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Episode 40: ESOP's & The Family Business

In this episode of the Family Biz Show, Michael Palumbos hosts a discussion on Employee Stock Ownership Plans (ESOPs) in family businesses. Guests Tracy Till, former chairman of Butler/Till, and Rob Brown, an ESOP expert, share their insights and experiences with ESOPs.

Tracy recounts her journey with Butler/Till, detailing the company's growth and her exploration of exit strategies, ultimately choosing an ESOP for its alignment with the company's employee-focused culture. She emphasizes the importance of trust, leadership, and envisioning a life beyond the business.

Rob Brown provides a technical perspective, explaining the structure of ESOPs, their tax advantages, and how they can serve as a tool for business succession while preserving the company's legacy. He discusses the importance of aligning family members and recognizing the decision-makers within the family dynamics.

Both guests stress the value of boards in strategic planning and maintaining financial health. Tracy highlights how a board can elevate a company's performance, while Rob mentions ESOPs as a means to resolve family disputes by monetizing the business.

The episode underscores the significance of planning, alignment, and expert guidance in transitioning to an ESOP, offering valuable insights for family businesses considering this path.

Episode 40 Transcript


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Michael Palumbos: Welcome everybody to the family biz show my name is Michael Columbus family wealth and legacy in Rochester New York and.

 

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Michael Palumbos: Today we are going to be talking about aesop's in the family business and i'm really super excited to have rob Brown and Tracy till with us today, welcome to both of you.

 

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Tracy Till: Thank you pleasure to be here.

 

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Michael Palumbos: So, as we often do, would you would the two of you each just kind of kick us off and tell us you know your story, how did you get you know, working with aesop's and family businesses, and you know where did that come about, for you so Tracy if you don't mind i'll have you kick us off.

 

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Tracy Till: Of course, thank you, I am most recently as a 2020 the chairman was the chairman of Butler tail, which is a media and communications marketing company based in Rochester New York.

 

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Tracy Till: Currently, about 200 plus people and I became a founder of Butler tail and about 1997 98 with my partners to Butler and we formed Butler till to be a unique entity and Rochester servicing brands all across the United States.

 

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Tracy Till: Seeing at the time, media being a very diverse specialized field and capitalized on that and grew quite rapidly.

 

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Tracy Till: About.

 

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Tracy Till: 2009 my partner came to me and said how will we retire and I thought she was insane she happens to be a little bit older than I am so I had to acquiesce and say alright teach me, what do you, what do you want to know.

 

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Tracy Till: We talked about private sale, we talked about.

 

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Tracy Till: Looking at a variety of options, but one that came to us via our CFO was that of an ISA we had a very family oriented employee based focused firm.

 

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Tracy Till: That for an ISA really, really sounded phenomenal and we engaged experts, such as.

 

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Tracy Till: Surat Brown and educated ourselves further and ultimately decided to say you know what we want in on this this model and sold the business to our employees.

 

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Tracy Till: became 100% employee owned in 2014 and have enjoyed the benefits of that emotionally financially and very proud of the structure we created so that's my story.

 

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Michael Palumbos: love it real quick today, what are you doing you're working with the private directors association, as well as.

 

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Michael Palumbos: Sovereign level tell us about yeah.

 

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Tracy Till: yeah I really I really loved the work of a board in terms of setting those strategic intent and direction and measurement of a farm and growth.

 

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Tracy Till: And with that basically said, I want to do this for other firms like me a private firm who needs to develop a board who wants to use the board strategically and bring in independent directors to elevate certain character characteristics or or skills.

 

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Tracy Till: So I do work with the PDA I work with the nac D, which is the National Association of corporate directors, I now serve on a couple nonprofits for the employee ownership world as well as a private employee ownership firm in buffalo great.

 

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Michael Palumbos: Thank you Tracy and welcome.

 

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Tracy Till: Thank you.

 

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Michael Palumbos: Now that I know the right correct title I apologize rob so rob Brown.

 

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Michael Palumbos: Tell us about your journey.

 

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Rob Brown: yeah so um I started practicing law before a risa.

 

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Rob Brown: And I was the youngest kid on the block in a big law firm and when arista came out the people in the tax department, which is where employee benefits was in that firm said we don't want to learn this stuff kid go read this book so for one brief instant I was an expert.

 

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Tracy Till: On a Recep because I.

 

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Rob Brown: had read the book and nobody else had.

 

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Rob Brown: And then, it turned out that.

 

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Rob Brown: I, as I went through that firm and went through another firm that I started.

 

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Rob Brown: We focus more and more on family businesses and, as you know, aesop's are governed by Orissa, so it became one of the tools that we use to help people exit from their businesses and then in about.

 

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Rob Brown: 2011 I got together with two other lawyers in Connecticut and we started this small boutique firm that practices nationally in the SAP space and employee ownership and.

 

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Rob Brown: Now we have an office in spokane and one in Kansas city Missouri and the one in Connecticut the Rochester and we have another one in Syracuse but she our partner there sometimes.

 

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Rob Brown: works out of Rochester so that that's kind of how I got into the business and, as I always tell people the older, I get the more I have to focus, so that I understand what i'm talking about we're doing just employee ownership.

 

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Michael Palumbos: rate i'm gonna.

 

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Michael Palumbos: pop that real quick all right um it was getting some feedback there, so I just wanted to turn him as we're not speaking, if we can use that be great um let's see here.

 

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Michael Palumbos: So we're talking about aesop's and family business why don't you kick us off rob and talk about you know just.

 

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Michael Palumbos: We don't need to go through the whole marissa rules on Nice up, but what is an ISA up, and I think it was you That said, you know it's kind of like blowing up a balloon so walk us through that a little bit and whether.

 

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Rob Brown: The way it's like blowing up a balloon it, I had a math teacher and when I when I wasn't doing well at math, she said to me, you just have to keep doing it over and over it's like blowing up a balloon it gets easier, each time so.

 

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Rob Brown: The fundamental conception of an ISA is really very simple what we do is we take an ordinary profit sharing plan.

 

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Rob Brown: That you would see a 401k plan is a profit sharing plan that has special rules, so we take a profit sharing plan and we add some special rules to it that Congress has required.

 

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Rob Brown: And all of a sudden that plan can buy the shares of related closely held company, so what we've now done is create a market for shares that wouldn't otherwise be saleable so.

 

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Rob Brown: The nice thing about it is if you're trying to sell your own company on the open market to a whole bunch of people it's very unlikely that you can sell part of it.

 

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Rob Brown: Because if there's not really a market, you have to find a buyer to buy it all with a Aesop you've created a market for the shares.

 

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Rob Brown: And so the East up could buy a smaller percentage, it could by controlling interest, it could buy 30% it could buy 2% or it could buy 100% now in in their late.

 

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Rob Brown: In the late 90s Congress changed the ISA up rules, the tax rules related to aesop's to make them even more attractive and it turns out of you now.

 

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Rob Brown: If you have an s corporation it's.

 

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Rob Brown: 100% owned by an ISA you don't pay any state or federal tax, so there is a tremendous tax advantage for the company itself to do any stuff.

 

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Rob Brown: There are also some other special rules that enable you to effectively deduct a portion of principle that you pay to buy a nice up.

 

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Rob Brown: And there are rules that allow selling shareholders to roll over their proceeds on a tax deferred or tax free basis, depending on the circumstances, so what you have.

 

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Rob Brown: is a market for the shares of a privately held company that has tax advantages attached to it.

 

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Rob Brown: Now we can I can instantly make this so complex that you're going to need to blow the balloon up again but i'm not going to do that, I think the best thing right now is that what you've done is create a market for shares that has tax advantages attached to it.

 

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Michael Palumbos: awesome you know I think that's a really good point is that you know when we Tracy as you went through this process, you talked about it, you know you and your partner were saying.

 

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Michael Palumbos: We need to figure out what is our exit strategy you understood you were proactive that you know.

 

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Michael Palumbos: Most of us aren't going to work forever one way or another, and so you know started thinking ahead on this that's number one kudos to you and your partner for doing that because, not everybody does that but.

 

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Michael Palumbos: You know I know and rob you know Tracy you probably looked at other ideas as well, and when it comes to exit planning that's one of the things that I talk to family it's all about all the time, is that there are several options.

 

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Michael Palumbos: And it's really, really wise to go through an exit planning.

 

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Michael Palumbos: process so that you can be exposed to not just one idea and get you know.

 

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Michael Palumbos: i'm only going to sell the business or i'm only going to give it to my kids or i'm only going to if you get stuck.

 

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Michael Palumbos: Then you may be missing some of the options, and I think that you know, an Aesop is one of those options that for.

 

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Michael Palumbos: Exactly what you were saying Tracy our employees were like family and in many of the family owned businesses.

 

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Michael Palumbos: You know the I serve through the years and rob you know that you've probably been involved with that's the way they think of employees and so that ISA is kind of that next generation that next you know the next valuable step I think in in thinking about things.

 

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Michael Palumbos: Again, it is one of you know there's 15 1820 different ways to exit your business but, at the end of the day, you know it boils down to just a handful.

 

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Michael Palumbos: of different options and understanding those options are really important Tracy what other what other things, did you look at before narrowing it down to say you know we're going to go down that the option to the ASAP road.

 

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Tracy Till: yeah um you know we are blessed to live in a marketplace of Rochester New York where there's a ton of great great marketing communications firms.

 

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Tracy Till: um they're not a lot of media and communications firms, but there are a lot of great brands here Rochester and we certainly gave thought to boy, you know it would be natural for us to approach, one of those businesses and look to merge our companies or be acquired.

 

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Tracy Till: The other thing we looked at was on more of a national scale could there be an entity or a holding company, who would like us the way our business works.

 

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Tracy Till: Excuse me, and what we found was the big stop gap for us was always the fact that wait a minute.

 

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Tracy Till: These individuals who work with us, we trust completely they know us they know our brand they know our value.

 

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Tracy Till: If we were acquired if we merged, it would be very likely that a good chunk of our employee base would go away.

 

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Tracy Till: Because it would be a duplication of the foundation of that business so that acquisition became less attractive to us, we couldn't imagine you know letting sewer or Bob or or anyone go for that reason of our own desires or wealth, you know desire.

 

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Tracy Till: What we also looked at was.

 

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Tracy Till: How the transitions go emotionally for employees, you know it's not very easy to merge cultures, and I think there's a Stat out there it's like 70 or 80% of mergers fail for acquisitions tend to fail because of poor planning and poor kind of adoption.

 

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Tracy Till: It just wasn't in our DNA to do it and so when we looked at the model for an ISA we were leaving money on the table from a private cell, but what we did was gained money on the tax basis.

 

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Tracy Till: To allow us to.

 

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Tracy Till: Number one funnel loans to the business and to keep investing in the business to keep it growing and and fruitful so for us, we did look at a magnitude of you know options at the end of the day, we came back to the ISA.

 

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Michael Palumbos: Great what before we started the recording rob was talking about.

 

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Michael Palumbos: culture.

 

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Michael Palumbos: And that that it really makes a big difference that the culture of the company has to fit that Aesop thinking, and you know Tracy when I look at you know your bio one of the things that says this culture builder.

 

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Michael Palumbos: What I wanted what i'd like you to do is just talk about how you build culture, what was the culture, like at Butler till and then rob will throw it over to you to talk about you know places where you've seen that lack of culture, you know fit not working, and why it's so important.

 

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Tracy Till: um Thank you, I think, for Sue and I were a very unique partnership we both have very different personalities and styles, but at the end of the day we valued performance and work ethic and human humanity we valued all of that.

 

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Tracy Till: We also were pretty scrappy when you know people open the door for us to participate, we participated fully there was no hesitancy.

 

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Tracy Till: We import our employer, our leaders to do that with their own staff we talk to our people, about being you know just proud of what it is you do for a living and to look at that, with the best of intentions.

 

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Tracy Till: We supported them we inspired them, I think that was probably the key word for a great culture, do you inspire as you lead, or do you dominate or do you criticize, you know there's a lot of different styles ours was based on inspiration and quality of work.

 

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Tracy Till: It was also based on being very human if someone came to our offices, we always said, our doors were open.

 

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Tracy Till: If someone came to our offices and said, you know my my uncle is over in.

 

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Tracy Till: In the military overseas and i'd like to form this kind of group and put together these boxes, to give to this his team is true, of course, we would you know someone's nice became ill with cancer, of course, we stepped up.

 

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Tracy Till: But we did it as a Community, and whether or not a person could participate in that financially or emotionally or or write a letter it didn't matter, it was that we stood side by side with our.

 

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Tracy Till: People we live with, if you will, more so than our own families, so our culture was very unique and it paved the way, I think, for this to be a successful ISA.

 

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Michael Palumbos: love it rob why don't you why don't you pick up from there, and just talk about you know some examples of where culture worked where it didn't why it's so important.

 

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Rob Brown: So we have one ASAP company, one of the characteristics and excuse me for saying is.

 

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Rob Brown: Tracy that characterizes Aesop sellers, is it they're used to control and that's because they started the business and they always make all the rules and everybody in the company looks up to them.

 

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Rob Brown: And the problem with that can be it's not it's not a problem with Butler telltale, but the problem with that can be.

 

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Rob Brown: That people don't develop individual initiative because they're always afraid they're going to be second guessed.

 

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Rob Brown: They come in as the controller, and they put all this stuff together and they go to the CEO and they say i've got a great idea for streamlining our accounts receivable.

 

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Rob Brown: And the owner says yeah We tried that 1984 and it didn't work go away, I mean they don't say go away, but what happens is you can chase better people away by doing that and end up with yes people now we we have one company and i'm i'm not.

 

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Rob Brown: Obviously, going to give much identifying information, but the the owners still hanging around and she she sold the business, you know 15 years ago and but.

 

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Rob Brown: Key employees will come and make a presentation.

 

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Rob Brown: And she'll say well you know I wouldn't do it that way, but it's your company now, so you you've immediately slice the legs off of the people that you're trying to mentor and bring along.

 

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Rob Brown: The the counter the corollary to that is to build the family that Tracy talks about and most of our clients have have built that family.

 

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Rob Brown: So what you're all doing is pulling together for the family good, just like kid doing your nuclear family.

 

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Rob Brown: So you know, sometimes if mom's overworked everybody chips in and does all the things that she typically does because she's got to be relieved.

 

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Rob Brown: And that, when that starts to happen in the culture, then you're really putting a powerful organization together The other thing that I think is is very interesting and I was actually talking with a.

 

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Rob Brown: Nice up some people at an established company in this morning about it is when we say the words ownership that's a conclusive return that doesn't have much definition.

 

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Rob Brown: So if you own a car and the Bank has a LIEN on it, because you still owe the bank money you own that car in a very different way from somebody who bought it outright.

 

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Rob Brown: or from somebody who has a collectible and what you need to do you can't just parrot the words and say to people.

 

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Rob Brown: Well, now you're owner and owners, so you got to act like an owner, because people first of all don't know what it means to act like an owner, because very few people are owners, but they all think they know what this conclusively word means so we had one company where.

 

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Rob Brown: They made a mistake and we advise them not to make this mistake but they put in they put in there, he said that they were going to pass board decisions through.

 

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Rob Brown: shareholder decisions through to the employees and it's going to be open book management and whatever.

 

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Rob Brown: And they never defined it and it turned out, the only thing people wanted to know was how much money the other guy made.

 

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Rob Brown: They didn't care about the financial statements they didn't care about the strategy, they didn't care about their projections, they just wanted to know what that bugger next to him was taken home.

 

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Rob Brown: And it didn't work right, so I would say that one of the things that you need to do with any culture is to define very carefully and thoughtfully what you're talking about.

 

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Rob Brown: and companies that I find that companies that have defined employee ownership in a way that is inclusive and based around the mission.

 

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Rob Brown: work much better, and you can do a nice job I can do a structural East up for you, you know blindfolded but.

 

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Rob Brown: The company has to build the culture that cannot be built by a stack of papers it's got to be built by intention.

 

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Rob Brown: And if I could just say one other thing I think that the characteristics well it's not one other thing it's one of the concept, the characteristics of people who are good Aesop.

 

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Rob Brown: prospects are that they have a legacy feeling so they're very proud of Butler till they've built something that works, they built something that they believe.

 

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Rob Brown: adds value, not just to their pocketbooks but to the world as a whole okay as Tracy pointed out there's a real feeling that employees are part of the family.

 

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Rob Brown: The third thing is they don't want to give up control over this thing they made.

 

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Rob Brown: And the fourth thing is that in return for that they'll take fair market value, rather than a strategic price.

 

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Rob Brown: If you have somebody who's looking for the top price there's a good chance they're not a good ISA prospect now.

 

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Rob Brown: When people always talk about well strategic value is higher than fair market value in here, but in fact nobody ever gets strategic value, I mean occasionally they do.

 

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Rob Brown: Because you can have somebody who's trying to establish a market monopoly and some specific place but, most people just think their businesses are worth more than they actually are.

 

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Rob Brown: And they're going to get they're going to get a fair market value, no matter who they sell it to.

 

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Rob Brown: If you happen to have the world's greatest cure for cancer yeah you probably get a strategic value but, but if you're just another vaccine maker or supplier to vaccine makers you're probably get fair market value.

 

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Michael Palumbos: grade, and you know I would say that it probably goes back to.

 

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Michael Palumbos: That, if the if the business has a purpose beyond profit it's that culture piece again, you may and if if getting strategic market value and getting that highest value is important to you.

 

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Michael Palumbos: So be it, but that you're going about it probably exactly the same way, creating a great culture, having a purpose, you know, having you know.

 

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Michael Palumbos: A business where it runs without the owner having to be there, so somebody can be you know running the somebody could come in as a as an investor not just you know, not just a manager of the business and by their job, I find it so important go ahead Tracy.

 

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Tracy Till: I just wanted to add, I also think that.

 

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Tracy Till: Anyone who really goes down this route family Ellen private owned whatever it is.

 

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Tracy Till: To me it's all about the foundation of your business sense and your business successes and what you've done to date right, because when you look at this as a model.

 

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Tracy Till: And you look at the plan it takes to execute it you look at the future in terms of session succession plan with your employees it's about being a damn good business person.

 

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Tracy Till: So whatever your structure is you adapt this like you would any other business challenge and you tackle it, so I think we did that as well.

 

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Tracy Till: Tracy.

 

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Michael Palumbos: Talk about real quick.

 

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Michael Palumbos: Your leadership team.

 

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Michael Palumbos: At Butler till and how did you inspire them and what were some of the ways that you worked with them to get them, you know.

 

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Michael Palumbos: You weren't planning a nice up, but you are managing you and your partner managing already in a manner that fits so talk about that a little bit I think it's important to hate to hear.

 

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Tracy Till: yeah well interestingly, we always refer to it as an executive leadership team, and then we looked at it as a strategic leadership team right.

 

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Tracy Till: We couldn't do everything we were doing and growing at the pace we are growing, so we had to adopt and bring in talent that was better than us in certain areas, our CFO.

 

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Tracy Till: Our HR person our technology transformation person, a lot of people we adopted and brought into that leadership team, because they were key to our growth.

 

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Tracy Till: And with that we were very transparent and we were very inspirational and we gave them the opportunity to fly, and with that we benefited it's a good business model right, the thing with the ISA, however, was when we decided to do it our CFO was highly involved, which was critical.

 

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Tracy Till: And the trust factor was completely there for all of us we approached our senior leadership team, those that we wanted to lead in our absence and said, this is what we're thinking, are you win or you out.

 

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Tracy Till: And we had that frank conversation and we explained it we talked about it, we engage them across the board with this so.

 

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Tracy Till: Again, like any good business does they engage their readership they communicate honestly, they have trust.

 

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Tracy Till: And to me it's very similar to a family business it just is, to me, you know it's you trust one another and when that can't be faulted.

 

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Tracy Till: You can do incredible things from a business perspective, so our senior leadership team was involved from the get go and we continue that process in our succession plan.

 

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Tracy Till: By making sure they adapted their junior teams and that whole kind of transformation occurred across the organization right.

 

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Michael Palumbos: rob go ahead.

 

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Rob Brown: Oh, what one of the really interesting things to tag on to what.

 

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Rob Brown: What Tracy was saying, obviously succession is is very important because businesses can't continue and we have many ISA clients that are in.

 

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Rob Brown: Their second or third generation beyond the founders, and the characteristic of the ones that are successful, is that they recognize that all businesses are dynamic.

 

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Rob Brown: So that Butler till when Tracy was there is not the same business as Butler till three years ago, or both or till now, or Butler till in five years.

 

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Rob Brown: And when you have a healthy culture that's working with a distributed share of profits which is really what the ISA does what you do is you encourage that dynamism.

 

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Rob Brown: Because people with different ideas will come to the fore and if the culture is right, those ideas will meld into something that nonetheless mash it matches the basic mission and vision of the organization, but it may look terribly different thing there might be different.

 

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Rob Brown: executive positions, there might be different organizations, it might move in a different direction in terms of its market.

 

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Rob Brown: But it's still the same company that's growing dynamically it's like lifelong education for humans right, you know you keep learning and if you keep learning and you keep practicing learning, you will get better and better.

 

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Michael Palumbos: yep it's the rules of physics it's entropy you're either growing or you're dying.

 

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Michael Palumbos: Right and you have to recognize that and one of the neat things and we did a book club last year on Simon cynics the infinite game.

 

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Michael Palumbos: And, and that was it was just fun to read, because when you think about it, you know business has no end.

 

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Michael Palumbos: Is long as you're thinking along the lines of the business as its own entity, which is why they do have their own you know he is number right they get their own social security number so to.

 

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Michael Palumbos: Speak and you really need to treat them that way you're just.

 

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Michael Palumbos: As the owner current owner you're just the current stored and and if you're really thinking about what's next you know, for all those people that are working there you're really.

 

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Michael Palumbos: Being thoughtful about and Tracy you and your partner definitely did that I think you know where the word that we that we've used a couple of times, I want to make sure that we're hitting on is that word trust.

 

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Michael Palumbos: And, and with the leadership teams, you know when we're coaching business owners.

 

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Michael Palumbos: it's, how do we work to develop trust along that leadership team is one of the most important pieces one you have to have the right people as Jim Collins, says the right people on the bus, and we know that, but I think one of the ways to keep them and attract them is that you're.

 

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Michael Palumbos: able to garner their trust and you know when somebody does come with an idea we're not betting in a way, and saying well I wouldn't do it that way we're open to going in and we're we want them to go out and you know experiment, so to speak, and making steaks and grow.

 

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Tracy Till: yeah I think it comes down to a couple things one is you know you get the right people in the room and and you have a vision for where you want to go and it's you're trusting that as well.

 

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Tracy Till: But it's also about us as founders and an order as leaders that there is an eagle portion to this and i'll not i'm not going to sugarcoat it I think when you've had success in in leadership or when you feel like you've birth that baby.

 

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Tracy Till: letting go of it in your normal capacity is really you know.

 

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Tracy Till: It needs to be profiled it needs to be tackled and discussed and you need to have someone who can say to you, you know what it's their turn.

 

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Tracy Till: it's their turn to be stellar and that's your job now your job isn't to say no it's not going to happen that way your job is to say, what can I do to make you successful because if you're successful i'm successful that's leadership to me.

 

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Tracy Till: So I think what we did was we had to really look at it and I I probably bout out of it a little bit faster than Su but the day to day in terms of where I was very heavy client focus.

 

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Tracy Till: I just switched it I switched it to the corporation, as my client versus the day to day client work and I let others tackle that and I was always there if they needed it.

 

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Tracy Till: But again, that trust had to be there for me to shift and when you clarify your roles, this is what you're going to tackle this what you're going to tackle you clarify it.

 

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Tracy Till: You still have to deal with your own issues you know up here.

 

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Tracy Till: You know what your jobs are and that really, really helped everyone trust, where we were going and what we're all doing and we communicated it.

 

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Michael Palumbos: yeah we when we talk about we talked about the course you know the the core purpose, the core values, which you know right there what they the core customer.

 

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Michael Palumbos: But then it's the core processes and then it's the function accountability chart you know, so if you if you understand.

 

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Michael Palumbos: You know the organization that's one thing, but then who's responsible for those and in tracking our core crop our core processes across the business to make sure that we're staying on top of those things, and that allows you some freedom doesn't it.

 

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Tracy Till: yeah play yeah and I think when you when you communicate that success in that like wow this is phenomenal what they did to your employee base you start to shift the.

 

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Tracy Till: The trust you start to or expand the trust right so now all employees are looking at that leadership team is saying it's not just you and Tracy.

 

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Tracy Till: it's the senior leadership team and wow those guys are really kicking ass yeah because that's what you need to do, you need to make sure that you're transitioning it properly.

 

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Michael Palumbos: love it here's.

 

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Michael Palumbos: Go ahead rob.

 

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Rob Brown: So my God, I wanted to add just a word on trust, trust is one of those words trust is a word like ownership it's one of those all inclusive words and nobody knows quite what it means, sometimes if you say.

 

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Rob Brown: I don't trust that guy that means you did you think he's probably a crook, but what we're talking about is trust that is more like reliability.

 

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Rob Brown: I can rely on my colleagues I, I know that if I jump off the cliff they will catch me on the way down it's not an absence of mistrust.

 

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Rob Brown: it's an actual reliance and I think that's what makes it so powerful as it develops in an organization, you get to the point where you say, well, if.

 

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Rob Brown: If the CFO is figured out that's the way to do it, who am I to say it isn't you know, because you have delegated your reliance to another individual and you are saying to them.

 

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Rob Brown: I believe that you will look up from my interest and your interest and everybody's interest and that's a very powerful affirmation of humanity and skill.

 

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Michael Palumbos: I love it, thank you for that you know.

 

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Michael Palumbos: Bringing that to light, I think the other piece to that I would throw is.

 

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Michael Palumbos: That trust that, when I do have an idea I can go back to the reliance I can rely on people to just be open to talking about it, and then I will be heard.

 

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Michael Palumbos: And if you like, you said if i'm always squashed on my ideas how am I i'm not going to trust that it would bring out anything new or anything different we're not going to have that growth that we need.

 

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Michael Palumbos: So um I want to change just briefly and then we'll and then we'll move on to the next section here, but if you were to give advice, both of you you're talking to an owner that says, I know I need to retire, I know I need to let go of the reins.

 

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Michael Palumbos: But I did birth this and I did and i'm having a really hard time making that transition from being the leader to being the mentor.

 

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Michael Palumbos: Or you know how would you how would you help that person what's the conversation, how do you how do you help them to make that turn what would you say to them.

 

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Tracy Till: well.

 

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Rob Brown: What I think one of the things you have to do is start with the inevitability, you are, you are going to exit your business the interesting question is whether it's on your terms.

 

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Rob Brown: And I think that if people really understand that concept, then they start thinking about the ways that they can leave a legacy that's more than the name on the door.

 

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Rob Brown: That is really an organization that can continue because you know they won't be there forever, I mean some people think they will but they won't.

 

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Tracy Till: yeah yeah you know for me if I could tell more people I would say, you know, look at look at your life don't just look at the business and say what's important to you.

 

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Tracy Till: You know, do you want to be a grandparent whose hands on or do you want to be, you know, a next level traveler and you know do all those things you'd hope to do in your time.

 

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Tracy Till: Those are important factors those you should look at your life because you are a human being, first and foremost, you are blessed to have this corporation or business that you now want to exit maybe with a better plan that you thought of I would really advise people to.

 

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Tracy Till: To speak to other.

 

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Tracy Till: People in your in your same scenario actually or the vistage group coaches.

 

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Tracy Till: Strategic planners folks like yourself, you know who can really lend insight and knowledge knowledge is power and that's not a cliche.

 

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Tracy Till: It is about finding out what other people are doing, you know but birthing the baby, I can tell you this i'd rather go out on a big ass hi then go out with no money in my pocket.

 

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Tracy Till: And no employees with paychecks it just was not going to happen, and so, for me, it was a combination of all those things my own humanity and what I wanted in life, and you know, because you know both factors matter.

 

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Tracy Till: So that was it for me.

 

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Michael Palumbos: Great Thank you.

 

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Michael Palumbos: Talking about you know advantages and disadvantages and Nice up is not for everybody, there are some huge you know advantages and there are definitely some some drawbacks to having a nice up so let's just hit on you know, a handful of those each.

 

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Michael Palumbos: and talk about rob, what do you see, are you know you talked about tax advantages, maybe discuss that a little bit more, but and then add some of the other advantages.

 

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Rob Brown: Well, the tax advantages are basically and.

 

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Rob Brown: In the opportunity for the selling shareholder to.

 

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Rob Brown: to shelter gain in the right circumstances that would be a C corp and immediately after the transaction the cell phones at least 30% or in the tax deductibility of amounts that are contributed to the ISA which shelter, a part of the principal payments for any outside debt.

 

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Rob Brown: But I think that that the real advantage of any setup is that it can it can it can retain your legacy, if you if you sell to big China NK.

 

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Rob Brown: You will be the Rochester development or the Rochester division of big China Inc you know i'm going to be be rob browns little widget company.

 

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Rob Brown: And and that's a real advantage for people, because people who build their own businesses base their whole social relationship on their business ownership when they go to the valley club, they are the person who employs 500 people.

 

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Rob Brown: When they sell the big China hank and big China hank moves all the jobs to Beijing there the goat that let 500 people down.

 

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Rob Brown: So I think that what you have to think about one of the one of the big advantages, with an ISA is that legacy continuity.

 

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Rob Brown: The other thing is that people who build their own businesses love riding a bronco these people are not risk averse they take risks, all the time.

 

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Rob Brown: I in my simplistic world there's a division between employees and owners and employees are critical and smart and well trained.

 

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Rob Brown: But they would like to take direction and do the best possible job they can to get that those directions completed.

 

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Rob Brown: The owners will go out one day and say why don't we take a flyer on this and they take a huge risk and they get a high from doing that.

 

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Rob Brown: With an ISA because you can sell part of your company, you can monetize enough to keep grandma and grandma safe and the grandkids in college, but you can keep riding the bronco and that's a big advantage for a lot of folks.

 

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Rob Brown: The other thing is that just protecting your employees is very important, we had a local company here that you may remember sold to another big company in Michigan.

 

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Rob Brown: And they thought they had some kind of a an agreement to keep the employees here and within a couple of years, all the employees were given a choice of moving to Michigan or moving out.

 

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Rob Brown: And the people who lose their employees in that kind of way.

 

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Rob Brown: are often very unhappy because of the fact that they have a relationship with these people so Those are some of the real advantages now, what are the disadvantages, you have to deal with the Department of Labor.

 

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Rob Brown: And you have to deal with the internal revenue service and those guys are obnoxious even in the best circumstances when our clients get audited and knock on wood we don't usually have any bad results from audit.

 

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Rob Brown: I always said, our clients, the goal here is to keep your costs down to a waste of your time.

 

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Rob Brown: And if we can keep it down to where all that happens is our client waste their time dealing with the government, then you have a win.

 

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Rob Brown: But sometimes that's an expensive waste of time because both the Department of Labor and the internal revenue service have huge resources and they can poke around for no good reason for whatever they want.

 

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Rob Brown: The other thing is transaction costs are relatively high for a nice APP now they're not high visa V.

 

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Rob Brown: The sale to a third party using an investment banker because there you're going to be paying.

 

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Rob Brown: some kind of a success fee maybe double Lehman Brothers formula or something and and you could have a huge cost, but in this area, right now in 21.

 

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Rob Brown: The costs, the total all in cost if you have a bank finance to ease up with say warrants attached to it is probably $150,000 or $200,000.

 

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Rob Brown: So if you've got a business that's worth a million and a half dollars you're really going to have to think hard about spending 10% of that.

 

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Rob Brown: On soft costs if you have a business that's worth $5 million, then you know So what if you try to sell that.

 

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Rob Brown: on the open market you're going to have double Lehman Brothers formula you're going to end up paying $350,000 so it's it's aesop's are not magic they're just tools.

 

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Rob Brown: And it's i've often said to people if if you have a nail that's loose in a piece of wood, you can probably pound it in with a crescent wrench.

 

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Rob Brown: But you'll it'll be really inefficient and you may well wreck the wrench it's much better to use a hammer.

 

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Rob Brown: So you have to look at your own business and see whether you want the hammer maybe that's these up or whether you want that, whether you need the crescent wrench which might be an out not sale now one one.

 

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Rob Brown: I don't want to digress too much here, but one of the one of the valid techniques for exiting a business is just to take out as much money as you can for in years and then quit.

 

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Rob Brown: That has a totally different set of values attached to it, but if you own your business that's a perfectly rational choice.

 

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Rob Brown: And you might do that if your business is not saleable or if somebody has a unique skill that can't be replaced, because the price that you get for your business is always based, at least in part on the Net present value of the continuing income stream.

 

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Rob Brown: So if you just take the income out for 15 years and then one day come in and pull the shutter down and lock it at the bottom that's a perfectly valid exit strategy, so I guess the question is for aesop's in anything else, use the tool that fits the task.

 

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Michael Palumbos: love it.

 

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Michael Palumbos: Tracy What would you add to that, having been through one.

 

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Tracy Till: Doing yeah I think you know he's right the dll the irs everybody down as he's talking, you know things that have always plugged my brain good or bad.

 

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Tracy Till: there's a lot of advisor fees on an annual basis, but the benefit of that is it does keep the dll and the irs off your ass.

 

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Tracy Till: And those are invaluable you know services, as well as I don't know how many times we approach rob with a question hey we're going to do this, what do you think.

 

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Tracy Till: And he is a Council for that business strategy and growth, which is invaluable again, I mean it's very, very critical and.

 

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Tracy Till: When you form partnerships with these folks you're you're covering your company really so those fees are well worth it.

 

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Tracy Till: You also get greater financial awareness, I think, as a corporate entity or as leadership goes.

 

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Tracy Till: Not only do we look at projections with our CFO consistently but you're then looking at you know what's the repurchase obligation of your shares that you're selling to both.

 

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Tracy Till: You know exiting or current employees and how does that work in or you're financially fit for that in the years to come.

 

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Tracy Till: You look at an annual evaluation and an assessment of your business year to year we're a lot of companies don't do that there's not that clarity and there's not that intelligence to help you make good decisions.

 

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Tracy Till: I think aesop's are known, and this is a proven fact today coming off a 2020 was you know employee retention is better growth is better, I mean Butler till had an incredible year in 2020 ironically and most aesop's did as well.

 

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Tracy Till: In terms of the sophistication of an Aesop there are some complexities to it, as I mentioned the advisor fees, the structures, you got a valuation firm you got lawyers you've got you know different CPA is you've got plan.

 

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Tracy Till: You know, authorities and monitors, but one of the biggest factors that he grew our business further and made us ladder up his leaders was the formation of a board of directors, for an ISA.

 

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Tracy Till: The formation of a board of directors, for us, was a game changer not necessarily the first year, but by the second year third year fourth year, certainly, we had a lot going for us it was a focus for Sue and I, it was a focus for bringing on independent talent in areas that were far.

 

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Tracy Till: far more important than just Susan my vision and with that that opportunities for growth and strip planning and senior leadership and just it totally elevated our game and.

 

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Tracy Till: When you do that i'm a big person on people product and processes well when you do that you look at those three categories and a boards focus versus a CEO or an executive leadership team, we are pushing inspiring beyond the norm that's a great board.

 

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Tracy Till: If you're able to do that with your ASAP or your firm and a family owned business a little bit more complex, I know.

 

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Tracy Till: Getting the right board of directors into place can be a game changer and thankfully an ISA requires that rate.

 

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Michael Palumbos: A lot that's huge advice and one of the you know banners that i'm waving on a regular basis, is it you know if not.

 

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Michael Palumbos: a board of directors, at least a board of advisors and, if not a board of advisors, then at least get yourself involved in a CEO Roundtable so that you're getting exposed to other ways of thinking you know, and I just I love that.

 

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Michael Palumbos: I want to mention, you know every one of our businesses, today, having a 401k is mandatory and so when we talk about aesop's rob alluded to it earlier that's just the Orissa laws.

 

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Michael Palumbos: So the complexity that's there.

 

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Michael Palumbos: it's already in all of our businesses at some levels where we have to you know.

 

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Michael Palumbos: We have to be a fiduciary, we have to you know, do the right things when it comes to our 401k and there's a lot of things that you know.

 

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Michael Palumbos: We may not be in the business of running that 401k or the pension plan or the you know the profit sharing plan, but that you know that is part of being successful so you're already exposed to it at some levels.

 

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Michael Palumbos: to your point, I think you know just the 401k or profit sharing plan frustrates a lot of employers, because there aren't systems and processes put in place to make it.

 

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Michael Palumbos: easy and so when we you know when we put systems and processes in place for the 401k planning.

 

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Michael Palumbos: portion of things clients love being freed of all of that, and I would imagine that, in the ISA world having somebody like a rob or you know some of these other professionals that are specialists in the area of aesop's really help.

 

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Michael Palumbos: To free your mind because they bring in the systems and the processes to make life easier and like rob said before.

 

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Michael Palumbos: You know we're not going to avoid the Department of Labor or the irs knocking on your door, but we just want it to be a time waster and we feel the same way when it comes to the 401k plans is.

 

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Michael Palumbos: You know, you can get audited that's fine but they're going to walk away because you have a compliance binder and we put all the pieces together, and you have the systems and processes in place rob would you is that makes sense.

 

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Rob Brown: yeah I absolutely agree, I think it's always cheaper to focus on your core competency and avoid trying to figure out how to build your own plan or do your own administration or whatever, because your time is far too valuable doing what you do best.

 

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Michael Palumbos: yeah love it it's the.

 

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Michael Palumbos: command Jim Collins talks about the hedgehog strategy which is.

 

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Michael Palumbos: You know, you can be the hedgehog or you can be the fox and the fox has got 1000 ways of getting to the hedgehog but the hedgehog knows, one thing, how to roll up in a ball and stick it's quills to keep everything away from it.

 

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Michael Palumbos: And we forget about that in business, because you know we think we need to be all things for everybody, sometimes we just need to really get focused put the blinders on.

 

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Rob Brown: Well, and and you know, Michael that the thing is that for entrepreneurs that that that's a danger because, at the beginning, you have to do everything.

 

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Rob Brown: At the beginning, you don't have an accountant.

 

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Rob Brown: At the beginning you're in the garage and it's cold in the winter, you know, and so you start getting used to doing everything yourself and then you decide that you do it well.

 

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Rob Brown: that's where the real mistake comes in, keep your keep doing it badly for years and years and years and then all of a sudden somebody comes along and says you can't do it that way, because you've gotten big enough to be noticed right.

 

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Michael Palumbos: love it, that is.

 

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Tracy Till: Really, I want to add to that is he's exactly right, because when you do add in that talent it ups your game.

 

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Tracy Till: The other thing is, is that when you have a board of directors it's an executive look under every.

 

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Tracy Till: Every bed cover, we can see it all, you know what to look for how to look for where we're we're we're off where we're not if it's a question.

 

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Tracy Till: And we're looking at that data on a quarterly basis so there's never a point where, as a leader or as a founder or as an executive team that you should be able to say I don't know what's going on, I don't get it.

 

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Tracy Till: that's not the point you're getting you're getting that data, and you can hear it in an executive format so.

 

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Tracy Till: Again, another reason why a board of directors does help, especially with those financials.

 

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Michael Palumbos: Right so.

 

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Michael Palumbos: As it, you know as a family business, what would you say you know are.

 

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Michael Palumbos: What needs to be in place before they start walking down that road of you know, talking to rob or talking to a an Aesop specialist, what are the things that need to be in place first.

 

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Tracy Till: For me, it would be a conversation with you know the owners, the founders, as well as the family in terms of anyone who's on that structure of influence.

 

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Tracy Till: And really kind of making sure that you've got the same vision.

 

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Tracy Till: Bringing in someone to counsel them if it's required and they're not meeting kind of that synergy, they need to meet to say yeah let's pursue this idea.

 

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Tracy Till: I actually had a conversation with someone who's on family board and advisory board she's a family member.

 

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Tracy Till: And she said to me, you know how can I talk my family off the ledge like even to have this conversation and that's the that's the deal right it's to say look we're not looking to out anybody.

 

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Tracy Till: we're not looking to you know make this a challenge, or an uncomfortable scenario that we can adapt, but you have to trust me that i'm going to lead you into the future and let's have these dialogues.

 

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Michael Palumbos: love it love.

 

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Rob Brown: To just to add to that I often tell people that in family business, one of the most important things is what does grandma think.

 

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Rob Brown: Because you can put whatever plan you want together, and if the matriarch of the family, whether or not she's the titular owner of the business.

 

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Rob Brown: If she says i'm not going to have that happen to my son in law you're finished, so you need to bring the key family decision makers.

 

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Rob Brown: Who are not the the owner of the business always it's always an old white guy in my experience, and he always thinks he makes the rules.

 

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Rob Brown: But that's a pretty laughable concept when it comes to actual family dynamics you just as when you're a salesperson.

 

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Rob Brown: You have to find, who is going to make the decision when you're dealing with a family, you have to figure out who's going to make the decision and it's not only it's not always obvious and people don't always admit to it yeah.

 

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Michael Palumbos: You know it's interesting that you both.

 

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Michael Palumbos: said we call that family alignment and we spend we interviewed 25 different family businesses and about 20 different family business advisors and coaches.

 

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Michael Palumbos: And they all said exactly the same thing all every one of them said it differently, it was the lack of alignment within the family that caused the you know the inability to grow to the level that they really wanted to, and so.

 

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Michael Palumbos: You know we've created a process now.

 

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Michael Palumbos: Where we can bring the entire family and rabbit to your point, you know you don't know and if you can't gather them all.

 

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Michael Palumbos: it's not going to matter and so it's getting that alignment getting everybody rowing in the right direction is my daughter learn when she was rowing you know, on the crew team you don't want to catch a crab.

 

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Michael Palumbos: As, as they say, as you're doing this stuff and that getting an alignment really makes a difference there.

 

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Tracy Till: And I think the other thing from a family owned business perspective is you know.

 

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Tracy Till: The buyout of an employee ownership firm, it can be in a fraction it can be you know 30 33% rob for the next 20 years or it can be.

 

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Tracy Till: You know 51% or whatever it is rather than those numbers make sense for that company to be you can have a partial ISA right rob I mean the structures don't have to.

 

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Tracy Till: Be 100%, so I think that's The other thing family businesses don't really understand, maybe, is that it can be done in a very long time frame.

 

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Michael Palumbos: love it love it so there's the back to that planning and thinking ahead if we can really make a difference there.

 

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Michael Palumbos: rob we want to add something.

 

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Rob Brown: I was just going to say that we actually have a situation right now, where two brothers dislike one another enough that they're suing one another, the only thing they both agree on.

 

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Rob Brown: Is that they want to sell the company 100% of the company to an ISA so what we've done is we've managed to isolate the sub transaction from their other dispute and they're going to get paid this aggregate amount that they're lawyers are going to fight over the division.

 

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Rob Brown: So you know it can also monetize disputes.

 

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Go.

 

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Michael Palumbos: Well Tracy you know and rob I want to say thank you to both of you for joining me today.

 

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Michael Palumbos: I hope that everybody has gleaned some wonderful gems from this conversation I am definitely picked up many from both of you.

 

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Michael Palumbos: Tracy if somebody was looking you know for somebody you know for somebody to help them to build a board and that, how would they reach out to you.

 

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Tracy Till: It can certainly connect with me via linkedin they can certainly get Ahold of me if you want to publish my phone number email that's fine to your group happy to help love to do it.

 

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Michael Palumbos: Great and rob what's The easiest way to find you out there.

 

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Rob Brown: Probably on our website, which is ISA plus two piece.com feel free to publish that if you wish.

 

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Michael Palumbos: Great again, I thank you both for joining us today.

 

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Michael Palumbos: Michael Michael Columbus with family wealth legacy and this has been the family biz show, please feel free to if you've enjoyed this episode subscribe, so that you don't miss an episode going forward everybody have a wonderful day appreciate you both.

 

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Tracy Till: Thank you.

 

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Rob Brown: wow.

If you’re a family business or a family business consultant and want to be on the show, share your story and help other family businesses, send us an email to producer@thefamilybizshow.com or fill out a contact form here!

*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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