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Episode 34: Advanced Exit Planning for the Family Business

In this episode of the Family Business Show, hosted by Michael Palumbos from Family Wealth and Legacy in Rochester, New York, the focus is on advanced exit planning for family businesses. The guests, John Brown and Josh Patrick, share their insights and experiences in the field of business exit planning.

John Brown begins by recounting his journey into the business exit planning industry, sharing how his background as an estate planning attorney and his personal experiences with family business shaped his career. He highlights a pivotal moment that led him to specialize in exit planning when he realized the lack of guidance available for business owners looking to sell their businesses successfully.

Josh Patrick then shares his story, detailing his transition from operating a family business to consulting and assisting other business owners in creating sustainable and economically viable businesses. His approach emphasizes the importance of preparing businesses for eventual exit, ensuring they are appealing to potential buyers or successors.

The discussion delves into the concept of exit planning, which is described as a comprehensive process that involves understanding a business owner's goals, assessing the resources available, and identifying any gaps that need to be addressed to achieve a successful exit. Both guests emphasize the importance of addressing immediate concerns or challenges within the business as part of the exit planning process.

The conversation also touches on the significance of having a competent management team, effective operating systems, and a diverse customer base to create a transferable value for the business. They highlight that many business owners aim to maintain some level of involvement or ownership even after exiting, reflecting a desire to see their business continue to thrive.

In summary, this episode offers valuable insights into the intricacies of exit planning, particularly for family businesses, emphasizing the need to tailor the process to the unique goals and circumstances of each business owner.

Episode 34 Transcript


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Michael Palumbos: Well, welcome everybody to the family business show my name is Michael Columbus with family wealth and legacy in Rochester New York, today we are really excited to have some wonderful guests, Mr john Brown and Mr josh Patrick welcome gentlemen, how are you today.

 

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Josh Patrick: Great how about yourself.

 

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John Brown: Wonderful wonderful.

 

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John Brown: Three thanks.

 

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Michael Palumbos: Of course, very excited we love this concept of talking about advanced exit planning for the family business.

 

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Michael Palumbos: there's a ton that we're going to cover today so hold on to your hats we've got josh and john here to guide us through this conversation.

 

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Michael Palumbos: In order to get started john why don't you, you know dive in and tell us about your journey, how did you end up in you know the business exit planning industry, to begin with, if I I would I would venture to guess that business exit planning wasn't even a thing 30 years ago.

 

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John Brown: If it probably was not at least I had never heard a good, so I began my professional life as an attorney.

 

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John Brown: started my own law firm in Denver Colorado I co founded it with my partner with him, I had lunch with earlier this week by the way.

 

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John Brown: And that was in 1977 so I started life out is.

 

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John Brown: Really in estate planning attorney back when estate planning was very different from what it was, but I.

 

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John Brown: But I liked working with business owners, I come from a family of business owners, just like our esteemed josh Patrick so I always.

 

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John Brown: understood the challenges business owners had the challenges, my father had when he sold his business incredibly unsuccessfully, which again as no surprise, so I always had this interest and.

 

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John Brown: The quick story is one day I was representing to two brothers who owned a very successful construction company, this was back in the mid 1980s.

 

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John Brown: And I done their estate plans for them and and they said hey Jen we want to meet with you and go over some business issues, can you meet with this, I thought sure I can do that was doing a little bit of by cell work and things like that.

 

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John Brown: So I sat down with them, so how can I help you guys guys and they said, you know what.

 

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John Brown: We want to sell our business, we are totally burned out, and so I thought for a second gosh this is new, so I thought well tell me, you know when you guys one leaf, and they said Friday.

 

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John Brown: And they were dead serious so that led me on a course of just thinking about this issue there's probably a lot of owners.

 

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John Brown: Who are in that same scenario they have their smart business owners, but they have no idea how to successfully exit their business so that's really what started me on this whole business exit planning.

 

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John Brown: I guess path that i'm still now living every day.

 

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Michael Palumbos: Great well welcome, I appreciate you joining us josh why don't you tell us your journey and how did you end up.

 

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Michael Palumbos: Getting to where you are today.

 

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Josh Patrick: Well, I was a 23 years old, I graduated from college.

 

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Josh Patrick: Now, and.

 

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Michael Palumbos: Re not that's.

 

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Josh Patrick: Okay i'm just gonna tell you how I get my family business was an easier way to go from.

 

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Michael Palumbos: Today i'm teasing For those of you who don't know josh and I know we have known each other for years and I have a lot of respect for him, I had to give a little ribbon there so.

 

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John Brown: Well, because.

 

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John Brown: I have known for years as well, so we'll just we'll just be on josh but listen I right, yes, so.

 

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Josh Patrick: So i'm between you two so i'm going to be ping pong back and forth.

 

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Josh Patrick: But anyway, I was a family person is because was the path of least resistance and that happens, more often, you would be than that I would think with family businesses.

 

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Josh Patrick: ended up leaving my father bought a small piece of his business grew to 90 employees after 20 years I realized the food service and Vending business was a terrible place to be and sold it.

 

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Josh Patrick: And I looked around so what's next I joined the national life insurance company was there for a year and a half.

 

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Josh Patrick: till I realized that you know life insurance companies want to sell life insurance and my spouse, she was working with private business owners and frankly they want a whole lot more than that.

 

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Josh Patrick: So we opened our own wealth management firm that kind of morphed into helping people create what I call a sustainable business economically and personally sustainable business.

 

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Josh Patrick: A piece of that is exit planning, because at some point someone's going to leave their business.

 

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Josh Patrick: And it was 1997 98 something like that john had just written this book I ran across it in a Barnes and noble I was with an organization or partners, financial and talk to a guy named Harry mccabe and said Harry you got to get this guy into speak.

 

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Josh Patrick: And john came in and spoke and I don't know five or six of us went to I think his third or fourth boot camp, he did for exit planning.

 

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proudly.

 

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Josh Patrick: And you know, since and john I have stayed in touch.

 

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Josh Patrick: We talked about exit planning a lot we don't do a lot of it, because what we find is when we get someone ready to exit their business they don't want to because we're having too much fun and making too much money.

 

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Josh Patrick: So exit planning is certainly a piece, but is a piece of happens further down the road and most people think it does.

 

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Michael Palumbos: Great so let's let's dive right into that and john why don't you kind of tea this off a little bit just what is exit planning, how do you define an exit planning, you know today and why does it matter.

 

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John Brown: So, first of all I generally agree with what josh just said.

 

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John Brown: Owners don't really want to start exit planning right away, they don't understand what it means, but that's also not what most exit planners, at least the exit planners we train do.

 

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John Brown: They don't do an entire exit plan right away so an exit planning is just.

 

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John Brown: Helping an owner, be able to exit her business on her terms, whatever that is with money to whom they want to transfer to when they want to exit and a variety of other aspirational goals.

 

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John Brown: So it's we have a process that we've developed and refined over 25 years.

 

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John Brown: We have a lot of tools that advisors us so we're a membership based organization, we support other advisors lawyers CPA financial planners, etc, and we give them we give them some training, but we provide them with tools to actually accomplish that it might be a.

 

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John Brown: Planning tool that creates plans, it might be a specific tool that accomplishes something that an owner wants to accomplish so.

 

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John Brown: Exit planning is almost a misnomer, even though our website is exit planning calm we're usually we're focusing on first understanding the challenges and owner has different challenges for different owners you guys see the same thing as I do, and then addressing that challenge.

 

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John Brown: And once that's done, we might move on to the next challenge we might move on into more of a planning roll with the owner and.

 

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John Brown: i'll shut up in just a second what we find is on with almost all business owners it's meant to start with understanding.

 

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John Brown: First, one of the owners goals and aspirations and refine those Secondly, what are the resources available today for that owner to achieve his or her goals.

 

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John Brown: And then, lastly, is there a gap between the resources, the owner has and what the owner is going to need in order to exit on her terms.

 

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John Brown: We need to do that, whether we're doing a buy sell agreement, whether we're doing an employment agreement for a key employee whatever if we don't start with understanding what the owner wants and needs and has we're not going to do a good job for the business owner great.

 

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Josh Patrick: You know, we call that Michael.

 

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Josh Patrick: scratching the itch, meaning that if you don't deal with what the business owner has on their mind you never get a chance to talk about the important stuff that you'd they really should be thinking about.

 

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Josh Patrick: So in as john just where we actually have a process we call the alignment conversation, which basically, is the first thing we do when we talk to a person is Where are you now, where do you want me in the future what's the gap between the two and what's the value of filling that gap.

 

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Josh Patrick: And if they decide they want some help they'll just say hey would you like some help and they say yes or no, if they say yes, we say, would you like us to help you, yes, are very complicated sales process.

 

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John Brown: it's very I mean this is every planning process if you're planning to build an automobile.

 

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John Brown: you're going to probably you need to go through this first stage, what does the automobile driver wants right, what does he have and so on, so it's foundational in any type of professional practice that deals with people who want to accomplish something some planning goal, and that is.

 

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John Brown: You josh you may have a better view of this, and I do.

 

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John Brown: Most advisors don't represent their clients that way they don't start out there if you're an insurance advisor.

 

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John Brown: you're going to sell insurance if you're a financial planner you're going to get assets under management if you're an estate planning attorney you're going to do an estate plan and so on.

 

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John Brown: We never bring up what is most concerning to a business owner and that's what we try to do it exit plan differently than the rest of the advisor world love it.

 

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Michael Palumbos: yeah, and that makes an awful lot of sense I two things popped into my head is you know, obviously josh and I get along really well john we just met, but we are already kindred spirits because.

 

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Michael Palumbos: When we you know put together wealth plans for clients, we in 2019 our team won the plan plus global financial planning competition.

 

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Michael Palumbos: And the asked him, you know I said why you know you've seen plans for four years, why did we win.

 

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Michael Palumbos: And they said number one you know, it was because when you look at your plan you didn't sell anything you solve their problems, it was all about them and that just really makes all the difference in the world doesn't it and.

 

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John Brown: it's the old if all you have is a hammer.

 

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Michael Palumbos: than ever yeah everything's a nail.

 

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Michael Palumbos: yeah and then.

 

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Josh Patrick: When I went to my Vending company, I would have people walk in my office on a regular basis and pitch me, whatever they pitched and, more often than not, in fact, I would say about 95% of the time they came in, with a solution looking for a problem right.

 

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Josh Patrick: Right and.

 

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Josh Patrick: When I saw my business my my primary.

 

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Josh Patrick: guiding principle I left was i'm not going to do that.

 

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Michael Palumbos: Smart and john you said one other thing that I just want to hit on I think you know josh you might have said I don't remember the alignment conversation.

 

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Michael Palumbos: Just you don't know this, but over the last three months i've interviewed probably close to 2025 family business members and and the the interview process was all about.

 

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Michael Palumbos: You know what were, what are the biggest pains that you're experiencing as a family owned business.

 

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Michael Palumbos: And to a TEE the number one biggest problem that they face was a lack of alignment among family members, it causes the friction it causes the family fires it's it was everything to them, and so you know spending the time to have that, as you call it the alignment conversation.

 

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Michael Palumbos: And you know doing that, not just for the owner, but for all owners and all family members that's one of the things that we've you know started to bring to the table that has really made a giant difference for people, so I spot on with you know with your thinking there.

 

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Michael Palumbos: um I want to go into you, you talked about identifying some of the challenges for owners john and josh Would you mind.

 

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Michael Palumbos: You know, you know as you're going through that alignment conversation what are some of the challenges that business owners, especially family on businesses start to identify before you, you know take them through any type of process what's identified in this alignment conversation.

 

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Josh Patrick: Where we currently don't have an idea what they want to accomplish that's, the first thing.

 

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Josh Patrick: We need is people, people who own businesses tend to go to work they deal with whatever's in front of them, they spend 95 to 97% of their time on that stuff.

 

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Josh Patrick: So they really never get enough time to really think strategically around their business and frankly exit planning this stuff john teaches and.

 

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Josh Patrick: Most of the stuff we do is strategically inclined So the first thing we need to do is find how to get them from three to 5% to five to 10% of their time, so they can actually think and act strategically.

 

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Josh Patrick: So we work with them all the time management, we work with them on getting rid of the $10 per hour jobs that they continue to do.

 

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Josh Patrick: So we start you know we might start off saying here's I want you to do for the next two weeks and you're going to hate this for the next two weeks.

 

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Josh Patrick: I want you to write down every 15 minutes what you're doing you know, at the end of that two weeks we're going to look at everything on there that you could hire somebody else for $25 an hour or less.

 

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Josh Patrick: And we're then going to have you move all of that off your plate, which means you're going to need to learn how to delegate effectively.

 

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Josh Patrick: it's the hardest skill any business owner ever learns is the one the screw up almost while they screw up 100% of the time, the first time they do it and, in my experience 75 to 90% of business owners give up, they say it doesn't work.

 

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Michael Palumbos: Agreed john what are some of the other challenges that the business owners again because we're the family biz show, especially inside of family businesses, what are some of the other things that pop up.

 

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John Brown: You never know when you first start working with the know what those challenges are So the first thing that we do.

 

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John Brown: Is what most of our Members do I should say is they give the they provide an assessment that they want the owner to take to identify what is most concerning to that owner today.

 

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John Brown: Because usually you have to deal with those before you can move on to more comprehensive planning.

 

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John Brown: As it's the same with a family business owner it if your client says my my son doesn't talk to me in the business my daughter's not talking to me because she thinks i'm favoring my son, you know until you kind of deal with some of these issues that are right in their face.

 

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John Brown: it's hard to move into more reasonable planning scenario so that's that's really the first thing we do, and the other thing I would say about family businesses is they have exactly the same problems non family business owners have just more of them.

 

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John Brown: Because they're dealing with family so you've got an added layer to all of the other challenges and opportunities of closely held business ownership and that's and that's probably why we all like working with family run businesses, because there are.

 

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John Brown: Larger problems greater power problems more complex problems sometimes not all the time, and we can help them.

 

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Josh Patrick: In one of the things that's missing for almost every planner I talked to with family businesses.

 

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Josh Patrick: And this is with male on male run companies is that the advisors forget to talk to the spouse.

 

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Josh Patrick: And if you're not talking to the spouse and including them in the planning, I can almost guarantee it's going to blow up in your face because they have an agenda.

 

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Josh Patrick: That is usually diametrically opposed to their others to their spouse who's running the business, and if we don't deal with that we're not getting anything done.

 

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Michael Palumbos: love it hey you'll appreciate this josh we we started a client advisory board this year and the very first meeting one of the spouses of the owner.

 

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Michael Palumbos: chimed up and said, you know we love the assessment that you send out on an annual basis, to check in, and you know how we're feeling about things, and what our objectives are.

 

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Michael Palumbos: But you need to create a whole new one, because everything on the business is focused on the owner.

 

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Michael Palumbos: Not on the spouse you're not asking me the right questions that are important to me so josh that's.

 

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Michael Palumbos: Huge we always you know thought that we, we would do that verbally but they actually said, you know we wanted to list of questions put right in front of us so that we can have the time to think about it, not just do it, while we're on you know, on the spot, with you.

 

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Michael Palumbos: So hugely important and that was echoed and all you know all of the spouses, whether it was male or female doesn't matter it's if you're not in the business you don't know all the different pieces you don't always know what to be asking so great point.

 

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Michael Palumbos: john you started doing this 25 years ago, plus what's changed, you know over that period of time and how did you, you know when we're talking about a family business who who may want to keep that legacy going, why is this stuff you know why is it important for them as well.

 

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John Brown: Well, I don't think you know the actual process has changed, I think there's more awareness of the need to do planning work with family run businesses in the advisor Community I think that's just more general awareness of that need.

 

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John Brown: But that doesn't mean that there's a lot more planning and work that's effective is going on, because I think most advisors a which is natural, they tend to know their profession well.

 

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John Brown: Working with family run businesses is not something that is taught is a major area by in any of the professions really it's something that i'm guessing Michael.

 

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John Brown: And josh and I have all learned by experience which, by definition, means we've made a lot of mistakes along the way, and hopefully we've learned from them.

 

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John Brown: So I don't think that has changed, I think, at least what we've created is a lot more tools.

 

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John Brown: For advisors, to use to understand how to represent owners to understand how to communicate with.

 

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John Brown: All of the parties in interest and again obviously it's the other spouse, but it might be all of the children, it might be the spouses of all of the other children.

 

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John Brown: It might be the key employees who are wondering what in the heck is going on with the transition planning, if any, in this family run business.

 

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John Brown: And what is my future in this company so it's the perspective has broadened I would say, at least with our Members over the last 20 or 25 years to encompass a lot more non technical non legal issues and challenges and.

 

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John Brown: Right, can I.

 

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Josh Patrick: Add on to that for a second.

 

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John Brown: Only if you agree with me josh.

 

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Josh Patrick: I happen to agree with you, because we thought about this for 20 years.

 

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Josh Patrick: Before you finally said gee there's more the technical.

 

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Josh Patrick: But there's another piece here which Susan Bradley brings into the party which is how to make those transitions.

 

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Josh Patrick: If we don't mean those transitions well, we are not going to get the job done, I mean if you talk to a third party m&a person.

 

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Josh Patrick: they're going to tell you that a bunch of their deals blow up because they get to the letter of intent or a sales agreement and the owner looks over the ledge.

 

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Josh Patrick: doesn't see anything that's a good future viable option for them and they pull it from them.

 

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Josh Patrick: Now, the thing about transitions, as we know, you know there's major transitions, we all know about we're going to retire we sell a business, we get divorced, we lose a spouse, those are major transitions that happen in your life.

 

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Josh Patrick: But in the business owners life they're constantly going through these minor transitions which still have the four stages.

 

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Josh Patrick: If I want to get you to go from being a control freak we do everything yourself.

 

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Josh Patrick: To becoming operationally irrelevant, we have nothing to do with the day to day operations of your business you're going to have to go through several major transitions to get there.

 

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Josh Patrick: And we as advisors are in a great position to help people manage those transitions so learning what they are, how they affect people.

 

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Josh Patrick: and understanding that when someone's going through a major transition they're under pressure, their IQ drops in their cognitive ability goes to nothing, we have to sort of walk them in a very slow pace and not big paces yeah.

 

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John Brown: You know josh I think we just talked about this not too long ago, maybe last week or so.

 

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John Brown: We pull business owners every other year typically low, we are going to be skipping year because of the pandemic.

 

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John Brown: But our last poll, we asked the question about when you want to exit the business business owner was opposed to business owners and what does that mean.

 

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John Brown: Well, the upshot was 80% of all owners would like to exit their business within 10 years and that's been historically that almost the same for the last 25 years.

 

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John Brown: But what is different, or maybe we ask the question differently is 25% of owners want to leave their business but they don't want to sell it.

 

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John Brown: They want to keep it, and that is something that has simply been unrecognized by the professional community.

 

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John Brown: By and large, and what makes me think of it, Michael is that that's very typical and family run businesses.

 

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John Brown: there's not necessarily mom and dad selling their entire interest and letting the kids read it it's often a gradual ownership transition over time.

 

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John Brown: With the usually the business active parent holding on to something maybe until they die I don't know if that's something you've seen Michael or in josh but that's common it's relatively common.

 

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Michael Palumbos: That.

 

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Michael Palumbos: You know I would I would tend to agree, you know it's.

 

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Michael Palumbos: it's funny josh came to you john through your organization I ended up because of Lincoln in another exit you know organization.

 

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Michael Palumbos: And we have use something called the business exit readiness index, and after 1000 or 1200 business owners have taken that that it always comes back about.

 

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Michael Palumbos: 84 85% say they want to stay in the business, even if they're financially ready to go out there just mentally they're not there yet.

 

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Michael Palumbos: And it's and so you're right you're spot on the you know it's surprising, you know that 10 years I want to be out five you know they keep talking about the tsunami of you know transitions happening, but that's not really the case is it exactly.

 

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John Brown: You know it's the tsunami is going to finally occur because these owners are dying.

 

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Michael Palumbos: which was.

 

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Michael Palumbos: which goes back to what you said in the beginning, you know as we were talking about this is.

 

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Michael Palumbos: You know exit planning, we all will exit our business someday, the question is, do you do it on your terms and at your with your business at the top aware of its game, or do you do it based on you know happenstance or just because we died it or desk.

 

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Michael Palumbos: Right um.

 

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Michael Palumbos: that's great josh you talk about you know we think of exit planning and.

 

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Michael Palumbos: Exit planning kind of has a negative connotation to it because i'm leaving.

 

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Michael Palumbos: You know the business or and that's probably one of the reasons why some owners kind of pushed back against exit planning, but there's a lot more to exit planning and you started to talk about a matter of fact, you started a whole nother you know website.

 

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Michael Palumbos: And company called this this, what are the sustainable this sustainable business and and that's really what a part of exit planning really is isn't it.

 

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Josh Patrick: Sustainable if you create a sustainable business you're actually by mistake doing an exit plan.

 

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Josh Patrick: Because when you create a sustainable business a personally and economically sustainable business.

 

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Josh Patrick: you've covered the four areas of business sustainability filled the what we call the four buckets of profit.

 

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Josh Patrick: That now makes your business sale ready because you're doing you've done all the things that are necessary that make your business attractive to a buyer now you're doing that for you you're not doing it for a buyer side effect is now for buyer.

 

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Josh Patrick: Excuse me um so.

 

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Josh Patrick: First, you get a sustainable business that's sustainable business once you reach there becomes a sale ready company.

 

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Josh Patrick: Well, let me talk about that for a second because I learned this almost 20 years ago.

 

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Josh Patrick: I had a client walked into his office, I asked him if he wanted to leave his business, so he called me about he said yesterday, which was like a normal thing to hear.

 

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Josh Patrick: And I said, well, we really need to do some things to fix your business before we sell it so we did those things it took us three years to get the business ready for sale.

 

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Josh Patrick: which was we made the business economically and personally sustainable forum, I went back to Mr Brian.

 

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Josh Patrick: Okay we're ready to get them in a person you want, can we can we start that process, and he looks at me like i'm crazy says.

 

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Josh Patrick: Why would I ever want to sell my business i'm making too much money i'm having too much fun, I hardly have to come in here at all, so what I learned at that point is business owners don't want to leave their business and want to change their relationship to the business yeah.

 

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Michael Palumbos: That move from owner dependent to self operating right.

 

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Josh Patrick: Here I want to create a new one, when you go from buying a job to creating a business yeah.

 

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Michael Palumbos: So some of the tools john through the years that you've created that you've created and.

 

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Michael Palumbos: And josh that you, you know you have created I would imagine that those are the same kinds of things that we've been working on to help business owners.

 

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Michael Palumbos: You know, to do just that and that exercise that you talked about in the beginning josh is just brilliant every 15 minutes write down what you're doing and find out what you can delegate to to somebody else at you know.

 

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Michael Palumbos: Much less that cost per hour than what you're you know what what the owner is is worth right there's probably several other tools that you guys teach.

 

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Michael Palumbos: business owners to start thinking like that correct what would you say, are some of the other quick and easy Aha moments for business owners start to say ooh.

 

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Michael Palumbos: I should have thought about that myself.

 

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John Brown: yeah it's and josh might be.

 

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John Brown: Better at answering that than I am, because we don't our organization doesn't deal with business owners, we do we deal with the advisors who deal.

 

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John Brown: With business sure, but we.

 

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John Brown: To josh is point about making the owner or the business independent of the owner we call that creating transferable value.

 

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John Brown: Because owners are going to be transferring ownership, maybe not until they pass away and at that point, we want the business to continue.

 

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John Brown: with minimal interruption to which cash flow when the owner is no longer there that's our definition of transferable value, so what we do is we have in our software.

 

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John Brown: recommendations on that our advisors would provide to the owners on things they can do so, for example, and I love to get josh his opinion.

 

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John Brown: On this, but the most important characteristic is to have a management team.

 

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John Brown: That can operate the business successfully without the owners involvement.

 

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John Brown: And that can take a lot of work, it means we have to train them, we have to motivate them, we have to keep them so we'll have recommendations, like a non qualified deferred.

 

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John Brown: Compensation plan a stock appreciation rights plan a phantom stock plan a stock purchase plan a stock bonus plan so there's eight or 10 different tools.

 

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John Brown: In advisor can recommend to the owner and the owner will select with the owner, with the advisors input, what is most appropriate for that owner so we're just trying to.

 

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John Brown: To create that transferable value through these implementation of these recommendations and we do that, because very few advisors know.

 

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John Brown: All of the possible recommendations when can make in the creation of an exit plan and that's what our that's what we provide or try to provide great.

 

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Michael Palumbos: josh I think that.

 

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Josh Patrick: For me it's around monorail system utilization.

 

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Josh Patrick: You know, one of the four things one the for Dr sustainability is have a business is not systematized is not transferable because P buyers are new owners, which includes your children, by the way.

 

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Josh Patrick: don't want you, they want your systems they want your managers, they want everything else in the business and I put management training or management ability as a systems process.

 

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Josh Patrick: And I think that businesses, especially private businesses with less than 50 employees, maybe less than 100 employees they're terrible systematized in the business.

 

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Josh Patrick: The owner has all the systems in in their head and i've got a bunch of helpers running around but name not really ever delegated or developed management, they can run on so yeah, which is one of the reasons that these businesses generally don't transfer.

 

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Josh Patrick: You know it's it's you know john john was telling me that the vast majority of the transfers that the people in his organization are doing our internal transfers.

 

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Josh Patrick: And one of the reasons are in trauma internal transfers or a more philosophically and psychologically satisfying a third party sale.

 

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Josh Patrick: But the other side is a lot of these owners have not created the business as saleable to a third party is only transferable to their kids or their managers because they've created no real value.

 

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John Brown: And just Finally I can disagree with you okay waiting this encounter podcasts to be able to do this, so I was.

 

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John Brown: Reading along with josh In fact we work with a lot of private equity firms and we asked them what do you look for in acquiring their business in the top three items consistently our.

 

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John Brown: management team that state that's very good operating systems that are state of the art to joshua's point.

 

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John Brown: And that's hard to find in the third one that we haven't really talked about that we probably don't need to is a diversity of the customer base abroad customer base so that we're not reliant on the small number of of.

 

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John Brown: Customers who might be looking to the owner for everything, especially.

 

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John Brown: So that's one thing, but I don't think we don't believe you can transfer a business successfully the insiders unless you have all of the qualities.

 

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John Brown: needed for sale to an outside third party, I mean, are you going to transfer the business to people who can't run it now you've got to have a management team, and so on, so I think.

 

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John Brown: that's really all the same it's just that we have more time perhaps to incrementally transfer duties responsibilities and so on to the people who are going to remain once the owner leaves.

 

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John Brown: But other than that that the factors are the same, we need financial independence when we're at the other but that then.

 

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John Brown: they'll finally shut up that's why a lot of owners do want to hold on to some ownership interest once they've created this they want to stay part of it, even if they're going to be largely inactive, they want to see 25% of the cash flow right so.

 

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Josh Patrick: So one of the reasons, and this is where.

 

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Josh Patrick: I don't know if john you really I know you've probably thought about this, but the reason that most businesses aren't sold to a third party in have to be an internal.

 

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Josh Patrick: transfer, which is especially true in the construction business where you spend a lot of time, Michael.

 

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Josh Patrick: Is that most businesses have not created a recurring revenue stream or a sales process that looks like it's a recurring revenue stream.

 

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Josh Patrick: And when I talked to private equity guys those three things are certainly on their list, but the other one is a recurring revenue stream that creates a stream of cash flows, they can depend on.

 

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Josh Patrick: And most business owners are really, really bad at that they wake up on January 1 and they don't have anything out more than 90 days in business.

 

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Michael Palumbos: It goes it goes to exactly what you were talking about josh is if i'm always working in the business and and i'm just doing task after task after task.

 

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Michael Palumbos: i'm not tackling, you know as Stephen covey said the rocks right, you know what are those, what are the big things that are really important to take the business to the next level like.

 

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Michael Palumbos: Putting an operating stream, you know, an operating system in place or adding new income streams to the business so that are duplicatable and repeatable so that we do become more attractive right.

 

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Josh Patrick: yeah absolutely yeah.

 

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John Brown: yeah it's true I think that's also true, or of smaller businesses, they that's why they're small one, is they lack all of that larger businesses.

 

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John Brown: You know let's let's say having a value of $10 million or more, they tend to have a lot of that in place it doesn't mean you have to accept that they tend to have learned how to do that.

 

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Josh Patrick: If they don't they're not going to get the 10 million if they get to turn million they're going to blow apart because I don't have the systems and processes to make it there.

 

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John Brown: I think it's a whole different set of issues with businesses that can be sold, but the origins is not.

 

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Josh Patrick: sure most in the truth is most businesses in the United States, I mean there's there's only 6 million or 20 million to have any employees.

 

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Josh Patrick: You only 300,000 do more than $5 million in sales and only 150,000 do more than $10 million in sales, so the vast majority of the business in this country are really basically the owners bought a job, and if they want to do better than that they have to change what they're doing.

 

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Josh Patrick: And we know how hard changes.

 

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Michael Palumbos: Right, I know that that's exactly it it's you know what i've seen with, especially within you know family businesses is somebody got good at.

 

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Michael Palumbos: taking care of a widget whether it's producing something or servicing someone or doing something they got really good at that piece.

 

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Michael Palumbos: And you know to your point john they they surround themselves with people that can help support them do more widgets.

 

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Michael Palumbos: or provide that service better they don't always get them to that point where they can do it themselves to your point on the on the systems and processes john.

 

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Michael Palumbos: josh I I I would I know I have many, many you know that I can think of, and I can point to where they've they've surpassed that five that $10 million range.

 

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Michael Palumbos: And i'm really still surprised had at how often they lack the systems and processes, they have just enough to get that piece done but not to make that next step to where it's a sustainable business or they're not dependent on the owner at that point.

 

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Michael Palumbos: So I it's funny that you know as we're talking about this i'm just.

 

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Michael Palumbos: Picking up you know some of my top three or four clients, where they haven't gone through that step and I keep poking and prodding Adam to say.

 

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Michael Palumbos: You really need to be looking at the have you know as Jim Collins says, what do you need to have you identified the right seats to have the right people in those seats and you have the right people in the right seats doing the right things right.

 

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Josh Patrick: Well, there that speaks of something that I don't think john works on would be era there's something we have is is absolutely core to us, which is becoming values led.

 

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Michael Palumbos: If that again josh.

 

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Josh Patrick: You having a values led business yeah if you don't have a value sled business your people don't know what they're supposed to be doing.

 

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Josh Patrick: they're going to make up their own values are going to make up their own culture, what your business is about it's your job as a CEO.

 

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Josh Patrick: To say here are the values we have here are the clarifying statements around these values in here's how they apply to different parts of our business.

 

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Josh Patrick: they're great teaching tools and they're great tools for for attracting the right people to your company, you know when when Jim Collins are right person right seat.

 

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Josh Patrick: right person is all about values, in fact, if you read his books, the first 50 pages of his books are about how he created value so i've company.

 

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Josh Patrick: And in his research, he says and that's the difference maker between the great companies versus the good companies.

 

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Michael Palumbos: yep agreed, and we look at that we eat those two pieces is the values is what is your core purpose beyond profit.

 

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Michael Palumbos: Because you know we're all doing stuff you know john you're teaching advisors, how to help people you know exit their business and josh you're talking about sustainable business and exit planning.

 

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Michael Palumbos: You know we're talking about how do we get the family business a line, but at the end of the day.

 

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Michael Palumbos: What is the what is their purpose beyond profit, because there has to be something bigger that draws and for like for me and my team we sat through a process and trying to figure that out, and for us what we came to is it's.

 

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Michael Palumbos: You know, we want to inspire change and now we've defined that we haven't changed the words but it's we want to inspire positive change, because you can inspire both positive and negative change but.

 

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Michael Palumbos: That you know everything that we do that when we're when we're meeting with business owners we're asking them.

 

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Michael Palumbos: To change and it wouldn't matter for us, we do it through wealth management, and you know exit planning, and you know.

 

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Michael Palumbos: Putting systems and processes in place for the business to help you know grow the business value that's how we do it and we make people uncomfortable so we have to inspire that level of change.

 

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Michael Palumbos: But we could also do that if we were in the schools, you know if if I was a college Professor Professor or whatever business, it was, and she will one of our you know clients their.

 

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Michael Palumbos: Their core purposes, making good things happen and it's really interesting as you look at the different businesses that they've acquired and they've run through the years.

 

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Michael Palumbos: They don't some of them don't even look, you know they're, not even in the same industry, they just totally went another place and they're like yeah but we're really still making good things happen.

 

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Michael Palumbos: And that's really what matters to us it's not so much we'll learn all the ins and outs of how to run that business as long as we're making good things happen out in the world josh today Hats off on you know, values and core purpose.

 

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Josh Patrick: So I would I would add one thing to that company, I will be asking him to give a definition what what making good things happens means.

 

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Michael Palumbos: means yeah.

 

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Josh Patrick: You know, Tony robbins used to have this exercise, he did the beginning of all these workshops back when he was Tony and Nadia Anthony.

 

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Josh Patrick: which was back in the early 80s, by the way, and he would have us getting groups of eight or 10 people sit around a table.

 

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Josh Patrick: And he would use the word picnic because we also both you know what picnic means I write down the first 10 words that comes into our mind about the word picnic and then we go through, and everyone will read off their list and see how many words all eight of us having common.

 

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Josh Patrick: Will usually be between somewhere between zero and one once I will get up to two so if you're not defining what your terms mean nobody knows what you're talking about.

 

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Josh Patrick: I mean it's a nice move above the you know, having no values, but without a definition with the value is your people don't know what you're talking about.

 

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Michael Palumbos: yeah lovely josh that's powerful Thank you.

 

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John Brown: yeah I guess again since my perspective is a little different than then certainly josh is.

 

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Josh Patrick: What a surprise.

 

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John Brown: So, so in our world.

 

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John Brown: With working with advisors, the way we respond to this values based discussion and how to implement that and company wide is to have business coaches, on your team of advisors, because I believe josh and you are an exception.

 

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John Brown: in so many ways, but you are an exception in that you are a business advisor but you had this this values based approach.

 

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John Brown: which I suspect you've done a lot of reading you've done training you've worked with business owners for 20 years to develop that.

 

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John Brown: Well that's not what most advisors, frankly, want to do that's outside of their wheelhouse they want to be helping owners, develop a plan and execute a plan to do something, maybe deal with an issue.

 

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John Brown: And they would bring in other advisors, like a business coach I mean bi has a business coach.

 

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John Brown: That we've hired and we work with and the and they're very valuable it's a very different discipline from what i'd call the basic professions lawyer financial planner CPA and so on it's it's a different way of approaching a business, and I think it's very valuable.

 

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John Brown: But in our world, we would tend not to try to train that teach regular advisors that because I think it's too involved, it does too important to know just a little bit about it.

 

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John Brown: Michael you do the same thing you probably have had some training and what you're just talking about.

 

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Josh Patrick: agree we call that the purposeful side of planning.

 

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Josh Patrick: yeah and there's two sides of money there's technical and there's purposeful but what they're different they're both are just as important, if you don't deal with both the other side falls apart.

 

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Michael Palumbos: So true so true i'm talking about you know, one of the notes i'm looking at you know when we talk josh but take either one of your inputs on this, why would you say business owners are typically not interested in exit planning, but always interested in in increasing the business profits.

 

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John Brown: Ahead josh go first.

 

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Josh Patrick: For me it's about.

 

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Josh Patrick: sellers remorse.

 

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Josh Patrick: You know, for years, I thought I could help people avoid sellers remorse.

 

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Josh Patrick: Which is you know we all have remorse as we move on, when we sell our company, we lose our you know our social network.

 

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Josh Patrick: In the phone stops ringing all that kind of stuff you know when I was in my food service business, and I was telling a story, I was one of the 10 most well known people in the venue and food service industry, I was the education chairman, the national many association.

 

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Josh Patrick: We probably talk 400 500 Vending companies out there on the company's better.

 

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Josh Patrick: year I sold my business.

 

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Josh Patrick: The phone literally stopped ringing I used to have five six calls a week from people looking for information, asking for advice stuff that really was good for my ego well that completely disappeared.

 

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Josh Patrick: And it was a very lonely year, the year after I saw my Vending company.

 

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Josh Patrick: i'm not unusual I never met a business owner who's left their business who hasn't had some form of sellers remorse.

 

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Josh Patrick: So if you haven't device with that purposeful advisor they can help you get through that transition we call the passage.

 

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Josh Patrick: is one of the four stages of transition going through the passage stage where you're left what you have you're trying to figure out what your new normal will be in that passage period is really messy and really ugly and really often painful but it's to be expected.

 

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Josh Patrick: And, most people aren't prepared for it, so instead of, and they have this sort of gut feeling that there's something bad, on the other side, so instead of doing something they don't do anything.

 

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John Brown: yeah and so again we call that a deal killer.

 

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John Brown: If the owner realized that before there's a defense of purchase agreement, they just disappear.

 

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John Brown: So yeah I think I think that's really important Michael name, to answer your question about exit planning versus waiting to grow, the business, I would take I would not disagree with you, but I take maybe a different approach, I think.

 

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John Brown: Our surveys of business owners show that.

 

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John Brown: 80% of owners know they need to plan in order to exit.

 

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John Brown: Successfully but they just don't want to do it now.

 

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John Brown: And so we have to figure out what that now is.

 

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John Brown: That now usually is a problem that they have in their company or something they want to attain specific in their company.

 

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John Brown: And that again gets back to why we do assessments, at the very beginning of an engagement, because unless we address that we're never going to get to exit planning and usually.

 

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John Brown: Our members don't do a complete exit plan, at least not at first they address they go through goals and resources and then they put that owners concerns in that perspective.

 

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John Brown: i'm having difficulty with a child in the business my business is stagnant it's not growing.

 

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John Brown: My key employee just left and took half of the company with them, so we deal with those issues and once we resolve those in the context.

 

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John Brown: Of the owners goals and resources, then we might move to the next step, the next next challenge, or we might do an exit plan, but in our world doing a complete exit plan is not important so much as dealing with what the owners concerns are.

 

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Michael Palumbos: gotcha it's that whole making sure that you know the person has something to retire to not retire from conversation right.

 

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Michael Palumbos: Well, you know it's interesting one of the ways that we attack that in the with the family owned businesses is because that piece of legacy is pretty powerful and with many of the family owned businesses that we serve what we've seen is that there's there's a really.

 

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Michael Palumbos: gratitude to the Community for helping them to get to where they got to, and so you know, the way we may attack, that is to for the family to start a family foundation.

 

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Michael Palumbos: And now you know what we we take you know grandpa was the one who's you know, moving on at this point, selling the business and the next generation whatever generation, it is, is running the business.

 

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Michael Palumbos: But we want to put you know grandpa and grandma or whomever that you know, is in that role in the position of the family in running the family foundation and becoming an elder within the family and working with the grandkids and helping by utilizing philanthropy as the playground to.

 

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Michael Palumbos: To start to develop the future leaders within the family, so you can work with the grandkids in philanthropy, which is another business and start developing those you know those those leaders at a very young age it's just kind of that's how we complete that circle for the family on.

 

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John Brown: business.

 

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John Brown: that's a great idea it's a great concept I don't hear about that very much so yeah and that obviously takes a pretty successful business to do that with that's.

 

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John Brown: generational but nevertheless I think it is a great topic to talk to the Elder generation about and it might remove some of their hesitation and transferring the balance of their ownership, because they had another project that's important.

 

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John Brown: And that's maybe another thing that I may have learned something from josh over the years, and that is.

 

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John Brown: He but you know exit planning used to be, when do you want to leave How much money do you want, who do you want to transfer the business to which is.

 

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John Brown: You know, still critical it's still key.

 

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John Brown: But it's not what necessarily drives owners to exit or to start planning it's these softer goals you were just talking about what's my legacy what's the culture, how do I benefit my community, how do I help all of the employees and my company and.

 

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John Brown: If we can address those concerns the balance of the exit planning process is smoother and it might get them jump started, and that is just a set of softer values that I don't remember learning about in law school.

 

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John Brown: Right, you know it didn't happen.

 

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Josh Patrick: When, nor do they teach in the CFP program or CPA programs or any of that stuff now I remember, I was writing I wrote a blog post on the earth turns out, she was our friend.

 

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Josh Patrick: out in the Midwest to is a big m&a guy yeah and it was on his coveted short on his one of his deals, and it was a very, very large distribution company electrical distribution company in new top and there were $3 billion companies going after this firm.

 

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Josh Patrick: And they ended up selling to a wholly owned Aesop.

 

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Josh Patrick: In the reason we sell to the Holy own Aesop versus the other people was a they got a good price for it, but more importantly.

 

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Josh Patrick: Their people were made 100% invested in the Aesop as part of the negotiation and they were very concerned with taking care of their employees.

 

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Josh Patrick: and making sure they were well taken care of and they knew the Aesop was a far better choice, just because of how aesop's run in those particular use operation, so they have a huge advantage, not only do they have a tax advantage.

 

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Josh Patrick: right or wrong other quarterly tax freeze and that's core, but they also had a philosophical advantage, because as an Aesop they were philosophically aligned with what the selling owners wanted to accomplish for other people, not for themselves.

 

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Josh Patrick: yeah it we're going to be fine we're going to bucket loads of cash, so the real thing was now, what are we going to do for people to make them feel honored and appreciated yeah.

 

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John Brown: Very good, what Michael was saying, as well as looking at those aspirational goals.

 

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Michael Palumbos: yeah yeah josh you taught me something when we were talking before you said, how do you identify a perma five.

 

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Michael Palumbos: And why it's so dangerous, and so you would you say you know, and I think that we're right at that point, because we're just talking about those you know we always you know, putting teach us what a perma five is and why it's so dangerous.

 

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Josh Patrick: When I first came to his business, I would ask a business owner when you will leave your business and if they were over 50 years old, I almost I heard the word five years and then I go back to that same business or two years later, and say when you leave your business.

 

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Josh Patrick: And they say five years in three years after that was always five years, so I just dumped that permit and around 15 years ago I finally figured out why is Parma five.

 

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Josh Patrick: And the reason is proof of it is a business owner often strategically doesn't know how to accomplish what they want to accomplish but they believe whatever it is, they need to do, will magically reveal itself and be fixed over the next five years.

 

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Josh Patrick: and get some help to help them think that through is always going to be five years because they still don't know what to do, yeah so that's where it came from.

 

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John Brown: So when I saw that question, Michael that you sent I thought, what in the heck is personified so I googled it it's a totally different thing I thought it was some type of a it's a it's a theory of happiness.

 

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If you agree with that.

 

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John Brown: And so, but that with josh mentioned and actually i'm sure you've seen it to five years is like the exit timeframe for most owners.

 

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John Brown: And one of our training sessions for advisors, I asked that question, why is it always five years and somebody answered it, I thought was perfect he said well.

 

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John Brown: Five years is far enough away for owners to think they don't have to actually start doing planning yet.

 

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John Brown: But it's close enough to think i'm really going to be able to leave in five years, so it's this combination of I can still procrastinate, but I do have a destination in mind, and then the next year it's five years we call that the rolling five year exit.

 

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John Brown: So it's the promo fly with a different name different.

 

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Josh Patrick: profile exists all over the places such as business owners.

 

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John Brown: Right or.

 

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Michael Palumbos: Of course john for the advisors that are listening to the show, because we do i'm positive there's a bunch of advisors that listen to this, how do they get in touch with your organization.

 

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John Brown: They just go to our website exit planning calm.

 

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Michael Palumbos: and

 

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John Brown: You know request more information or whatever in.

 

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Michael Palumbos: And I would tell you after all the time of you know, talking with josh through the years and now talking with you that if an advisors thinking about being able to help the you know business owners with exit planning I would highly recommend that they reach out to you nice job for you.

 

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Thank you for all the work you.

 

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Michael Palumbos: josh How do people get Ahold of you, if they'd like to.

 

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Josh Patrick: Use us where you just email me Jay Patrick and stage two planning calmness and number two or you can just go to either for websites www stage to planning COM or www dot sustainable business.co.co.com I didn't forget the M couldn't get the m.

 

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Michael Palumbos: Unless you want to pay an arm and a leg for it and.

 

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Josh Patrick: I don't think it could be good for them some environmental group that as.

 

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Michael Palumbos: Well, I just want to say thank you to the both of you for joining us today this is been really informative and a great conversation.

 

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Michael Palumbos: Again, my name is Michael Columbus this has been the family business show and with family wealth and legacy in Rochester New York, if I can help you in any way feel free to reach out to us, and thank you for joining us today we'll catch you next time have a great day, everybody.

 

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John Brown: yeah hey Michael thanks a lot, it was very good two quick things I since we're probably not being recorded now.

 

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Josh Patrick: One or two stores.

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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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