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Episode 104: Major Components of Family Business Exit Planning

Are you prepared for the future transition of your business?

In a recent episode of the Family Biz Show, we welcomed John Leonetti* from the International Exit Planning Association to discuss the intricacies of exit planning. Leonetti* emphasized the importance of planning for business owners looking to transition out of their companies, whether for retirement or succession.

Have you considered what will happen to your business when you step away? John shared his background, including his own family's business journey, highlighting the lack of comprehensive resources available when he needed them. He explained that exit planning involves preparing for the eventual transition of a business, focusing on three main aspects: personal readiness, company preparedness, and market conditions.

Do you know your financial and mental readiness for exiting your business? Key points from the discussion included the importance of understanding one's financial and mental readiness for exit, the need for strategic growth planning, and reducing owner dependence on the business. Leonetti* also introduced tools like the Business Exit Readiness Index (BERI) to help business owners assess their situation and plan effectively. 

Are you taking proactive steps to ensure the long-term success and legacy of your business? The conversation underscored the critical nature of exit planning, encouraging owners to take proactive steps towards their future transitions.

Episode 104 Transcript

Michael Palumbos (00:02.702)
Welcome everybody to the Family Biz Show. I'm your host, Michael Palumbis with Family Wealth and Legacy in Rochester, New York. And today we've got a really exciting show for you. We've got John Leonetti from the International Exit Planning Association with us today. Welcome, John. Thank you, Michael. Great to be here. Appreciate the opportunity to join the show. Yeah. So before we get into talking about what is exit planning, in a nutshell, it's that...

that journey that somebody takes from, I own and run this company to, I need to be, I need a successor and I need to step away from owning and running this company, in a nutshell. But before we get into that, talk about kind of your history of what is your background? Where did you come from? What did you do before exit planning? Yeah, thanks Michael. Well, I started in family business.

And I'll talk a little bit about that. My dad was a New York City police officer, NYPD. And at night he went and got his accounting degree. So when he was ready to retire, he got into business and then the entrepreneurial

the entrepreneurial urge kicked in and he started his own company right about the time that I was graduating from college. And so I wasn't only a family business, we were a family startup business. And after about five years of working together, as I was approaching my late 20s,

I was ready, I had met my wife, I was ready to get married and start settle down. And the business had some challenges. It was an old industry. And we started talking about succession planning and exit planning. And I realized that there really wasn't any good resource out there that was able to help us. We went to all of our different advisors. The financial advisor offered,

Michael Palumbos (02:23.822)
you know, a financial solution related to investments in planning. Our estate planner offered, you know, succession planning at my dad's demise. And that's not what we were looking for. Right. The CPA came in and tried to help us, you know, with the numbers side, but that wasn't really what we were looking for either. So that was the mid nineties. And it stuck with me that we had this issue that.

we couldn't resolve. And by the way, Michael, at no point in time in the family business, did we entertain a conversation about selling to somebody else ever. It wasn't ever discussed. It was, this is what we've got. We're a family business. How does it move from my dad to me? How do we look after my sisters who weren't working in the business? How does all of that happen? Right. So,

I wound up leaving that business, not because we didn't have a succession plan, but because, like I said, it was an old industry and my goals are a little more aspirational. I went back to school, I got a joint degree in law and finance, found my way into mergers and acquisitions, and then got into, you know, started the exit planning business about 15 years ago. And,

During that time, I wrote this book called Exiting Your Business, Protecting Your Wealth. It came out 15 years ago because it never left me from working with my dad that there wasn't a solution out there. So I was first time author, got the book out. I wanted to put a message out there that had a process that could be followed. And I've just been blessed more than 15 years later to be able to continue to educate the market, come on shows like yours.

talk about my experience today. We have training and curriculum and thought leadership that we offer through the International Exit Planning Association, but I'm also wearing another hat of helping owners with their exits. So, you know, we're helping to sell companies, we're helping to transition businesses, much like yourself, Michael. So, we, I've just been very blessed that I was able to...

Michael Palumbos (04:44.302)
write about something that I experienced and now we're able to go out and teach a large number of advisors how to do it and then I get to help certain business owners on a select basis, you know, actually do it. So a practitioner as well. So that's a little bit of my journey. I love it. Thank you. When you talk about exit planning with somebody that's not, you know,

maybe he hasn't heard of the term or most people I think if you're a business owner, you know that I'm exiting the business, you know, one time or another. So it's not that we're unfamiliar with the term, but I think, you know, to your point of there wasn't really any one one -stop shop to help you through that stuff. How do you define, you know, what is exit planning for you? Can you just share that with, you know, our listeners?

Be happy to, Michael. And I can do by way of example, right? So if you look at any planning exercise, it almost by definition precedes an event that you anticipate happening in the future. If you're doing retirement planning, no matter what age you're at, unless you're already retired, in which case the planning window is probably closed, now you're actually enjoying retirement.

But a lot of people do retirement planning because in the future they want to retire. They want to make sure that things are set up for that meaningful event. On a more tactical basis, annually, people will do tax planning ahead of, you know, and this is the time to do it, right? December ahead of next year when taxes are due, what can you do before the end of the year to mitigate some tax? You know, what rules, what options are available to you?

There's insurance planning, of course. The purchase of insurance is against the contingency of potential death, right? In a lot of cases, that's risk management. And then financial planning, right? What are we doing on a comprehensive basis with the wealth that we've created? Exit planning is in the same category as all those other types of planning.

Michael Palumbos (07:03.662)
but it is the work that a business owner can and arguably should do prior to the future succession, transition or sale of that business. And as you know, Michael, statistically clients that do planning do significantly better than those that don't, right? And the same can be said about planning for an exit.

the illiquid asset that is a business is something that needs to be analyzed, assessed, valued, and planned for most oftentimes done best over a period of years before there's any actual transition or succession or sale transaction. And if owners, and the market hasn't really been set up for business owners to do this type of proactive planning.

And you know, we've been at this more than 15 years trying to move that needle even just a little bit. And I feel like we're making at least the small dent in the market because more and more business owners are realizing and more and more of their advisors are realizing if you just put some time into preparing for that future event, no matter what you determine the results should be or you want it to be, whether it's transition to your children, to employees.

or you bring in an investor, you sell it, you will almost certainly get a better result if you do some planning in advance. So to me, that's what exit planning is simply. It is planning today for something you envision in the future and identifying the steps to help optimize that outcome. So let's talk about for a second why there's a reluctance.

from a lot of owners to engage in that conversation. You've been doing this for a while. What do you see as the reluctance that stops people from doing that? There's a number of leading factors. I'll start with the most intuitive, which is what I experienced, which is many owners simply don't know that the service exists, right? So, and in fact, in fairness,

Michael Palumbos (09:29.582)
going back almost 30 years, it did not exist when I was specifically looking for it, right? So today it exists, but most owners don't know it exists. So they don't know this is an option.

What compounds that is two things. It's complicated, so it's not easy to engage, because it's multifaceted. You have business planning, you have family wealth, you have legacy planning, you have tax planning, you have a state tax planning, financial planning. It's not simple. So human nature is sort of, as a business owner, we kind of want to...

make that payroll, get their next hire, get their next client, just take care of things on a tactical basis. Too often, small business owners don't do the type of strategic planning that would fall in the bucket of exit planning, right? Longer term planning. So combined with the fact that most owners don't know it exists, it's complicated, and it just isn't something that...

has been a part of the discussions over many decades. Most business owners fail to do it. But the other reason is a bit psychological. And it's a little bit, if you recall for those listening, when you purchased insurance, what was that great person who helped you purchase that insurance doing? They had the courage to have you think about your own demise, which is inherently uncomfortable. But if you don't do it,

If you don't think about the end of things, if you don't think about the consequences to your family, that advisor that helped you think about that and helped you design a solution against that risk did you and your family a tremendous benefit, you know, a service because they force you to do something that's inherently uncomfortable to do. If you draw the comparison of life insurance and thinking about your mortality, you can draw some parallels because most owners,

Michael Palumbos (11:38.35)
at some level enjoy running their business. It becomes part of their alter ego, their company. So thinking about the end of things is not very pleasant for them, right? And what would an owner be doing if they weren't running their company? It's an inherently difficult question to ask because the owners have to do so much to overcome the challenges of running a successful business. It just cuts against the grain to think about how it's going to wrap up.

But very similar to life insurance, if you consider that we haven't figured out the formula for immortality, all of us are faced with that deadline that's coming. And if you can think about that in terms of managing against any kind of risk, there's a risk that your business doesn't go into the future, that it doesn't survive you. And we find that business owners,

do not naturally lean into those types of things. You don't wake up in the morning thinking, let me plan for the end today. So when you add all that up, it's something that's becoming better known. The market's developing around it. But most owners are just not aware that this is available to them and available in a comprehensive way, by the way.

You know, and that's a really good analogy, John, because I think, you know, as founders of businesses, as husbands, as wives, you know, when we have families, we know that we have a responsibility to make sure that my family is taken care of, God forbid anything were to happen to me or my wife, you know, as we're doing this stuff. So that...

that conversation around life insurance and utilizing that analogy with a business owner to say, look at, God forbid something were to happen to you, you have a responsibility to these employees, you have a responsibility to your family and it's exactly the same type of conversation. I love that analogy, thank you. Yeah, no problem. And we think it's the, let me say this.

Michael Palumbos (14:02.542)
there's a strong correlation between owners that do this type of planning and owners that feel that responsibility and take that responsibility very seriously because those same responsibilities apply to the tactical day to day. If you can just get a business owner and hopefully this piece helps owners think about this, if they can just dedicate and think about the time that they spend.

doing tactical work versus strategic work. If they can just take a step back and as Michael Gerber said, instead of working in the business, work on the business, but now we're just not working on the business, we're working on the future of the enterprise and planning for the wealth that's in there, then I would say comfortably after doing this a very long time, those owners are very well served. And if they can find an advisor,

that's qualified to help them like yourself, then that's even better because they have somebody with experience going, taking them through this process. Yeah, you know, that's a really good point. And I'm gonna add to that. I had an owner recently in another interview that I did for the show. He said, I don't own this business. He goes, on paper, I own this business. He goes, I really, if you really stop to think about it, Michael, I am...

the steward of this business right now. And that's all I am. And I think, you know, for owners, it's harder to do when you're the founder and he was, and he's second generation. But when, you know, you find that business, when you grow that business and build it, there's an emotional attachment, like you said before. But if you can just put that little piece of thought in there that says,

I am the steward of this business and I am the steward for all of the people whose life is dependent and their financial independence is dependent on how I steward this business. And so that I think can help a lot of owners to say, all right, if I'm the steward of this business, then yes, I have to do not just work on the business, and not just in the business, but on the business, and I have to do some exit planning for the what ifs. And there's going to come a day,

Michael Palumbos (16:25.678)
when I get mentally ready, right? To say, all right, you know, or, you know, I'm either mentally ready to make that transition or I have a heart attack at my desk and, you know, one way or another, we all leave this world eventually, you know? Yeah, Michael, you raised some really good points, right? It is hard to step away from the responsibilities of running the business and...

in addition to all the complexity and the lack of understanding and dealing with the mortality, those are all challenges with exit planning. But now you're pointing to another one, which is for entrepreneurs kind of letting go, right? Most entrepreneurs are tied, as it's been said in the past, with a steel umbilical cord to their baby, to their company, right?

So it can be inherently difficult to make that mental leap to say, hey, I'm a steward of this business, right? And to compartmentalize and say, okay, on the one hand, I'm a valued employee, maybe even an essential employee in the business. But on the other hand, I'm the owner of the shares of this company that have value to me.

and to my family and to anybody else that I want to benefit from the wealth that I've created. And those truly are two separate hats that the owner should be think wearing and looking at and making decisions with. On the one hat is your employee hat, your leadership hat, what you're doing day to day in the company. But the other hat is that ownership hat and

what are you doing to look after the value of this asset that so many people are dependent on for their livelihoods, for the community, and everything else? And in fact, Michael, that adds to the complexity because any time an owner looks to make a major change in the business with the ownership, it's disruptive. So now you have another human dynamic at work.

Michael Palumbos (18:48.462)
that's saying, well, it's easy to put that off because let me just take care of things today because there's almost no exit that's gonna make everybody happy. And when I say everybody, it's everybody that's sitting around that planning table, it's employees, it's customers, it's vendors, it's family, right? It's the government who's your partner on a revenue basis with the taxes, right? So. Yeah.

And then there's future generations, but if you do it right, right Michael, when it's done properly, these owners have the opportunity to make this the most significant financial event, most oftentimes in the history of their family tree. Most entrepreneurs, especially founders, will be the most financially successful person in the lineage of that family. So,

If owners listening to this can think about in those terms and think about in terms of what you said about responsibility, incrementally, it's not that much effort to protect it. Psychologically, there could be a few hurdles that are creating that resistance. But yes, at the end of the day, being a good steward of the business will help perpetuate the company beyond

the tenure of the owner. And Michael is, you know, most businesses don't survive the tenure of the founder. So those listening today might really want to consider that. Do they want this business enterprise to survive their tenure to go on without them? And if so, when are you going to start planning for that? Because without planning, it becomes highly unlikely in most instances that that's what's going to happen.

Yeah, it goes back to the old saying, people don't plan to fail, they fail to plan. But let's talk about the process. And what I wanna really key in on for people is that it is different than wealth management planning or financial planning, exit planning. Like you said, we're talking about that business and the...

Michael Palumbos (21:16.366)
the business as an asset, that business as this live entity all by itself, and what do we do with this? So would you share the planning process for business exit planning? Sure. Let me first say that this planning can be complicated because we want to think in terms of three different components of planning.

We talked a lot about the psychological challenges that business owners face. That's the personal aspect. That's number one out of three. How predisposed is the owner towards planning and being mentally and financially and emotionally ready to make this type of separation, right? That's number one is the personal.

aspect of the owner. Number two is the company aspect, which is is the enterprise set up in such a way that it can run and function without the owner or owners or can do so over a period of time? And when we look at the company, we think about valuation, maximizing value, transferable value. That's all in column number two.

So first the owner has to make a decision that this is something they want to do, that they're ready to undertake this. Then next you have to consider the company and how it's set up and what the value is and how that value could be monetized or improved. And if that value is enough to meet their financial goals on the personal side for retirement and otherwise.

And the third component that you wanna look at is market timing. Is the environment a good environment for an exit or a transition to the business? And of course, Michael, as we're recording this, we're seeing that interest rates are high, there's warfare around the globe, the economy may or may not be slowing, we're less than a year from the next presidential election.

Michael Palumbos (23:43.118)
there's a lot of disruption in the market, but yet the market for valuation and transfer is still pretty strong, right? So we wanna start with that understanding that helps compartmentalize the considerations, personal company and market. And then within that or against that backdrop, as you know,

we have a six step process that owners can follow, that their advisors can take them through. That's kind of stood the test of time. It was in the book 15 years ago. And very simply, without getting into all the details, time won't permit. We can do a whole other session on the six step process, but it starts with figuring out the goals. Yep. Comprehensive goals. Right. What do you want to see happen?

Who do you want ideally to take over the company next? And personally, what would you like to see over what time period? That's the goal setting, that's number one. Number two is let's talk about how ready you are to meet those goals from a financial and mental perspective, right? Just let's get a sense of what you're thinking about in terms of timing and how dependent you are on the business financially.

And we're going to use those criteria to help identify what type of owner you are. Then based on that, we're going to talk about step number four, the exit options, step number five, the different valuations associated with each of those options. And step number six would be the execution of the option that you chose based on the goals that you articulated and your readiness to hit those goals.

Now this process has worked many thousands of times over the last 15 years. It's hard to count because we distribute the book and we do training, but we know and I know from doing the work that it works consistently, it works well. It gives the owners a framework to understand how to proceed in a way that 30 years ago, I wish we had.

Michael Palumbos (26:03.598)
when I was working with my dad in the family business. It would have made all of this so much easier. So that's the process, Michael, that's the backdrop against the process for owners to start to understand how to think about, you know, timing, company and personal. But if you follow those six steps within those six steps is a very comprehensive conversation.

that owners can and should be having. And frankly, Michael, it's a lot like other levels of planning. Most owners will go to a seasoned, experienced advisor or consultant to help them with this because it's not something that, you know, there's not a lot of utility in owners learning all this just to do it, in most cases, once, right? Agreed. So advisors like yourself are very helpful in walking owners through this process.

So I wanna dig in just a little bit. I know we don't have time to go through all of them, but there's some pieces that I think that, from my perspective, having gone through the training and utilize the training with clients that I think are really important for people to get. Obviously, I think it's really helpful to having somebody help you think through your objectives and your goals because...

You don't always know the right questions to be thinking about around those areas. So that is super helpful. The second step there in the determining financial and mental readiness, I love those conversations with people. And one of the things that we've been working on is I have found several people that just mentally were not ready to even really

jump into this conversation. And one of the things that we've been building and we haven't rolled it out yet is just another process that helps them to think about what am I gonna do after I'm done with all this stuff? When I do exit, if I don't have something that I'm exiting to, sometimes I might avoid it because I'm not ready and I don't wanna do that work. But if I have a plan for what is...

Michael Palumbos (28:22.094)
my third act look like or what is my life after the business look like? That's helpful. And so we've been working on a process to help with that. The financial readiness, obviously, the term that I love talking about is what's the value gap? So it's, talk about the value gap for just a second, if you wouldn't mind. Cause I think that'll help paint a picture for people on understanding financial readiness.

Yeah, it's a good question, Michael. So again, this is why the steps help, right? Because it can get confusing quickly because it's multi -layered and multifaceted. But what you're pointing to in our process is step number two, which has two components in the one step, financial readiness and mental readiness. So financial readiness goes to very basic Maslow's hierarchy of needs. What

amount of money would you as a business owner need to continue with the lifestyle that you have today? Presumably you don't want to change it and to satisfy any other goals that you have for retirement, legacy, philanthropy, and so on and so forth. And for every owner it's different, but once we know what that

number is, give or take, and putting in a whole bunch of assumptions on drawing down principle during retirement and how it's going to grow. So it's not very simple, but we have to start someplace. Once we know what that number is, let's just say it's five million dollars for argument's sake. Five million dollars will allow me to live the life I want to live. Let's just assume...

for simple math, 5 % interest I can get pre -tax, I can get $250 ,000 a year, it's about 20 grand a month. So if I have $5 million, I'm in great shape. And then I can do my legacy and philanthropy from there. Okay, great. So now we know what that number is that a business owner needs. So the next question is, okay, what's the company worth? What's the value of the business? Now,

Michael Palumbos (30:44.718)
In some instances, we work with business owners whose businesses are worth $50 million. And now there are multiple ways to fill that gap. We work with some businesses whose values are less than $5 million. And now it gets a little harder.

You also have to account for taxes when you sell a business. What's not only what the business is worth, but what's it going to cost me to go through this process in terms of advisory fees and taxes? So what's the net that I get to keep? So if I need 5 million, I might need a business value closer to 8 million, right? When I'm done with taxes and advisory fees and transaction fees and that kind of thing.

So the gap becomes what's needed and what the business value is today. And then what different ways can we begin to look at this enterprise that the business owner created to begin to monetize a portion or all of the value of the business? And if the gap is significant, should we be looking at ways to improve the value of the company?

years in advance of a sale or a transfer. So then that becomes part of exit planning as well as increasing the value. So we start with financial readiness because oftentimes it's the most concrete quantitative measurement that's relatively easy. The math is relatively easy. It may not be so easy to figure out your lifestyle.

because many owners live out of their company and they're expensing things through the business. If they didn't have the business, the numbers change a little bit. And then we get to the qualitative, right? That mental readiness. When do you think you want this to happen? So that's a little bit on that. And as you were alluding to, many years ago, we created an assessment that helps business owners figure this out.

Michael Palumbos (32:59.694)
a relatively easy assessment called the Business Exit Readiness Index. That's the acronym is BERI, a very convenient acronym, B -E -R -I, Business Exit Readiness Index. And advisors like yourself, Michael, can send that assessment to a business owner who can answer, takes about 10 minutes, not to figure this whole thing out, but the initial assessment. And then it opens up that conversation that you were alluding to.

We offer that for anybody that's interested. It's right on our website, thefamilywealthandlegacy .com under free resources. And it's a phenomenal tool to just get you thinking about where am I right now? What am I thinking about right now? How am I feeling right now about this idea of exit planning? Great tool. And how many people have, you have data on...

thousands of people that have taken the Barry tool and gone through that assessment. And the conversations that come out of that for you with prospective clients, they're wonderful conversations. They are. As I like to say, there's no downside to education. There's no downside to assessing where you are, right? It takes a little bit of time, but the upside is potentially,

you know, significant. And in terms of the bury, it helps structure the conversation as a starting point to think about an exit for a business owner to say, okay, many of them will say five years and I need this amount of money, right? Okay, great. Now let's drill down a little bit and look at the questions and see how you answered them and come to understand your situation.

a little bit more and stress test and challenge some of the assumptions and the way that you answered some of those questions. So that tool, when we got going in the business about 15 years ago when the book came out, took us a couple of years to realize that if instead of asking general questions, if we can be very specific and create a score,

Michael Palumbos (35:21.198)
then it would help business owners understand where they are. Now, to your point, Michael, yes, we've had over 3000 business owners take the survey. And very interestingly, more than 80 % of business owners have what we call a low mental readiness. They're not ready to leave. Only about 20%, a little less than that, have a high mental readiness and they're ready to exit or sell. When you think about that,

and that's 10 years of data, you realize that the market for planning an exit is four times as large as the market for selling a company, which can be easily extrapolated to say that the need for business owners to do some planning is four times greater than the need to go sell. Ironically, the market...

for business sales is very well developed. So if you're ready to sell, there's a whole market of service providers willing to help you with that. But if you're not ready to sell, now we're into the exit plan and conversation, which is a far greater volume and greater need than that is unmet, then the need of sellers that is more easily met with a more fully developed market. And

And that comes back to some of the challenges around exit planning that we're raising awareness of here. But the BERI simply gave us some data to support what many of us knew intuitively. Yeah. And on top of the BERI, there's two other assessments, the Growth Planning Index and the Owner Dependence Index. And those arose out of the data that you found.

inside of the Barry report to say, most people, they're not mentally ready to do this. So I've got to help them think about, okay, then what type of growth planning do you want to do? What does that look like? And then if you're going to do growth planning and you want to start sliding into the exit planning, well, you got to start looking at how dependent is this business on you as the owner, right? And that's, I can't thank you enough for those.

Michael Palumbos (37:46.606)
those tools because those assessments really help people to start to say, okay, here's where I'm at. What do I need to change? What has to happen differently if I'm going to be successful at making an exit? Yeah, that's right, Michael. And now that we've laid a foundation, we can build upon it. So the Bury will help identify the value gap. So let's say I need $5 million. Well, let's say my

my business is worth $3 million or $4 million. But I really need to double the value of the business to $8 million after taxes and fees to get the fine. So the very helped us do the gap. Now we're in a situation under this example where effectively the owner to make the numbers work without changes to the assumptions with those numbers, which you can change.

we need to effectively double the value of the company. So now we go to growth planning index. And it begins to ask questions of the owner. How committed to you are you to this growth? Because growth doesn't happen simply organically because the sun comes up, your company starts to grow. You've got to commit. You've got to focus. You've got to sometimes.

put more resources into the business. Sometimes you have to take one step backwards, take two forwards. Sometimes you either have to borrow from the bank or take excess cashflow and reinvest it to get that growth. Either purchase new equipment or inventory, hire new people or new marketing and sales program. You need to make that investment. So the growth planning index measures the commitment to growth, right?

Because if you don't understand how committed somebody is to something, it's hard to coach them up on how to achieve it, right? And any good advisor, consultant or coach understands that it's the client that's going to determine where they want to go. And then our job as advisors is simply just to guide them along that journey, but they have to decide their level of commitment to growth.

Michael Palumbos (40:12.398)
Once they do, then we can introduce solutions. And then to your point, if you're going to monetize that value of the business in the future, it's a whole lot easier if the business is less dependent on you. So the owner dependence index takes a measurement on eight different functional areas of the company and assesses how dependent the company is on the owner.

in those different areas, which introduces a new and related conversation about how to reduce that dependence over time. So now if we pull this all together, exit planning is about doing this work ahead of transition or sale. The Berry report helps us take some quantitative and qualitative measurements. The Growth Planning Index helps us understand

our commitment to meeting that higher value or growing the company larger. And the owner dependence index gives us very tactical instructions on how to make the business less dependent on us so that it can go and succeed without us or the owner into the future and make the business more transferable to capture the value. You know, an owner that's so involved in all areas of the company,

You know, it doesn't really have a transferable business without them, right? We think about a hot dog vendor. If they don't wake up and roll the card out to the street and collect the money and serve the hot dogs, they don't have a business, right? But the other extreme is a publicly traded company. When we talked about the separation between your job at your company and your ownership of that company,

We all own stocks and bonds and mutual funds of companies. We don't even know who runs those companies in many instances. That's how far the separation is. So if owners can think about being less of the push card vendor, the hot tub vendor, more of the separation of ownership and management, they can begin to remove themselves from tasks within the business and have the company begin to grow without their direct involvement.

Michael Palumbos (42:30.958)
And then that exit planning scenario frees up the owner, strengthens the company, improves value and improves transferability. And all of that takes time. It doesn't happen right away. And that's why exit planning is so important. Yeah. And if you wait too long, it just gets harder and harder to do at some levels because the old dog doesn't learn new tricks.

as easily. So the sooner you can start to implement this kind of thinking and being open to it, I think the easier it is. I had one founder said to me, Michael, what you're asking me to do is go from benevolent dictator to fully functioning team. And this is the hardest work I've ever had to do. And had somebody started talking to him about not just succession planning.

because it is just one piece of the exit planning process, but really talking about exit planning all the way through, it would have been much easier for them to digest these things and they could have started on it 15 years ago. Yeah, and Michael, it is hard. It's one of the reasons that owners avoid it, right? That's human nature. But the responsibility piece we come back to.

It may be hard, but just consider what's at stake if you don't do this, right? It's all your hard work potentially being jeopardized. And there's this image that I have of businesses that don't survive, right? What happens to those companies, right? Well, almost every business has competition. So when the company goes out of business,

the customers and the employees and all of that productivity that company produced, it just gets dispersed into the marketplace. It gets absorbed in the marketplace, right? The market's going to continue to function unless there's an exception without that company. But what's lost in the process is everything that that owner or set of owners assembled and all the goodwill of that company that has real value.

Michael Palumbos (44:52.622)
And so even though it's hard to go from benevolent dictator to a part of a team and kind of reduce your role so to speak and empower others around you in a different way, the benefits of doing that are so much greater than the pain and discomfort that one person can experience.

that when that person, that owner sees it that way and they can see the long view of what's trying to be accomplished, they're more willing to undertake that discomfort just the same way that we all signed up for those life insurance policies. It was uncomfortable to think about your demise, but when it was done, you protected that wealth and you protected your family. And this is, unfortunately, we can't create a policy for exit planning, right?

That would be a lot more convenient if you could just write a check and sign the policy. 100%. This is more intrusive because you have to make some changes. But each owner that's listening just has to determine the relative priorities. And most of our clients and your clients will be the ones that choose that long view and say, I want this wealth protected. I want to enjoy my golden years.

do not wanna be encumbered by work, especially work that I don't enjoy doing. And I do want this business to go on without me, whether it is a family business or whether it is a business that will transfer to an investor or a competitor in the future. Agreed. John, originally I had said, let's talk about how this impacts a family business, but I think -

through this whole entire conversation, because this is the Family Biz Show, I think you can hear exactly why it's so important. You are the steward of the family business and it's time, your responsibility to be looking at exit planning all the way through this process. I think we're gonna have to have you back someday, John, and do a round two on this, because there's...

Michael Palumbos (47:12.046)
Like you said, there's so many areas that we could go deeper on. And I think it would be really beneficial for some people to say, oh, you know, like we didn't even talk about the rainbow of valuations, the spectrum of valuations that a business could have depending on the different choices that you have available to you. And there's a lot that we could dig deep on in those areas. So we'll set that up sometime in the future.

But I just want to say thank you for your time. Is there any, you know, besides, besides everything that we talked about, is there any parting words that you want to add to this? Well, just where you were going with it, Michael, right? For business owners who are listening, even advisors who are listening, you can think about the business and the planning, you know, in three different terms, right? And again, when we do this kind of work, we try to compartmentalize. First, there's the exit, which is getting your wealth,

out of the business, right? And perhaps even yourself. Then there's the succession planning, which is more family planning, which would be a future episode. How do you over years prepare the family members and non -family members for the transition of responsibility? So the owner dependence begins that, right? Especially for an owner that's very active in the business. How do you do succession planning to a company

exit planning, and then the third one for families, which to me is the pot of gold at the end of the rainbow is legacy planning, right? So you have exit, succession, and legacy, and they're all related, but owners have remarkable opportunities to create legacies that for causes they care about, for family members, we sell businesses for tens and tens of millions of dollars, and

these owners, grandchildren, grandchildren are going to benefit from the work and the trust planning and the financial planning and the estate planning that we do. So owners that are thinking about legacy planning, succession planning are very well served starting with the exit planning because that's a great place to begin to have that conversation and to begin to think about things strategically.

Michael Palumbos (49:38.254)
The advice I would give in closing to business owners is think about how and where you're doing strategic planning, if at all, and what percentage of time you're spending doing that. And if over time, you can just increase that allocation even a little bit, put more into strategic planning, take that first step. It is a process, it's not a single event.

you'll benefit tremendously. And Michael, if they find an advisor like yourself that been through training and knows what they're doing, then the probability of success is that much better. Love it. John Leonetti with the International Exit Planning Association. Thank you for joining us. My name is Michael Palumbis, Family Wealth and Legacy in Rochester, New York, and you've been listening to the Family Biz Show.

Thank you everybody and have a great day. Thanks, Michael.

 

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*not affiliated with Lincoln Financial Advisors Corp.

Michael Palumbos is a registered representative of Lincoln Financial Advisors Corp. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. Family Wealth & Legacy, LLC is not an affiliate of Lincoln Financial Advisors Corp. Lincoln Financial Advisors Corp. and its representatives do not provide legal or tax advice. You may want to consult a legal or tax advisor regarding any legal or tax information as it relates to your personal circumstances.

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