have no plan and want to get our as soon as possible. Now Books & The Biz shares a real world example of how complex a seemingly simple business sale can impact the overall transfer of wealth in the family.

Succession is a process and needs to be planned well in advance of the actual transfer of business. Other factors need to be brought forth and discussed that are often overlooked.

This episode digs deeper into how as simple transaction can become more complicated as the family gets involved. Please like, share, and subscribe.

[00:00:00.00] - Alice

Hello. Welcome to Books in the Biz, a podcast that looks at both the financial and operational sides of success. Please welcome our hosts, Dan Paulson and Richard Veltre. Dan is the CEO of Envision Development International, and he works with leaders to increase sales and profits through great cultures with solid operations. Rich is CEO of the Veltre Group and a financial strategist working with companies to manage their money more effectively. Now on to the podcast.

[00:00:43.13] - Dan Paulson

Hello. Welcome to Books and the Biz. We are back. Thank you, AI Alice. Rich, how are you doing today?

[00:00:49.19] - Rich Veltre

I'm doing okay. Dan, how are you?

[00:00:51.20] - Dan Paulson

I am doing wonderfully. As of this recording, this is following Labor Day. So did you have a good Labor Day?

[00:00:59.08] - Rich Veltre

I assume so.

[00:01:01.01] - Dan Paulson

You assume so. Well, either way, it's good to talk to you. And we were having discussions recently, and we've done a lot of talking about succession planning. We're focusing a lot more on that, especially with XCXO. And you brought up a very interesting subject, which... So I guess to our audience, here's where things have gone. We talked to a number of companies. We're talking to more and more businesses that are starting to think about, what do I do with this thing? I've grown it to this point. I am getting to the age where I know I'm going to be looking at retirement. I'm going to be looking at selling this or passing this on to a family member. And when you start asking the questions of, when do you want to do this? A lot of times we're getting the answers as well as soon as possible. And sometimes as soon as, if you could sell next week. That would be great. And if you remember when we talked to Will last week, he brought up, I asked him the question of how many of the people that you're talking with family-owned businesses are they wanting to sell immediately?

[00:02:16.29] - Dan Paulson

And he said about 70 %. So almost three quarters of the businesses out there think that they're going to sell tomorrow and get out. I find that difficult to do, if not impossible. I think if we go back to what Paul Curtis had told us once, he says, even if a business has everything ready, it still takes about a year through the due diligence process and everything else to get a business to the point where it can be sold. And you have a high percentage of owners that think, well, just snap my fingers and give me several million dollars and make this thing go away. It doesn't seem easy. But you brought up an example, which I was really interesting, because I'll let you tell more about the story. But here's an example where the business was previously sold from one family member to another, but the property was not. And now the remaining matriarch of the business is looking to liquidate, to settle up assets, and that's causing an issue. So tell me more, Rich, or tell our audience more, because I thought this was a very interesting complication.

[00:03:31.04] - Rich Veltre

Yeah. So family, woman has five children, and her husband passed away in COVID, and she was left with, I assets that they had had jointly. But most of it was property because they had previously sold the family business to one of the kids. And because they sold the business to one of the kids, he's operating the business on the property that houses all of the equipment that's used in the business. And there's another piece of property that one of the other kids is interested in making it his. And then there's three other kids who want nothing to do with any of it. So I think what's interesting about the story, because at first glance, it sounds like, well, that has nothing to do with XEXO. Actually, it has everything to do with XEXO because it has to do with the timing. This has been going on, and this conversation has been going on for years now. The matriarch of the family is in her 80s, and she's trying to settle things up so she knows that it's all taken care of. But it can't be taken care of because it's so complicated at this point.

[00:04:48.29] - Rich Veltre

It's something that has to be figured out so you can figure out, well, how do you make it equitable to all your kids? Because you love your kids the same way, and you want them all to be set up and equal, and you don't want to leave it where there's bickering and fighting after an event. So they're trying to figure this out. And like I said, it's been going on for a couple of years. So if you add get the business back into that mix, how can you assume it's easy? How can you assume that it can be done in a week? I mean, we're talking about two years and the business is already out of the mix. So that's the part that really becomes important to bring up for the audience. Like, hey, guys, we're not just making it up because we won't work two years before you decide to sell or three years before you decide to sell. That timeline, from what we're hearing from other professionals, is that timeline is getting longer.

[00:05:48.11] - Dan Paulson

Yes.

[00:05:49.04] - Rich Veltre

Because there's more prep involved. There's more possibilities of who they can buy. So you have to be out there ahead of time and hope that they pick you, as opposed to picking someone else first. So there's this extending timeline. And now, if you add complication, then how can you think, well, I'm just going to sell tomorrow because I'm just done? It's an impossible deal to expect that you can get done in a short amount of time.

[00:06:19.05] - Dan Paulson

Yeah. What is interesting to me in this discussion, as you pointed out, the business entity is already sold. One of the kids has already bought that. But as is common place with other family businesses, the primary owner of that business often keeps the property because the property provides residual income, almost like a retirement account, because they know they're going to collect rent on that business as long as it's successful for however long they're alive. And I agree with you. I don't think people think about the complications that come into that, because now you have a property that will... I have no clue, because this is something you're probably more familiar with, but I'm going to guess the property is worth several million dollars, because it sounds like it was a fairly decent-sized company, and they had a fair amount of equipment. And if you were to sell that property and redevelop it, it's probably going to be worth some significant money. Right now, it's worth more to the person who owns the business because he I was seeing all his equipment there. And if that property is sold to somebody else, then obviously that creates all sorts of problems for him.

[00:07:37.23] - Dan Paulson

So you can quickly start seeing where this one thing compounds on the next, and the next, and the next. And then, again, you have family members of various interests involved in this, some directly involved and very interested in what happens so that I would come to others that are just like, I'll worry about it when mom dies and whatever I get for my part of the retirement that's left over. And dealing with that broad swath of people, if you haven't done proper planning and handled that, I can see where that just turns into a mess. And as you pointed out, she's trying to do it to end it or prevent any family bickering after she's gone. And you and I have probably both been in or experienced situations where it seems like all the I's were dotted and T's were crossed, and then the last person passes away, and now it's nothing but fighting amongst the siblings about what's going to come with this.

[00:08:39.21] - Rich Veltre

Absolutely. And I can understand why she wants to have that all buttoned up. But Some things are just, even if no matter how well you button it up, some of these things just still wind up being some bickering session. But I can only hope the way that this is going, I can only hope that it's resulting in what she wants. Because once it's over, it's over. I don't want it to be something, especially for her. I've known her for years. So I don't want anything bad to be going on for her before or after at all. But sometimes I just tell her, you can't control everything.

[00:09:30.00] - Dan Paulson

Right. So you're involved in this situation, and obviously it's fluid. Nothing's been resolved yet. So I'm keeping that in mind as we're discussing this. At the same time, though, you're looking at from a financial perspective, what are some of the things that you are maybe advising her on, or at least at high level, as these discussions are happening, even working with the family? What recommendations do you tend to make on stuff like this?

[00:09:59.23] - Rich Veltre

I mean, for me, it comes down to, if I take the emotion out of it, then it really becomes just, hey, well, the fair market value of the property is in the fair market value of the other house that's left, and you can split it five ways. And that's the number that you're trying to get for each of your children. So it doesn't become all that difficult if one of the kids is interested in a piece of property, and it would have been sold anyway, as long as that child is taking that over at that fair market value, what's the difference? If you sold it to him or you sold it to her, or you sold it to an outside party. So it really comes down to, I have this many assets, and this is the five children, just so everything divided by five, what's the number? And you start there. Somebody else can just bicker just because they want to bicker. As long as it's fair and you see that it's fair. Look, numbers don't lie. They They are what they are. If it's a $5 million estate and each child is getting a million dollars, you've covered what you can cover.

[00:11:08.02] - Rich Veltre

If they want to cry sour grapes later on, there's not a whole lot you can do about that. They're going to do it, whether you give them the full amount. You give them extra. And guess what? They're still going to cry sour grapes.

[00:11:19.21] - Dan Paulson

There are always those siblings that do that, right?

[00:11:22.13] - Rich Veltre

Yes, 100 %. So that's the big piece. You give what you can give. And after that, you just leave it up to, Hey, At some point you have to work it out.

[00:11:32.14] - Dan Paulson

Yeah. Yeah. I mean, from my perspective, and again, I'm the outside guy. We just talked about this, so I don't have all the details you do. But looking at it from an operation side of things, the first thing I would say is, well, why wasn't this worked out at the time of the sale of the business? Because even though you kept the property, you sold the business, there's going to be an issue there no matter what. Because if that son or daughter, whoever the business turns around and sells the business again or something happens to them, which leads to a different succession planning event that's three steps removed now, you still have the issue with the property. Because whoever is coming in to take that business over is going to run into the same boat where they don't own the property, but they have all this equipment. And if something were to change suddenly, now they have an issue. So to me, that should have been figured out at the same time the sale of the business happened. So that there was some understanding of what would happen. Now, to your point, fair market value on that property.

[00:12:39.01] - Dan Paulson

From an operations side, the recommendations typically I would look at making, and I will say, I am not a tax adviser, I am not a lawyer, I am not a wealth adviser. But here's some of the recommendations I would make to the family to look into and again, reach out to those professionals for more details to cover it. But from the fair market value, typically what I'll say, if there's a dispute amongst the family members on what that value is, you get three valuations, you pick the middle one. And then I would say the business owner has first right of refusal because they have vested interest in the property. So you pick, again, that middle value. That business owner has first right of refusal. If they choose to purchase the property, they would purchase it at that fair market value less their 20 % share in the overall, inheritance, I'll say. So that leaves the other four siblings whole Basically, you've determined fair market value. You've paid those other siblings out. To your point, can you make everybody happy? More than likely somebody's going to dispute that. But that, to me, is the most equitable way of doing it, because you've gotten a you've gotten a low, you've picked the middle number, which, again, is the fairest of the group.

[00:14:05.08] - Dan Paulson

There'll be some that say, well, no, it's really worth the high number. We should go with the high number. Well, that isn't always accurate because there's a lot of subjectivity when it comes to assessing property values and what you do there. So ideally, those numbers are close, if not the same, but rarely ever are they. So you pick that, you get that settled up. That owner then, business owner, buys the property. They have to figure out how to finance it. Now, let's say, for example, they couldn't finance it. That creates other complications, which, again, back to your point, why XCXO makes sense in this and makes sense in being involved early on, is you figure out all these potential roadblocks along the way. So that way, once you get to that point where those decisions are made, you have professionals in place who have experience with this, who are guiding you through the process. Because to me, that would be the other monkey wrench in. Okay, guy who has first right of refusal, agrees to the price, agrees to buy the property, and now he goes to the bank. And for whatever reason, Bank lending doesn't go through.

[00:15:19.05] - Dan Paulson

And if you remember one of our friends, Warren Lauby, who I think we had on this podcast a while back, he published something on LinkedIn recently talking about why banks will refuse a loan, even if the loan is with a current client or with somebody who would normally appear to be a good investment, per se. It could be everything from profit earnings being offset by debt and all this other stuff. And you can get into that more because you're on the financial side of it. But there's a number of reasons where that loan might not go through. Okay, now what do you do? And that can create a problem. Yeah.

[00:16:04.24] - Rich Veltre

Well, I mean, there's a ton of issues around the timing. There's a ton of issues around the dollars. There's a ton of issues around the fair market value. When you I'm sorry, I'm looking at that, that right there is three tons.

[00:16:17.17] - Dan Paulson

Yeah.

[00:16:18.05] - Rich Veltre

That's pretty heavy. It's a lot to carry. That's pretty heavy. That's a car.

[00:16:24.08] - Dan Paulson

Pretty big car. Yes. About half an SUV in today's modern Pretty much.

[00:16:32.16] - Rich Veltre

So I think this, again, becomes the reason why you can't wait until December 31st, then it has to be done this year. Too late. You can't go You can't go to the last possible minute. If this is what you want to actually accomplish, you have to do it ahead of time. So the rest of it, every point that you made, I totally agree with And probably has been in the discussions at some point. How do you get to fair market value of all the property, plus any cash and assets other than property?

[00:17:10.29] - Dan Paulson

Yeah. Well, to me, the cash and assets, that's a whole different discussion.

[00:17:16.07] - Rich Veltre

Yeah. I mean, if you turn it into, if you just basically say the overall is five million dollars for no connection to anything other than five kids, $1 million each. It makes it nice and easy to talk about.

[00:17:30.15] - Dan Paulson

Nice round number. Right.

[00:17:32.06] - Rich Veltre

So if the five million divided by five basically covers everything, then how do you break it up so that each kid gets a million dollars of value as opposed to this one got this and that one got that. No, in total, everyone got that value. That's what you want to achieve.

[00:17:55.16] - Dan Paulson

Yeah. And to me, I mean, probably Probably the bigger story here that people should really be as they're listening to this. There's a lot... I mean, this is a tangled web. And it's not a tangled web in a bad or nefarious way. It is just Here's an example of something that I would say a business owner could normally experience, because, and you've brought this up, but I've talked to a lot of business owners. Their whole goal is, well, I'm 65. I don't want to run the business anymore. We'll use a family member at this point as an example. I have a family member, a son, daughter, cousin, niece, nephew, whoever that wants to buy the business. I will sell the business, but I want continuous income because that's going to help fund my retirement. So I have this asset. I have this property that the business is on. When I sell the business, I'm going to structure in a way that the business cannot It's got to stay on that property, and it's going to continue paying me rent for as long as I'm alive. And that's usually as far as the conversation goes. So now you have taken it a step further and said, well, now we've reached that point past where the owner of the property wants to keep the property more.

[00:19:19.27] - Dan Paulson

Now, what do you do with it? So nothing negative or nothing trying to deceive anybody, but here's the mess that it creates. And you're in a rare situation where there's five siblings. I mean, I'm trying to think of how many families in the last 40 years have more than two kids, if they have any kids at all. So it gets a little bit simpler there. But once you have that many different tentacles reaching out and that many people impacted, and Yes, family members will say, I don't care. Do whatever you need to do. That always works until that family member passes away, or until a decision is made, then it's like, well, I feel like I got cheated on something. So having those legal structures in place early on can be very helpful. But that, to me, is what families, business owners need to realize, is that for as simple as you think this process is, it's not simple at all. And without continuous planning, and then without planning, starting years in advance of your idea of when you're looking to get out, is the real issue that I think most business owners miss when they're in that discussion phase.

[00:20:31.02] - Rich Veltre

I agree.

[00:20:34.13] - Dan Paulson

So what will we recommend people do, Rich? As we're wrapping up, I'm going to throw the question back at you since you agree. Totally fine.

[00:20:46.07] - Rich Veltre

My suggestion is that everyone take a look at your timeline and be realistic about it. Don't think that on a weekend, it's Labor Day weekend. I want to be out of business by Labor Day. Totally unrealistic, okay? You need a runway, at least a few years of how do you get your number set if you're selling a business? How do you get your number set if you're looking at an estate plan as we're talking about here, a transition of wealth plan, whatever you want to call it. You got to give yourself some time and have the realistic conversation. So turn it into, this is what I need to have accomplished so that I have peace of mind and I don't have to deal with it anymore. In other words, get it done, get it out of your way, and move on with the rest of your life, the rest of your plan, your outside of the business plan, work on whatever you need to work on so that you have that. Like I said, I think I'm repeating myself.

[00:21:54.05] - Dan Paulson

But peace of mind to move forward really comes from planning ahead. Yeah. Well, I think that's the key issue. And really planning ahead is five years. And that was more or less affirmed by Will in our last episode that it used to be three years because three years gave you good three years solid financials. But there is so much complexity in business sales nowadays that most are looking at a five year window to really get that buttoned up. And again, from the operations side, not just talking about the monetary or how are these assets that's going to break down in the inheritance side of things. There's a lot that goes on in your company that isn't documented, that isn't realized, that is controlled by you, controlled by other people, that without that being set, is is going to create even more complication when you do come to that point where you say, okay, now's the time. Now I need to get out. And if that stuff's not documented, it's going to affect the cost of the business. If that stuff's not addressed, it's going to create more complications for the person who does want to buy the business, because they're going to be concerned about what do they have to build or rebuild after you leave.

[00:23:07.14] - Dan Paulson

So that, to me, is really good discussion. And I hope more business owners start having that talk, because that's going to be very important. Rich, thanks again. Appreciate having you on here now that the kids are back in school and we're back to work. We've got a bunch more subjects related to this that we're going to be talking about in the coming weeks. We have a couple more guests we're going to have on to interview to dig into these topics further, but appreciate having you on. Thanks again.

[00:23:38.08] - Rich Veltre

All right. Talk to you soon.

[00:23:39.23] - Dan Paulson

All right. Take care.

[00:23:41.28] - Bob

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