Transcript

Michael Palumbos (00:46.938)

Welcome everybody to the Family Biz Show. I am your host, Michael Palumbos from Family Wealth and Legacy in Rochester, New York. And today I've got a really exciting show for you. We are joined by Mark Bronfman from Bold Value. And Mark is a specialist. He's one of the specialists that we reach out to and partner with when it comes to strategic incentives. 

Michael Palumbos (01:13.966)

for growth and succession planning within family businesses that we serve. So welcome, Mark. 

Mark Bronfman (01:20.398)

Thank you, Michael. Pleasure to be here. 

Michael Palumbos (01:22.444)

Great. We always ask people to kind of tell us their journey. You didn't go to college and say, ooh, I can't wait to do strategic incentives and growth and succession planning for business owners. But you've been in this world and in this industry for many, years. Tell us what that journey looked like for you and how 

Michael Palumbos (01:50.954)

One thing led to another led to another to where you are today. 

Mark Bronfman (01:54.798)

Thanks, Michael. So I am a classically trained strategy management consultant in the first half of my career. So I went to Penn State University, got my MBA at Darden at UVA, went into management consulting after a couple of years as a CPA with Coopers & Lybrand way back when, if you remember that name. 

Mark Bronfman (02:24.078)

was in really an international role, working with clients in Asia, Europe, US, premier set of clients. And I had the opportunity after my employer Accenture went public, I had the opportunity to take my winnings and go. We had a partner leave program. 

Mark Bronfman (02:52.814)

This was at the end of the recession in, what was it, 2001. And they started to move partners over to Asia. And my wife was not gonna move to Asia at all. She was not gonna move to Singapore. She's not gonna move to Seoul. And we had done well enough. So like a lot of other people, I had a liquidity event. 

Michael Palumbos (03:19.726)

Okay. 

Mark Bronfman (03:20.206)

which was 

Mark Bronfman (03:20.606)

great. And then I had a question of, so now I'm in my mid 40s, what am I going to do? What's my identity? sometime when we have more time, I'll tell you the story about how I actually ended up at Sagemark. But it was a referral from someone in the insurance industry. people had told me that financial services was a great place to be. 

Mark Bronfman (03:47.66)

And SageMark, by the way, is a division of Lincoln Financial Advisors, the platform that both you and I are affiliated with. And as I went around the financial services industry and try to find out where I may find a great home, several organizations said, we aspire to be like SageMark. So I said, well, if you aspire to be like SageMark, I'm just going to go to SageMark. And I joined SageMark in 2000. 

Mark Bronfman (04:17.272)

Three, I found my business model around privately held business owners in 2005, made Chairman's Council 2007 and been there since. Chairman's Council, as you may know, is the top advisors inside of Lincoln Financial Advisors. And what's funny is there's a lot of myths in this industry. And one myth, 

Michael Palumbos (04:36.782)

Yeah. 

Mark Bronfman (04:46.606)

is that if you've got a CFO, you don't need an outside party to help you through succession planning. And that can not be wrong. That can not be more than the truth. One of my coaches said, Mark, you're going to be able to use your services, your background, your financial acumen for companies that maybe are 25, 35, $40 million. Once you hit the $50 million in revenue, they're not going to need you. They have a CFO. 

Mark Bronfman (05:16.6)

they got the whole thing covered. And as I got into it and realized that on topics of leadership, on topics of ownership, on topics of stewardship, the entire arc of strategic incentives really needed to be brought into the fore. And I've been doing it ever since. So I bring a very unique set of skills in management consulting and financial advisory services to our clients in properly held businesses. 

Michael Palumbos (05:45.038)

So for just for people that don't really understand when you talk about the work that you did at Accenture, can you give us like an example or two of like how you would help clients when you were there? And because I think it really translates well into what you're doing today. 

Mark Bronfman (06:05.4)

So when you're dealing with large clients, my clients, my published clients back then included companies like Sony, Samsung, Disney, Best Buy, know, really a set of A-class clients. Very politically driven organizations. A lot of people who have initiatives, people move around from place to place. 

Mark Bronfman (06:30.998)

And one of the things that I learned to go do was to manage a multi-stakeholder environment. 

Mark Bronfman (06:37.856)

and working in strategic incentives for middle market companies, you have to be able to be like Switzerland. You've got to embrace the needs of your family, your executives, your company. You may even need to embrace the needs of potential acquirers or venture partners. And so the ability to zoom out and have everyone there feel like you don't have a favorite in the 

Mark Bronfman (07:05.974)

in the game, but you're there as a facilitator is a key lesson that I learned in management consulting. And like or not like it, a lot of financial advisors grow up in an environment where they just have a single client and never have to deal with the question of different objectives. And I guess the other element of it is, you know, at 

Mark Bronfman (07:31.478)

Accenture at Deloitte where I was, very financially driven organizations, very financially driven projects and the ability to get into, with my CPA background, into financials, the financial statements, valuations, really getting into the core of 

Mark Bronfman (07:58.35)

what creates value inside of organization is not a typical skill for a financial advisor. So with all those kinds of things, able to bring my me and my team are able to bring a great level of value. And what really makes things exciting is when a client turns to you during the project and the end of the project and they say, Mark, you don't understand how much value you've brought to the equation. 

Mark Bronfman (08:28.738)

I've been looking for someone like you for a long time and clients don't always say thank you. And when they say thank you, it really matters. 

Michael Palumbos (08:37.294)

Yeah. And you know, it's really interesting, as you said, when you were working in those politically motivated organizations, you know, there's lots of silos and lots of different players in that arena. And it is so true with the middle market businesses as well. It's just different. It's, you know, like we were talking before the show started is, 

Michael Palumbos (09:01.202)

I was working with a family that has multi-generation. So one generation is talking about, we don't want to give you X amount of dollars. And the other generation is like, but we're trying to retire. And so, you know, there's that, that, that, you know, yin and yang happening there, the tug, you know, the push and pull. And then on top of that, there's employees that are wondering, are they going to make it through this transition? Is this going to happen? And when you have those. 

Michael Palumbos (09:30.402)

dynamics and you know, there are heavy emotions on top of the political silos that you might have from the, you know, different family members, especially when you get, you know, what I found is when you get to the third generation and not everybody was raised in the same house. And so there's different value pieces that are brought to it. And on top of that, there's emotions, you know, if you get to be president, dad loved you more. 

Michael Palumbos (10:00.094)

And so you have to, there's being Switzerland is a really great skill that we bring to the table. The other thing that I'd say is that you and I, know, at Sagemark Lincoln Financial, one of the things and the reasons why I've chosen to, you know, plant with this company and stay with this company all the years that I've been here is because of initiatives like the Business Intelligence Institute, where, you know, 

Michael Palumbos (10:29.004)

people like you and I get together and we talk about, you know, how do we best serve these business owners, these middle market businesses that are really, you know, I, how do I say this? it's, oftentimes they need the services that a family office would bring to them. They need somebody taking that 30,000 foot view and everybody looking at them from the perspectives of, 

Michael Palumbos (10:55.746)

you know, not just transition and business and strategy, but also in terms of my estate planning and my tax strategies and retirement and all these other different pieces. But most of their value, most of their network is in the business. So they don't have the $100 million to start this. And so we kind of, and you I know how you work, we work a lot the same way in is that, you know, we may come at it from our specialty, but we're always looking to bring in the accountant 

Michael Palumbos (11:25.25)

We're looking to bring in the attorney so that when we're making and helping the client make decisions and we're educating them about things, it's always about how do we get the highest and best use out of their assets that they have, right? 

Mark Bronfman (11:37.518)

Right. And, you know, if there's one superpower that I've got, it's being a collaborator. And everyone needs to know their own superpower. And when someone first asked me that question, you know, about a decade ago, I had to think about it. But it really works out well. We're not here to replace other advisors. We're here to create a fabric of advisors to solve an issue, to solve a problem. 

Michael Palumbos (12:06.349)

I love it. 

Michael Palumbos (12:06.894)

And that's a, we have that same mentality as we're going through. just sent an email to a new attorney that we're doing some estate planning work with. I said, let them know, said, just as an FYI, I'm a little different than other advisors. I'm very collaborative, really want to be engaged so that if there's something that I know about the client's objectives or goals that they didn't tell you, you don't miss it. And if there's something that's going on from their tax perspective, we can bring in the accountant and they're happy to talk about this stuff so that we're all on the 

Michael Palumbos (12:36.848)

the same page as we're doing, helping the client, you know, get to from point A to point B. So let's talk about what you do at Bold Value today. And, you know, that, that middle market that you serve, that we serve, you have this really unique, special approach to how you serve and how you, you know, how you show up for people. Talk about that a bit, if you don't mind. 

Mark Bronfman (13:05.304)

Sure, so we have this practice that I call strategic incentives and it has three pillars to it. The pillar of leadership, the pillar of ownership and the pillar of stewardship and riding on the arc of the full business experience, the full business owner experience, we're able to bring those three things together. And what does that mean? know, many of our clients are professional services companies 

Mark Bronfman (13:33.666)

were companies that live and die by human capital. 

Mark Bronfman (13:39.414)

And these days, human capital is probably the single most important, biggest asset that any company would ever have. And more than just struggling with the executive compensation issues of how to attract and retain talent, it's how do you weave strategic incentives into the issues of goals, of 

Mark Bronfman (14:09.07)

growth, succession, and keeping the end in mind. One of the things I love to say is that there's many exit strategies, many succession strategies, but if you know which exit strategy you're working on, I'm walk through four of them, that'll tell you an awful lot about how you want to reward on the front end. so before I do that, I just want to distinguish between executive compensation, 

Mark Bronfman (14:39.35)

and strategic incentives because people get them conflated and think that they are the same exact thing. Executive compensation answers the question of how are your peers paying? What are you paying? How do you provide long and short term incentives? And it's relatively sterile, it's relatively mathematical and it can be almost hands-free. 

Mark Bronfman (15:07.598)

Every company has a strategy as to what amount of short-term, what amount of long-term incentives, but that's about as far as executive compensation goes. Strategic incentives tries to weave it into the larger strategies of the organization. Really where is the goal, the opportunity in regard to culture, in regard to a career paths, in regard to 

Mark Bronfman (15:37.07)

what really creates value. And one of the greatest myths that we have is that all EBITDA is equal and the more profit that a company has, the more valuable it is. And that's not necessarily true because strategic incentives understands that you may have a software product and a services business and the software product may trade for lots of. 

Mark Bronfman (16:03.794)

maybe trade for a whole lot more than the services business as well. And so if you just reward on cash and reward based on your financial statements, you're not going to be able to do a good job. So I've really distinguished the whole difference between strategic incentives and executive compensation. And keeping the end in mind, we talk about four different succession pathways. And these are really important, Michael. 

Mark Bronfman (16:33.408)

And if there's I think anyone walks away with it's understanding these four. So the first one is moving towards a change of control. And that I know you work with family owned businesses, some family businesses, you know, say that once we hit a certain milestone, a certain size, et cetera, or certain value, we're going to sell. Some would want to be there perpetually, but that's a different kind of objective from the second kind of succession pathway. 

Mark Bronfman (17:03.394)

which is a perpetual business. We think about perpetual businesses like partnerships, law firms, accounting firms, engineering firms, architecture firms. They may not have family in them, but they necessarily are organizations that wanna stay at least two to three to four generations of management. Generation management is probably seven to 10 years. A third succession pathway is keep it in the family. 

Mark Bronfman (17:34.348)

And when you want to keep it in the family, you typically have a generational gap between those that are older, have learned the business, and those that are younger that are not yet ready. And the key issue with a keep it the family business is how do you bring on professional management and give them a reward that doesn't mess up your estate planning and all those kind of elements like that. And then a fourth succession path is an ESOP. 

Mark Bronfman (18:02.286)

an employee stock ownership plan, which is a way to get some liquidity out of a business, keep control management control over it. And that requires a whole different kind of incentive plan because of the gyrating value of an ESOP as you go through the recapitalization of the ESOP over time. So knowing whether or not you are gonna do strategic incentives around 

Mark Bronfman (18:30.72)

around changing control, around a perpetual business, when are you going to do it around a family-owned business or when are you going it on ESOP is critically important. And with that end in mind, then you can come back in and have a better view of executive compensation, huge consensives, and make the whole thing work together. we've had clients turn to us and say, we've just never seen an approach like this. And thank you so much for doing it. 

Michael Palumbos (18:59.86)

It's, know, if we talk about, we're both in the business exit planning space. And that's really one of the most important conversations that we have with the client is helping them to understand, know, the vast, the number of different options that are available there and then helping them to get through to understand what is their objective. Because if, you know, Simon Sinek, begin with the end in mind, right? If we don't know where you want to go, 

Michael Palumbos (19:28.716)

How are we gonna know if you got there? So very important, very, very important, thank you. You know, it's interesting and you don't know, you and I haven't had this conversation. So I'm gonna, you come at your work from the strategic incentive position, which I love. And I have a quick story to tell you. I have a guy that runs a small engine company that I know of. Every single employee in the business, 

Mark Bronfman (19:30.819)

That's right. 

Michael Palumbos (19:57.998)

is compensated based on the work that they do as well as their hourly wage. And so here's a guy that runs his business one week a month in town, three weeks a month in his home in the South. from, know, so in his business is in upstate New York. we talk about it and I said, you're one of the few that understands that you're incentivizing people from a strategic, you know, 

Michael Palumbos (20:27.982)

that's helping them to understand that they're not just a cog in the wheel, they are the wheel. They are what makes the business run and you've aligned them in a way that keeps people incentivized to do a great job for you and to be able to run the business without you there. And I think that's a lot of the people's goals. And again, it's how do I work on my business, not just in my business, how do I... 

Michael Palumbos (20:57.28)

not have to have all of the stress of being the entrepreneur in the business. How do I run this more as the CEO and the alignment of strategic incentives from your perspective does that incredibly well. And you and I have talked before, we've talked with some of our clients in the past and we'll do that some more in the future. I come at it from a standpoint of these entrepreneurs were really good at doing something. 

Michael Palumbos (21:26.584)

Okay. Whether it be running, you know, a sheet metal or, you know, demolition or, know, most of my, you know, a lot of my businesses are in the construction world, real estate development, whatever their widget, whatever their thing was, they got really good at it. And then they, you know, they were benevolent dictators, which I think, you know, and they, were really good with their people, but they told them what to do and they kind of controlled everything. 

Michael Palumbos (21:53.27)

And now they're thinking about succession and they haven't built teams. And so I come in and help them with moving from that benevolent dictator to a strategically aligned team on the future of the business. I believe that the two of us, if you partnered those two pieces together, just really, really helps a company. So we're going to talk some more about a lot of what you're thinking about and how you do things. 

Michael Palumbos (22:22.72)

I'm looking forward to bringing that in for a lot of the people that we talk to because it just fits hand in glove when you can get them aligned around the vision and the culture of the company, but then also pair their incentives strategically and match them together. It's like now you're not just preaching to the choir, everybody's singing. 

Mark Bronfman (22:46.112)

So can I tell you two stories on this? One's a story about how there's a disconnect often between equity structure and ownership and executive compensation. And the second story is about getting synthetic equity, which is term that I'll define, down deep in the organization. So I walk into a prospect. 

Mark Bronfman (23:15.278)

I ask him how he pays and how he's organized, all that kind of stuff. And it comes out that he's got three key people, two owners that are 50-50, and one guy who's a key up and comer, who's got 4 % of the company in stock options. 

Mark Bronfman (23:35.32)

And I ask him, let's call him Phil. It's not his real name, but I asked Phil, Phil, what's wrong with this picture? 50-50 and 4 % stock options. And he says, nothing, I love it. And I say, what happens, Phil, when the 4 % stock option holder exercises? They go from being a 4 % stock option holder to a 4 % equity owner. He says, 

Mark Bronfman (24:04.718)

I guess they own 4 % of stock. I say, okay, so what now has happened to the value of your own stock? 

Mark Bronfman (24:16.366)

And says, what? said, well, I've looked at your shareholders agreement and minority shareholders have a 25 % discount off of their value. So as soon as this 4 % stock option holder exercises, your shares go down by 25 % in value. Did you know that? But I say worse than that, who now has the control over this company? 

Mark Bronfman (24:46.904)

He says, what do you mean? I says, well, if you have big decisions to make, sell the company, do a big acquisition, et cetera, who's the swing vote? And he thinks about it, thinks about it, and he takes his head and he starts banging it on the desk and saying, okay, I give up. But that's an example of how people just don't understand the interconnection between capital structure and executive compensation. 

Michael Palumbos (25:16.46)

Yeah, and to your point before talking about, you know, the CFO's job is not to read that stockholder agreement or the buy sell agreement and to understand how the structure works there. Their job is to be focused on the financials, make sure cash flow is going well, make sure that there's, you know, cash to grow and do all the things that need to be taken care of. It's why we, you know, why we have a job, but I think it's 

Michael Palumbos (25:45.966)

Really important that we make that note again, that there's a distinction. You're the chief financial officer of the company. That doesn't necessarily mean that you've got, that you built the skills around, shareholder agreements, operating agreements and strategic incentives. And you may have some things where you took a class, but you've got 20 years. I have 20 years. 

Michael Palumbos (26:14.194)

of doing these things. And so we've just seen more and like when somebody's selling a business or somebody's doing strategic incentives, you you're doing this once. Once you, you know, once you want to work with somebody that's done this many, many, many times. 

Mark Bronfman (26:30.574)

Mark Bronfman (26:33.997)

So let me give you the second story, which is what's old is new again. So are you familiar with the private equity firm KKR? Okay, so they have a partner by the name of Pete Stravos, who now has a not for profit entity called Ownership Works. 

Michael Palumbos (26:40.654)

Okay. 

Michael Palumbos (26:46.253)

I am. 

Mark Bronfman (26:56.854)

and they are trying to solve what we've already solved, what we're already doing is giving slices of equity to every rank and file person inside of the organization on the upside. Private equity firm, as you know, their typical game plan is they come in, they buy an organization, they hold it for a period of three to five to seven years and then sell. 

Mark Bronfman (27:23.214)

And you know, five, seven, 10 years ago that may have been viewed as Machiavellian. I think now it's viewed as a very good way of doing business because they are involved in so many transactions. so Pete Stravos is raising the flag that by giving slices of equity, 

Mark Bronfman (27:53.198)

to everyone in your organization, especially blue collar organizations, you can have people who are more responsible and rewarded for innovation, esprit de corps, for really value creation inside the organization. Well, we've done this using synthetic equity, and I'm going to define that term now. People know what equity is, stock options, true stock, S corporation stock, C corporation stock, LLC, et cetera. 

Mark Bronfman (28:22.988)

Synthetic equity is a mathematical equivalent to equity, but it's paid out as compensation, not property, and can be almost any calculation you want it be, any financial calculation. So you can say, if I'm running a business and I've got a set of car dealerships and it's worth $100 million, I'm gonna give any slice above $100 million or any amount that I want. 

Mark Bronfman (28:51.66)

If you can articulate it, you can do it with synthetic equity. And so what we've done recently for some clients is partitioned off five, 10, 15 % of the overall upside value of the organization and given that to every single person inside the organization. Now that pays off only upon a change of control. Why is that? 

Mark Bronfman (29:20.11)

because it's much too complicated to try to pay that off per a perpetual company, et cetera. But for a company that says, I'm going to be selling, you know, in the standpoint of three, five, seven, 10 years, and people who can get a piece of it, it makes a lot of sense. And it really shows from the heart as to what you really made of. Not every company is going to go do this. Some companies don't have that level of size and scale. 

Mark Bronfman (29:50.638)

But we're using synthetic equity in a way that really changes the culture of organizations. 

Michael Palumbos (29:57.068)

love it. mean, it's Jack Stacks, the great game of business. Get everybody involved and make them have ownership thinking. And that brings, like you said, the innovation to the organization and gets everybody aligned. 

Michael Palumbos (30:14.334)

in how they're doing things. So it's not always about the silos about my group, my people that report to me, it's what's best for the business because we're all getting compensated based on that strategic or the synthetic equity rather. And I love that, very good. 

Mark Bronfman (30:32.77)

So the other thing that we do really well together on you coming from the personal planning side and everything else you're doing and our team coming from the business side is you can't do a work on strategic incentives without really understanding the family structure, the family wealth and what you have achieved. One of my clients coined the term personal endowment, which I love. 

Mark Bronfman (31:01.1)

which is what's the amount of money I need to have in order to endow my family with enough money that they're okay for us to the lives. And once you know that personal diamond number, let's call $20 million for just sake of having a number out there. Anything above that has a law of diminishing returns to the family. Sure. And so, you you often say you have three places you can leave your money. You can leave it with family charity, the IRS. 

Mark Bronfman (31:30.836)

I say, why not a fourth one? 

Michael Palumbos (31:32.942)

I love that! 

Mark Bronfman (31:36.297)

And... 

Michael Palumbos (31:37.196)

And the fourth one is... 

Mark Bronfman (31:38.818)

The fourth one is the people that got you there. The fourth one is people that got you the wealth. And this runs off of the classically trained work of Daniel Kahneman in his famous book, Thinking Fast and Slow, around prospect theory, which is in one way the law of dimensioning returns, but what we do is we tailor these business owner 

Mark Bronfman (32:06.987)

value sharing techniques to the personal endowment that families need. And that's why I work mostly with the upside because that's the law of diminishing returns. 

Michael Palumbos (32:18.668)

Right. Once you know what you need. 

Michael Palumbos (32:23.022)

Having a dollar more really doesn't make a difference. I love that concept. So when we're talking with business owners, you're right. I always see there's three places where your money can go. It can go to the IRS, can go to taxes, can your IRS, charity, or your family. But there's a fourth bucket there that is just eye-opening. It can go to the employees, the people that help you build this organization at a much 

Michael Palumbos (32:51.438)

higher, deeper, meaningful level that could really change their lives, not just change your family's life. 

Mark Bronfman (32:58.572)

Right. So one way of doing this and this is not a recommendation. This is just every situation is different. Right. One of the designs that we've put together is a split dollar insurance contract where the beneficiaries of the of the insurance policy are the executives themselves. So if the patriarch passes away, 

Mark Bronfman (33:28.044)

and there aren't the people inside the family to take it over and the family doesn't want it. And the life insurance proceeds goes into a trust for the benefit of these executives. They use that as seed capital to then buy out the company. Now that is not executive compensation. You would never ever get that from executive compensation. 

Mark Bronfman (33:56.002)

But when the patriarch says, guys are being lined up to be able to buy out the company and I'm doing that for you, that makes all sense in the world, but I'm keeping all the power in this because once I set this up, I can determine year by year whether or not I want to have the insurance proceeds going out to my family or going to you guys. If it goes to you guys, you guys are gonna pay the insurance premium value each year. 

Mark Bronfman (34:25.984)

I may bonus you up for that. But these are examples, you know, where you just end up at a place that's different than what you expected. We came into a engagement recently where a construction company in Washington, DC wanted help around executive compensation. And very clearly it became clear 

Mark Bronfman (34:54.978)

that the owner who's 57 years old wanted a pathway to exit. And we ended up doing an ESOP with a stock appreciation right plan attached to it for the executives, what really scratches all the itch. And you never would have gotten there, you know, from a standpoint of just doing a competitive peer compensation study. 

Mark Bronfman (35:24.768)

strategic consensus is so much broader. The arc is so much more important and so much more impactful to a business owner. And that was the situation where we brought in Dan Preciada of Equity Strategies Group to do the ESOP and the client could not be happier. 

Michael Palumbos (35:44.366)

Yeah. And it's, one of the things that the ESOP, thank goodness, I think 10 years ago, there was a misnomer that, you know, it's too complicated. There's too many moving parts. Not quite, you know, there was a lot of downplay, I think on the ESOP. I think in the last 10 years, even maybe in the last five years, you know, more specifically, where people are starting to really realize that the ESOP is a powerful, powerful tool. 

Michael Palumbos (36:13.202)

and can really make a competitive difference in the business. It can be an alignment of the employee engagement, just so many good things when it's done properly. Again, I'm a big fan of family philanthropy. I believe that family philanthropy can be a sandbox for teaching entrepreneurship to young children. I'm talking about as young as five years old. 

Michael Palumbos (36:41.184)

six years old, you can start teaching leadership skills and communication skills by utilizing family philanthropy. So that's where I come from. But I always tell my clients, said, do not start a family foundation just for the tax purposes. are so many, don't do this for you. I still want you to be thinking about the community that helped you to be successful. It has to be coming from the heart first. 

Michael Palumbos (37:10.284)

And then you'll get all of the side benefits that come with it. think the same thing is true with an ESOP is don't be doing this just because of how the benefits work for you. Think about all of the people that are involved because it really makes a big benefit to everybody. There is work that goes inside of an ESOP, but it's so worth that when it's done properly. 

Mark Bronfman (37:30.316)

Yeah. And ESOPs are probably not right for most companies. One of my dear friends took his business, ESOP, he was a client. And, you know, they were in a weird situation where if they were to sell the company on the outside, every one of the logical buyers had some conflict of interest that would not be able to take the full set of revenue that they were offering. 

Michael Palumbos (38:00.535)

Okay. 

Mark Bronfman (38:00.686)

Mark Bronfman (38:01.386)

But a financial buyer in ESOP could. So they were an organization that if they sold to one of the big four, one of the big six accounting firms, consulting firms, it was a conflict around being able to take all that revenue. And the ESOP was the right answer. And they also were a company that went from an LLC to a C corporation to do the ESOP. 

Mark Bronfman (38:27.522)

which worked out very, well for them and did the 1042 and all those kind of geeky things we talk about. 

Michael Palumbos (38:33.442)

And that, mean, that's the fun part about for you and I, you just said magic words to me. I'm a geek and I'm okay. I love being a geek because it's that geekiness that makes me look into weird, you know, potential solutions that somebody didn't think about. We just had a client. Then, you know, I tell people all the time, and you mentioned insurance earlier, you and I are not insurance salespeople by any means. We help people buy insurance. 

Michael Palumbos (39:03.052)

a lot of times because it's just the only solution. And so this family was going through transition. One child's taking over the business. It's a $20 million business and he's getting it gifted to him, but he has three siblings. How do you think Thanksgiving dinner is going to look when, you know, and so what we ended up doing and dad had put, left all the money in the business for many, many, many years. That's what his decisions were. 

Michael Palumbos (39:31.832)

So he didn't really have a ton of money. So when he leaves, he needed to be able to have a nice retirement. And so we put together a nice deferred comp program for him. And we did a split dollar with a trust for a giant, it was a $20 million life insurance policy. And this is again, not a recommendation. This just worked for this family. And so the son is now paying, so he is now paying. It's not just gifted to him. He's paying dad's deferred comp. 

Michael Palumbos (40:01.74)

and he's paying the insurance premiums on a $20 million life insurance policy so that when mom and dad pass, his sisters have cash and it's in trust for them. And so it was just that, how do we take all of the different things that are out there? You tell me what you're trying to do. Don't tell me how to do it. That's where I think a lot of our clients sometimes get wrapped around the axles. They wanna tell you, well, what if we did this or what if we did that? like, just tell me what you want. 

Mark Bronfman (40:11.512)

Right. 

Michael Palumbos (40:30.958)

And then we'll tell you how, because we want to try on two or three or five or maybe 17 different ideas to help you think through. Again, go back to what we said at the beginning, what's the highest and best used, most efficient and effective way to manage and work with your capital. And when we talk about capital, you and I talk about not just your assets, but we you your capital is your people and your family, and it's the social and it's the relational. 

Michael Palumbos (40:57.08)

capital that you have that you bring to this thing. And we want all of those pieces of capital to be right up there. I want to ask you, I've looked at your website and really anybody that wants to take a peek at Bold Values website, you're just blown away with the articles and the writings that Mark has put together. I reference it probably at least monthly, just so that you know, and going through to be able to help 

Michael Palumbos (41:25.762)

have conversations where you and I are slightly different. I only have probably about five or six clients and we only take on one or two a year. It's just, you know, key clients. do have, you know, people that don't fit, you know, you know, our core customer, which is that middle market business owner. But when I serve them, we act like that outsourced family office. And so there's just so much work to do. 

Michael Palumbos (41:51.894)

on a regular basis for people that are doing this stuff that that's enough for me. So I don't have a lot of swings, so to speak. don't think where you, because you collaborate really well with other teams like ours, advisors bring in and say, I have a situation. Can you help me think through this? And it's just, like I'm looking at one right now, the top 40 executive rewards, a pathway to strategic advantage. I have referenced this one piece, one document. 

Michael Palumbos (42:20.174)

probably 50 times in conversations with people just to help them understand the world's big in this world of incentives and strategic thinking. it can be equity-based or it can be cash-based and it can be immediate, it can be later and deferred. It's just so many things. I love it. You talked about another 

Michael Palumbos (42:46.808)

concept that I've heard you talk about, and I'm hoping that you'll spend a couple of minutes talking about profits interests. Do you mind sharing with you know with us what that what that is and how that might work for somebody. 

Mark Bronfman (42:58.702)

Mark Bronfman (42:59.182)

Right. So profits interest is the number one article that gets pulled down from the website. And we're called frequently by other attorneys, by other financial advisors, from CFOs, from board members about profits interests. And what profits interests are is a type of equity, which is upside equity that you don't have to pay anything for. 

Mark Bronfman (43:28.086)

It is granted to you. It's only available inside of an LLC tax as a partnership. So if you're an LLC tax as a nest corporation, it doesn't work. we talk about the bet. There's three ways of transferring value in a privately held business. Sell pay convey. You can sell ownership to a key executive such as such as stock. We should just stock. 

Mark Bronfman (43:57.218)

you can pay it to them as compensation. So you give it to them and then they pay tax on that compensation amount or convey it, which is to give value to an executive at no cost to them. That's what a profits interest is. you are giving the upside of an amount. So if you have a business that's worth $10 million, 

Mark Bronfman (44:27.31)

The threshold value is $10 million and you can't use any discount for minority interest. Someone who has a 5 % profits interest when the business goes from 10 million to 30 million, it's gone up $20 million. 5 % of $20 million is $1 million. They can sell that. And Michael, do you think it's taxed at ordinary income or capital gain? 

Michael Palumbos (44:55.384)

Capital gain. 

Mark Bronfman (44:56.91)

It is taxes, capital gain. You get it right. You get five points for that. But it's probably the only type of equity that you didn't pay anything for. 

Michael Palumbos (45:00.664)

Thank you. 

Michael Palumbos (45:06.843)

And it's wow. 

Mark Bronfman (45:09.358)

But it's property. Profits interests are mostly used in self liquidating situations. What do mean by that? People that are doing real estate partnerships, that it's gonna be you're building a real estate strip mall and you're gonna sell it in three to five to seven years. 

Mark Bronfman (45:35.47)

Okay. You might get profits interest to the people that are helping to go build this and three to five to seven years once the whole thing sells, then it'll pay out as a capital gain. Alternatively, you can use it as a junior partner role. So you get profits interest, you get your value up to it, and then you convert it from profits interest to capital interest, which is class A shares, if you will. 

Mark Bronfman (46:05.036)

And Michael, when you do the conversion from profit to capital interest, do you think it's a taxable event? 

Michael Palumbos (46:11.598)

I would think that would make, you know, you're changing control, changing the type. So you're saying it's, I'm assuming it's. 

Mark Bronfman (46:21.07)

It's 

Mark Bronfman (46:21.911)

not a taxable event. You can take that $1 million value and now contribute it to the company and get your million dollars of capital interest. Love it. So it plays a lot of key roles. We have used profits interest in many situations. 

Mark Bronfman (46:50.05)

They are complicated animals because you have so much flexibility in how you put things together. But when you are trying to use a convey strategy, profit-centrism is a great approach. Let me share with you another convey strategy. And this is one that is sometimes talked about as a Popeye plan. Have you heard of the Popeye plan? 

Michael Palumbos (47:02.786)

Yep. 

Michael Palumbos (47:14.734)

Absolutely. Help walk us through this because this is phenomenal. 

Mark Bronfman (47:19.64)

So, and I'm not gonna go into the gory details, but let's say that you want to, you've got a key family member, a key executive, someone that you want to convey value to, and you're not in an LLC, taxes of partnership, you can't use profits interest. So what you do is you seed S-E-E-D, a small amount of capital, a small amount of capital so that 

Mark Bronfman (47:49.378)

You can have this key executive have some ownership. Let's presume that the founder has 99 shares and now you seed 1%. So now it's 99 and one. Okay. That's the capital structure. Using this redemption strategy. Let's say the company now redeems 90 shares from the founder. 

Mark Bronfman (48:18.402)

The new share table is nine and one. 

Mark Bronfman (48:24.386)

First question, Michael, what percentage of the company does the founder now own? 

Michael Palumbos (48:30.734)

founder owns 90%. 

Mark Bronfman (48:33.422)

90%. Very good. Some people say that that that that he sold off 90 % of the business because he went from 99 to nine. Right. 

Michael Palumbos (48:44.174)

but it's the shares that left because the company redeemed them. So now you have nine shares plus the one. 

Mark Bronfman (48:50.678)

So now what percentage of the company does the executive now own? 

Michael Palumbos (48:54.248)

Now the executive owns 10%. 

Mark Bronfman (48:56.686)

So how much tax did that executive pay in order to go up from 1 % to 10 %? 

Michael Palumbos (49:05.282)

Zero. Wow, that's phenomenal. 

Mark Bronfman (49:06.2)

Bubkiss. 

Mark Bronfman (49:09.934)

And you can use this technique as long as it's no more than 20 % shifting of value per year. And you can use this to go from 99 to 80 to 20 % of 80 is 16. So you can bring it down to 64. So you can do that year over year to really shift the balance of power. 

Mark Bronfman (49:39.15)

And that all goes back to the whole concept of prospect theory. Why would I do this? I would do this if you want to flip the ownership and use the key thing here is that you're using the AAA account, the accumulated adjustments account. I know I'm getting geeky here. So excuse me for doing that. But using the AAA account as... 

Mark Bronfman (50:06.094)

redemption capital, not distribution capital. It works off of 301 and 302 of the tax code, but those are redemption strategies. So profit centric is a redemption strategy. The redeem and accrete is a redemption strategy, sometimes called the Popeye plan. But just learning sell, pay and convey, and how you can use all these different techniques is something that our team does. 

Mark Bronfman (50:35.956)

all in the context of the broader arc of his owner experience. 

Michael Palumbos (50:41.35)

And that's why we partner with a specialist like you because this is where you shine and this is what you do and you dig into them. I've heard of the plans, but again, go back, I have five to seven families that I serve as my core customers. So I just don't see 50 different scenarios like you do. so, 

Michael Palumbos (51:08.526)

When I partner for the &A work, bring Dan Preciado in or NISAP, we bring Dan in. When we're partnering, when we talk about strategic incentives, we're bringing in Bold Value and Mark Brontman. We appreciate that geekiness because it's legal, it's tax, it's business. There's so many different aspects of what we need to look at for a client. There's not one person out there 

Michael Palumbos (51:38.498)

that can know it all. It's just too hard. But it's like, you know, where we shine is that, you know, we have enough knowledge in all these different areas that it's like, wait a minute, this is a Mark Bronson specialty. Hold on one second, let's get Mark in here and we can do that. And it's beautiful. 

Mark Bronfman (51:58.348)

So if someone wants a primer on sell, and convey, they can pull down the article entitled equity rules from the bull value website. 

Michael Palumbos (52:08.366)

so yeah, boldvalue.com, spend some time, take a look at the articles for inspiration, look at the blog. It's just packed full of information. I will say, for somebody that's in the industry that knows what you're doing, even reading some of your articles, I'm like, he lost me. So if you're looking at this, folks, and you go to Mark's site and you're like, 

Michael Palumbos (52:38.188)

You know, it's just know that there's, it's a specialty. It is what Mark does, you know, for years now to really help people think through these areas. And this isn't an endorsement for your, know, for what you do or anything. It's just the fact that it's, you know, it's not bragging if you do it. You know what I mean? And so you've been doing it for many, many years now, and we appreciate it. 

Mark Bronfman (53:05.454)

So let me finish up with one story which reinforces the whole concept here of human capital. Because this all started with the idea of attract, retain, reward people because human capital is the asset in the 21st century to creating value for an organization. So one of our larger clients brought us in to help with a carve out plan for key executives. 

Mark Bronfman (53:35.126)

And it took us probably the better part of nine to 12 months to figure this out. It was a very complicated situation. They had put in a UAR plan, a unit appreciation right plan that almost killed the company. It's a plan like a SAR plan, stock appreciation right plan that people can exercise at will. And when they do that, the company needs to cough up the cash. 

Mark Bronfman (54:04.046)

And this ended up being a growth story company of a large amount of equity value, but a small amount of cash, not quite a .com, but a vet ilk. So we had to come in, we had to shimmy that plan out and replace it with something else. And this company basically ended up selling for $2.5 billion, 11 % 

Mark Bronfman (54:33.108)

of the capital of the business went through our plans. So it ended up being almost $300 million that went through the plans. And there were two comments that came out of this. One is when the white shoe law firms went through the plans, they said the plan is flawless. But more importantly than that, the chief human resources officer said this plan was a lifesaver. 

Mark Bronfman (55:02.594)

This plan was the glue that brought everyone together and created fairness in the environment. And you guys did a great job. And so if you're looking for tools around strategic incentives, again, more than executive compensation to align and promote and fit in with the personal financial planning for personal endowment and all things we've been talking about, give us a whirl, give us a call. 

Mark Bronfman (55:31.374)

through Michael, you know, we had to reach us, boldvalue.com. And so I just thought you'd like to hear that story. 

Michael Palumbos (55:38.744)

Definitely. We're in a battle right now. Every employer is in a battle for talent. When I interview CEOs and talk with CEOs, the one thing that they all can agree upon is that the battle for talent right now is big. And so when you're talking about attracting and retaining A players, top talent, it's things like strategic incentives. 

Michael Palumbos (56:06.422)

are going to make the difference for that talent for a lot of these companies. So when you're fighting against the big boys that might have more cash to throw at people, utilizing strategic incentives in that middle market space just makes all the sense in the world. 

Mark Bronfman (56:25.806)

Michael, this has been a heck of a lot of fun. really appreciate it. 

Michael Palumbos (56:29.558)

And I appreciate you spending the time with us. Ladies and gentlemen, Mark Brompton from Bold Value. My name is Michael Palumbos from Family Wealth and Legacy in Rochester, New York, and you've been listening to Family Biz Show. Have a great day, everybody. We can't wait to have you listen to the next episode. Take care.