Broker Check


Episode 45: 8 Mistakes Family Businesses Make When It’s Time to Sell and Why it Matters

In this episode of the Family Biz Show, Michael Palumbos welcomes guest Dan Prisciotta from Equity Strategies Group. The episode dives into the nuances of succession and exit planning for family businesses. Prisciotta, with a rich background in financial services and expertise in mergers and acquisitions (M&A), shares insights on the criticality of planning for business transition, whether it's within the family or selling to external parties.

Prisciotta emphasizes the importance of understanding the emotional and financial readiness of business owners contemplating their exit strategy. He outlines a four-step process crucial for successful transition: discovery, number crunching, design, and action plan implementation. The discussion also covers various exit paths, including family succession, selling to partners or employees, and selling to external buyers, each with its own set of considerations and strategies.

One of the highlights is the discussion on Employee Stock Ownership Plans (ESOPs) and their growing popularity as a business exit strategy. Prisciotta notes the current M&A market's robustness, with businesses fetching premium prices, urging owners to consider professional assistance to maximize outcomes.

The episode is a treasure trove of advice for business owners contemplating their future steps, emphasizing preparation, objective advice, and proactive action to ensure a legacy and financial success for themselves and their successors.

Episode 45 Transcript


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Michael Palumbos: Welcome everybody to the family biz show I am Michael Columbus your host with from family wealth and legacy in Rochester New York and we've got a great show for you today we've got Dan pre shot, I hear from equity strategies group and Dan.

 

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Michael Palumbos: you'll notice he's on the family, wealth and legacy.

 

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Michael Palumbos: website, you know he's a partner he's a mentor and a great resource that we have available to us, and I wanted to take some time.

 

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Michael Palumbos: To allow all of you to get to know Dan and understand a little bit about you know his m&a world in the investment banking world and what it means for family businesses so Dan welcome to the show.

 

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Dan Prisciotta: Thank you very much, Michael pleasure to be here.

 

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Michael Palumbos: So we have a tradition, with new way, you know as a guest comes on.

 

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Michael Palumbos: Tell us about your background, and you know, like, I always say nobody nobody ends up waking up and being you know who they are, today, so what was dan's journey to get to where you are today.

 

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Dan Prisciotta: Sure sure so i'll be happy to share that with you and your audience um I actually started my career as a CPA with Price Waterhouse Coopers.

 

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Dan Prisciotta: And it was a great background, because I learned a lot about business structure taxes, accounting and auditing and so forth.

 

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Dan Prisciotta: But I felt somewhat restricted in terms of what I could do for my clients, so I migrated into the financial services world.

 

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Dan Prisciotta: and join a large national firm and when I came in, I actually came into a management role.

 

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Dan Prisciotta: and helped build a fee based financial planning department I ran a business I hired people I fired people I trained and developed people I was responsible for profit and loss my compensation was based on profitability and so forth.

 

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Dan Prisciotta: And I did that for about 16 years it was a great run and then I kind of woke up one day and said, you know this, this is fantastic but really my passion.

 

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Dan Prisciotta: is working with clients, one on one I was always kind of once removed because I was supporting and working with other financial advisors, but I was in the trenches a lot.

 

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Dan Prisciotta: They brought me out to a lot of client meetings, particularly where you know the accountants, the attorneys the bankers were involved in a lot of seminars and public speaking and so forth.

 

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Dan Prisciotta: But like I said I really my passion was working with and serving clients, one on one so at the ripe age of 40 I started my practice you under i'm going to clients, I had Michael.

 

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That.

 

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Dan Prisciotta: Okay.

 

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Michael Palumbos: Nothing 40.

 

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Dan Prisciotta: And yeah yeah but you know, took the plunge being entrepreneurial and I was very blessed and fortunate I built up the clientele and a following fairly quickly wrote a couple of books that you are aware of.

 

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Dan Prisciotta: And, and I was fortunate enough to to earn the respect of my fellow financial advisors accountants attorneys who became just excellent referral sources.

 

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Dan Prisciotta: And and and the way I really got started with equity strategies group was it was born out of the man, because I would meet with business owner clients.

 

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Dan Prisciotta: And they would ask me, you know, Dan Can you help me to develop and implement an exit strategy now.

 

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Dan Prisciotta: Many of my clients like yours are family businesses, but there are a number of business owners who you know either they don't have children or their children are not interested in the business.

 

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Dan Prisciotta: or their children went to you know university and then became doctors and lawyers and you know we're not interested in the family manufacturing business let's say.

 

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Dan Prisciotta: or simply we had owners who were looking for a liquidity event and they said i'll take care of my children in other ways, but i've had a nice run and i'd like to kind of cash out and move on, so.

 

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Dan Prisciotta: Out of out of really client demand Can you help me that's where equity strategy group was born to a point now and we've been doing this almost.

 

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Dan Prisciotta: gosh 1718 years blink of an eye and we have helped I mean literally hundreds of family business is either with family succession.

 

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Dan Prisciotta: or a third party liquidity event we're completely objective and agnostic It really is based on the client's goals and needs and so forth, but that's that's how it got started and that's how we kind of got to where we are today.

 

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Michael Palumbos: Right so we're going to dive into everything in a second, but I want to hit on to other things real quick.

 

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Michael Palumbos: Just to give a equity strategies group, you know what is.

 

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Michael Palumbos: It when people talk about m&a when they talk about investment banking, what does that that rainbow what does that you know what does that look like, what are the variety of options that you guys, you know, bring to the table for for clients.

 

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Dan Prisciotta: Right, so you know what we do and I have several partners around the country as well and staff it's not just myself, but what we do is, I think, because we've been doing this, a fairly long time and we understand businesses and family businesses is we do a lot of.

 

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Dan Prisciotta: Asking intelligent questions and follow on questions and trying to connect with our business owners to really kind of go deep and understand exactly what they want to accomplish.

 

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Dan Prisciotta: You know which their definition of family well financial independence, what do they want to do for their kids what's right for their business their employees their community.

 

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Dan Prisciotta: And in that sort of questioning process we gather a lot of information that then leads to.

 

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Dan Prisciotta: You know oftentimes we're working with another financial advisor or sometimes you know i'm working with them directly, and what we'll do is collaborate build a team and then implement a plan that that's most effective.

 

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Dan Prisciotta: As I said, if it's family succession, we can help them go down that path, if they want to go in a different direction will educate them as to.

 

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Dan Prisciotta: Certain things like an ISA or a third party, sale and i'm sure we'll get into that a little bit more Michael but you know that that's kind of I think what sets us apart, is the fact that we're objective work gnostic we don't walk into the room, with an agenda.

 

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Dan Prisciotta: which I think is different it's really based on our clients goals and objectives.

 

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Michael Palumbos: ya know what you just said, I think, is an interesting point that we want, I want to make sure that people get is that agnostic piece, because you know I have spoken with a lot of business brokers.

 

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Michael Palumbos: and

 

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Michael Palumbos: When they walk into a family situation where there's the possibility that maybe we need to develop the leadership from in the next generation and there's a desire to do that, but maybe just not the skill set yet that business broker really doesn't have any desire to do that.

 

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Dan Prisciotta: that's right and I teach business brokers and investment bankers, all the time, you know when when.

 

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Dan Prisciotta: Your only tool is a hammer everything looks like a nail Okay, but luckily guys like you and I, Michael can kind of sit back ask the right questions get to know our clients and develop a plan that's most appropriate.

 

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Michael Palumbos: I appreciate you setting the foundation for us here so.

 

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Michael Palumbos: You wrote a book called one way out and you wrote two books, the other one is defend your wealth both available.

 

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Michael Palumbos: For you out there, take a peek at them, but walk us through kind of the the premise of one way out, so that you know kind of tease people if they want to go out and grab it, but then I want to dive into the process, you know behind it and whatnot.

 

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Dan Prisciotta: Sure sure So my first book, I wrote in 2011 which was defend your wealth which was really targeted towards.

 

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Dan Prisciotta: individuals have who had accumulated a lot of wealth, whether it was you know within their business or maybe they were executives at a company and.

 

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Dan Prisciotta: They were very concerned about how do I protect this wealth that i've worked my entire life to achieve and pass it down to my loved ones or to charities.

 

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Dan Prisciotta: And that was terrific and then as as we got more focused on the family business aspect of this idea of one way out, you know kind of a play on words right there's multiple ways out of a business but what's the right way, one way for you so.

 

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Dan Prisciotta: Again, it was really to satisfy a demand of baby boomers approaching a point in their lives, where they're saying hey i've got to do something right.

 

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Dan Prisciotta: And, and we talked to business owners, all the time about you know and i'll even kid around when i'm doing some public speaking and i'll ask the audience.

 

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Dan Prisciotta: How many business owners are going to exit one day, you know, obviously a trick trick question 100%.

 

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Dan Prisciotta: of business owners will exit one day, and I also jokingly say either vertically or horizontally, so you know, this is something that every owner must face at one point in time.

 

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Dan Prisciotta: So I wanted to build sort of a roadmap for them, you know what are the steps that that we need to take leading up to that decision.

 

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Dan Prisciotta: What are my options or, as I call them exit paths and there's five will spend some time on those five and how do I determine which of those paths, is the best one for me.

 

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Dan Prisciotta: And then also included in the book is hey you know between here, and the decision to exit once we've selected the right path.

 

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Dan Prisciotta: You know there's 100 things that could happen 99 of them are good, and you know one or two maybe or not so good, and how do I protect my business, how do I grow my business to maximize value and or ensure a greater.

 

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Dan Prisciotta: sense of success if I pass it on to my children and then Lastly, I couldn't resist but I had to put a chapter on wealth preservation right so.

 

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Dan Prisciotta: And I think it's even more important for business owners, because what you and I see all the time, is much of their wealth is is concentrated in that business.

 

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Dan Prisciotta: As much as 80 or sometimes even 90% of an individual as well, could be in their business and their business real estate.

 

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Dan Prisciotta: which makes them, especially susceptible I think one of the greatest threats to the family business remains.

 

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Dan Prisciotta: The federal estate tax right, so the day you walk out the government walks in and they want almost half.

 

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Dan Prisciotta: So, you know how do you deal with equalization issues when you have children in the business children, not in the business.

 

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Dan Prisciotta: How do you even ensure the continuity of the business if if the irs US Treasury comes in and says okay what's your net worth you know over an exemption give us half.

 

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Dan Prisciotta: And as i'm sure you and many of your viewers are aware and listeners are aware, we are embroiled right now in a debate.

 

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Dan Prisciotta: in Congress as to what's going to happen to the federal estate tax law and it looks like the exemption is going to get cut in half, so I think it's a growing problem and, and these are all the reasons why I wrote one way out to help business owners make that crucial decision.

 

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Michael Palumbos: got it, so the one way out is you like you said a play on words that there's more than one way out, but you need to know the right one for yourself.

 

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Michael Palumbos: Because every family is different right every family business is different, and you know, one of the things the concepts that I talked about with families, all the time.

 

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Michael Palumbos: Dan and you joked about it with the horizontal versus vertical you know piece is that we are finite human beings are finite the leader of the businesses is finite if you if you change your thinking and get it straight, the business is infinite.

 

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Dan Prisciotta: Yes.

 

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Michael Palumbos: So, and so you know it's it's until you start to realize that the business is an entity all of its own and then needs to be treated that's why it has its own tax ID number right.

 

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Michael Palumbos: that's why it has it is its own entity, and it can be infinite if you do kind of the the planning and the thoughtful thinking that you're talking about when you go through the one way out process.

 

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Dan Prisciotta: That exactly I mean certainly it has the potential to be infinite.

 

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Dan Prisciotta: But you know you know the statistics they're frightening Michael you know, two thirds of family businesses don't make it to the third generation, and you know the question becomes well why and how does my business not become a fatal statistic.

 

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Dan Prisciotta: And I think.

 

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Dan Prisciotta: Part of that is a state taxes but Moreover, its leadership succession its retention of key people it's.

 

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Dan Prisciotta: Managing the balance sheet and the profit profit and loss statements correctly so there's a whole host of ingredients that go into a successful succession plan, if you will, to keep it in the family.

 

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Michael Palumbos: Right, so you talked about, and you know there's five exit path is now a good time to move into the five exit path, or is there anything else about the process, the.

 

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Michael Palumbos: process, you want to hit on.

 

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Dan Prisciotta: yeah let me, let me take a couple of minutes on the process, because I think this is something else that's critically important what I find is.

 

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Dan Prisciotta: Some people will resist the planning or put it off or maybe even below the into a false sense of security well gee you know, Dan I have an accountant, I have an attorney.

 

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Dan Prisciotta: i've had it all done right and oftentimes they have the ingredients of a succession a succession plan, they have a will, or they have you in a buy sell agreement right.

 

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Dan Prisciotta: But the ingredients does not necessarily mean that there is a holistic well coordinated plan.

 

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Dan Prisciotta: That hasn't been stress tested that hasn't been really kind of thought through or revisited in some time so.

 

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Dan Prisciotta: I think there's no replacement for going through a process as a recovering CPA I can say the CPA is critically important the Attorney is critically important, but I think what's most important.

 

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Dan Prisciotta: is to build a team that works collaboratively on your behalf right, so I often tell my my clients if it's the Smith family okay we're going to put together a team Smith.

 

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Dan Prisciotta: And we're all here your advisors should be speaking to one another, the left hand should know what the right hand is doing.

 

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Dan Prisciotta: And there needs to be a process that's follow it's real quickly I prescribed to a subscribe to a four step process so step one is discovery.

 

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Dan Prisciotta: You know data gathering data analysis understanding about the business, and I think another part that's interesting in our process is.

 

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Dan Prisciotta: There are plenty of personal financial planners and advisors and there are corporate advisors, but very rarely did the to kind of marry up.

 

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Dan Prisciotta: And, and part of what we take pride in is bringing the personal planning and the business planning together because they do intersect.

 

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Dan Prisciotta: So under this heading of discovery and data yes there's going to be a dive into okay let's read all of your wills trusts tax returns business agreements etc financial statements and that's critically important.

 

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Dan Prisciotta: there's another side, which is understanding, you know your your emotional readiness.

 

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Dan Prisciotta: So you know it's kind of like you know when the students ready the teacher appears right, so if if you're not emotionally ready to tackle this decision.

 

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Dan Prisciotta: Of one way out of succession planning a lot of it's going to fall on deaf ears so.

 

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Dan Prisciotta: We need to kind of get a sense of emotional readiness to exit and it's fine I don't want us exit now, you may want to exit 510 1520 years without their things and you need to be doing and thinking about.

 

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Dan Prisciotta: And then also your financial readiness so looking at your other resources your your your assets your liabilities your sources of cash flow.

 

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Dan Prisciotta: To some expense even even your expenses, so that comes in step one discovery step two is kind of crunch, the numbers right.

 

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Dan Prisciotta: You need to put together some type of financial condition model or database, where you can play some What if scenarios right, so you know what if I want to.

 

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Dan Prisciotta: step back, I hate to use the word retire right, but if I want to slow down and take more time for myself at age 60 versus 65 verses 17 what does that look like.

 

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Dan Prisciotta: Am I going to be able to maintain the same lifestyle, especially if i've been running a business, all these years, businesses, paying a lot of expenses now it's all on me.

 

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Dan Prisciotta: You know what is my life, do I have to give up any of that lifestyle so crunching the numbers is very important, and again on the business side what's my business worth.

 

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Dan Prisciotta: Well, we find is when we speak with business owners initially their estimate can be off by as much as 50%.

 

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Dan Prisciotta: And it could be high or low so someone and my business is worth 10 million, well, it could be five and could be 20.

 

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Dan Prisciotta: How did you arrive at that number so let's let's understand what that number came from so step one discovery step to crunch, the numbers step three is design.

 

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Dan Prisciotta: And this is where we utilize all the resources within our firm our in house, if you will attorneys and financial analysts.

 

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Dan Prisciotta: In my case, our network of investment bankers, we work with 20 of what we consider to be the best middle market investment banks and m&a firms in the country.

 

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Dan Prisciotta: And they have industry, knowledge and expertise that is just off the charts so that helps us with the analysis and then step four is the critical part which is the action plan right as Michael you and I know.

 

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Dan Prisciotta: that the best plan in the universe is worth nothing you know if it's not implemented it's not worth the paper it's written on.

 

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Dan Prisciotta: So it's having an advisor who has a bias for action who's going to you know co pilot.

 

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Dan Prisciotta: and work with all these other advisors again whether it's your account attorney investment bank commercial banker, to make sure that the plan you put together actually materializes it gets implemented so I wanted to touch on that four step process.

 

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Dan Prisciotta: let's talk about let me jump in for a second because there's a couple things I want to make sure that people.

 

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Michael Palumbos: When you're listening this that you that you pull away because one of the things I we just started working with a with a new client recently.

 

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Michael Palumbos: And what he said to me, is you to me to him, we all sound the same.

 

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Michael Palumbos: So you just went through this four step process then i'm going right now and I apologize Dan but to a lot of people, it sounds exactly the same as every other financial advisor.

 

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Michael Palumbos: And so, he so what I want to make sure that people understand what's different.

 

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Michael Palumbos: So number one is getting all of the advisory team together and creating that team that yet is over and over and over again, if you if the right hand doesn't know what the left hand is doing.

 

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Michael Palumbos: The Attorney might come up with a great plan to restructure the businesses but have no idea what the tax consequences are.

 

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Michael Palumbos: In doing that, and if the Attorney the accounting in the financial advisor you know insurance person aren't the all talking together there's no way for them to know number one and the way I like to use you talk about it is.

 

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Michael Palumbos: How do I know how do I, ensure that the team is utilizing and creating the highest and best use of the clients assets, whether it be the business there you know.

 

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Michael Palumbos: Investment assets their insurance assets, etc, etc, so that's one that I think that is this gigantic and I can't I can't stress it enough how often i'm working with one of my largest clients right now.

 

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Michael Palumbos: They hired a new a new accounting firm and it's a.

 

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Michael Palumbos: Great firm and they have one of the best attorneys that I know of technically.

 

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Michael Palumbos: took me three emails and I finally had to ask the client, is it Okay, if I copy you in to get the Attorney the accountant to answer me back.

 

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Michael Palumbos: To say hey give us an update of what's going on, where are real, because I wanted it on one email so that everybody could see what's going on, so there's no surprises you follow me.

 

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Michael Palumbos: Absolutely, this is a big year for us because we don't know what's going to happen next year, and there are a lot of people that are making plans.

 

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Michael Palumbos: And here we are middle of October and then dating the the time but, again, you get to the end of the year and it gets a little crazy sometimes so there's there's number one number number two.

 

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Michael Palumbos: it's really important that that agnostic piece okay it's you really need to make sure that there is that quarterback in the Center that doesn't matter whether they want to help you.

 

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Michael Palumbos: build your leadership team and help you to think those things through build the next generation up versus selling the business.

 

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Michael Palumbos: I think that those are critically important pieces and the last thing is, you can really tell you know you're.

 

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Michael Palumbos: A solid financial advisor if they're not asking to see the wills, the trusts.

 

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Michael Palumbos: The tax returns your business financials in your buy sell agreement or operating room and if they're not asking for the paper documents, the odds are they're only interested in assets under management and I don't.

 

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Michael Palumbos: I know i'm putting a column, some people out but in Rochester what we just started doing is something called the planning professionals network just launched in.

 

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Michael Palumbos: October, the whole idea is to get all the planning professionals together and start going through case studies and get them used to collaborating, and so we did this because you know.

 

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Michael Palumbos: We i'm tired of the the lack of collaboration that is out there and we're just looking to to break down those barriers so anything add to that that I missed in you know, being able to differentiate while i'm interviewing financial advisors wealth managers my team.

 

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Michael Palumbos: Anything else to add to that.

 

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Dan Prisciotta: I think it's perfect, but you know, Michael I sit here and, as I listened to you and I listened to myself and I hear about all this collaboration let's get the advisors found the business owner listening to this podcast.

 

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Dan Prisciotta: i'm sitting here scratching my head saying oh my gosh i'm piling fees, on top of these right which is not necessarily the case, what I find is when we get involved, we actually save our clients money in professional fields.

 

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Dan Prisciotta: Right, because we are able to work with the clients kind of put together this blueprint here's the plan we're working with the other professionals and then, when it comes time to implement.

 

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Dan Prisciotta: The other professionals can go right to work, the Attorney can start drafting immediately there's no, you know let's let's step back and educate and.

 

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Dan Prisciotta: You know all of that has been done, yes, certainly, we want cross pollination of ideas and you know the attorneys going to add their own little spin to the documents which is, which is wonderful, but.

 

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Dan Prisciotta: Quite the opposite we're not you know it's not like oh my gosh, I have three or four meters running.

 

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Dan Prisciotta: it's we're actually in the end, going to see on professional fees and, more importantly.

 

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Dan Prisciotta: get the job done the best way possible, you look back in time and I have clients that oh my gosh I had to spend money for evaluation or how to spend money for a lawyer.

 

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Dan Prisciotta: yeah but we just saved your family $3 million in a state taxes or we just save you 150,000 and income taxes, so I just caution people not to let that I get it, nobody wants to pay fees, but don't Let that be an impediment to not doing the proper planning agree.

 

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Michael Palumbos: Okay.

 

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Michael Palumbos: Thank you, no, thank you, Miss that piece.

 

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Dan Prisciotta: No, no it's all good.

 

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Michael Palumbos: No sort of keep us moving along.

 

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Dan Prisciotta: we've got the.

 

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Michael Palumbos: Exit paths, can you just point them out to us and let's let's talk about in them and then we'll dive into you know how do we choose it.

 

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Dan Prisciotta: what's the best stuff right so in one way out and in real life when i'm meeting with clients, I tried to make life as simple as possible right.

 

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Dan Prisciotta: There are essentially five exit path it's kind of like a game show there's five curtains to choose from right, so the first one is you can transfer your business, of course, your family.

 

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Dan Prisciotta: The second is, if you have partners or co shareholders, you can transfer it to that the 30 is your employees now, it could be your employees at large.

 

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Dan Prisciotta: or it could be, maybe a handful of management people Okay, the fourth path is a sale to an outsider will call it.

 

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Dan Prisciotta: It could be a larger strategic company someone in your industry or related industry, it could be a financial buyer like a private equity group and they're not all evil, there are very good.

 

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Dan Prisciotta: Private equity groups in fact there are ways we can do it we've done it Michael we're the children.

 

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Dan Prisciotta: Pardon me mom and dad you know sell the business to a private equity group and maybe they sell just a portion of it.

 

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Dan Prisciotta: don't have to sell the entire business they take some chips off the table, they go to Florida North Carolina someplace nice warm.

 

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Dan Prisciotta: And they can still have you know saying the business sit on a board their children can continue to work there, the culture is perpetuated so there's a lot of different ways to approach those types of sales.

 

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Dan Prisciotta: And then, finally, the fifth exit path is going public, which you know, obviously not too many of our clients are in that position or even want to go public with all of the regulatory issues and.

 

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Dan Prisciotta: it's even a while before you actually get liquidity because stocks, you know restricted so really there's four main exit pads for the entrepreneurial business the family business great.

 

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Michael Palumbos: Now alright so i've got four exit pass i've got my my family.

 

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Michael Palumbos: I have my my leadership team my employees and I can sell it out, right now, you could private equity group or investment bankers get together to you know sell you know put a match together.

 

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Michael Palumbos: Right, how do I pick I mean i'm a business owner, you know what do I need to do to to put that together.

 

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Dan Prisciotta: yeah yeah so I always mind the for his family Okay, so when i'm talking to a business owner i'll ask them do you have any family in the business Oh yes, we do you know juniors working here.

 

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Dan Prisciotta: My daughter's working here multiple get.

 

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Dan Prisciotta: Tell me about your children in the business, you know how long have they been in the business what are their job duties and functions, how did they get along with your other senior management team.

 

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Dan Prisciotta: What are their aspirations what conversations Have you had with them, have you made them certain promises, or have they come to you and knocked on your door and said hey I want to you know one day be sitting in your chair so.

 

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Dan Prisciotta: we'll spend sometimes hours talking about that now here's The interesting thing I find is.

 

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Dan Prisciotta: And i'm going to disparage some other professionals but I don't mean it that way, I think a lot of professionals that work with the family business automatically assume Oh, you have a kid in the business home it's a family succession.

 

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Dan Prisciotta: situation and that may be the case, but what they fail to do, I think, is go deeper in that conversation tell me about your children tell me about you, your spouse, what do you want to do.

 

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Dan Prisciotta: Do you want a liquidity event, then we get into a lot of the soft issues we get into their financial independence is there a value gap right.

 

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Dan Prisciotta: And I know Michael you're familiar with that terminology now you probably use it on other podcasts Okay, so, if you look at all of your resources that are available to you and your spouse.

 

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Dan Prisciotta: And you look at your lifestyle and whether it's hey I need 150 to 5500 or whatever your number is or maybe it's expressed, as you know, a number, I need $10 million, however, you want to express it and then you'll income need.

 

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Dan Prisciotta: or a lump sum Okay, how are you going to get there, so let's look at your other sources of income interest dividends rent.

 

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Dan Prisciotta: Consulting Inc or whatever it might be and do some number crunching back to that and are you going to be okay, and then it's okay if family is the path.

 

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Dan Prisciotta: Great let's let's go down that path and let's look at the best way to make that happen, how do we set up the children for success, I mean I sit on a number of boards with families.

 

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Dan Prisciotta: Where you know we'll have the kids come to the Boards see you smiling already and we've got an agenda, we want to talk about their training needs their development, what do they need to do, going forward.

 

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Dan Prisciotta: You know who are the non family people who are key to the business where are they are we going to be able to retain them.

 

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Dan Prisciotta: You know, sometimes these key people say hey, this is a family business is a little bit of a dead end, for me, because I don't have the same last name as you.

 

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Dan Prisciotta: So how do we retain and reward those folks so there's a lot to be said last comment on that family piece is again if family succession, is the direction we're going in well how do we transfer the business to the children.

 

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Dan Prisciotta: Do we gift it to them do we sell it to them do we leave it to them under the will is a request, do we sell it to them when we were gone through a family by cell.

 

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Dan Prisciotta: And how do we deal with the remaining unavoidable estate taxes, so that the family business doesn't have to be busted up to pay state taxes.

 

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Dan Prisciotta: And how do we deal with equalization where we have children, who are active in the business and children who are not active in the business so.

 

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Dan Prisciotta: it's a big job it can certainly be done, but it has to be done methodically and thoughtfully and and it's got to be implemented, we can't kick that can down the road oh i'll address it in five years right because five years never comes so.

 

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Michael Palumbos: i'll share a quick story with you that you'll appreciate so.

 

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Michael Palumbos: When I talked about this, I I probably have many advisors I spend a lot more time on this growth side.

 

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Michael Palumbos: And in what I what i've come to realize is in the family business growing you know business growth strategy What that means is creating a succession plan that's really stable in and going to work.

 

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Michael Palumbos: So you know, one of our top clients has been every time I talked about you know their business growth strategy and working through this stuff.

 

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Michael Palumbos: They just kept pushing me away, they didn't get it right.

 

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Michael Palumbos: As soon as I started to explain to them that both of them are going to you know, the father and son.

 

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Michael Palumbos: they're both going to leave the business, whether they choose to or not it's 100% guaranteed, but you need you know, and that the business is could be infinite and that's what they want it to be, because there's you know 200 employees and.

 

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Michael Palumbos: And they're like you know, but we don't have a way to transfer so.

 

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Michael Palumbos: that's what i'm trying to teach you and i've been missing it all this time, is what I what you do is taking that CEO and helping the CEO.

 

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Michael Palumbos: build a leadership team that's capable of making 80 to 90% of the business decisions going forward.

 

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Michael Palumbos: And that transition of knowledge to be able to put that together, and having the framework that we've created that we've put together to help them to do that, we did.

 

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Michael Palumbos: Our first today when they heard it that way they're like let's do this, we did our first kickoff meeting at the end of the kickoff meeting over the course of the week and.

 

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Michael Palumbos: I get an email from them going, had I known this was what you were trying to do you know I would have done this, five years ago.

 

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Michael Palumbos: And I you know it was really nice because, for me, I think about things as business strategy.

 

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Michael Palumbos: What they need here and where they need to be met, was they needed to create a succession plan and build a leadership team and they didn't know how to transfer the DNA from the CEO to the leadership team and that's what I do is I help the CEO transfer.

 

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Michael Palumbos: Their DNA and their knowledge to the leadership team to be able to run those things so it's a family business to.

 

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Dan Prisciotta: exactly right is the ability to communicate and to have frequent meetings with an agenda deadlines like you can be flexible, but, but you have to have some kind of structure.

 

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Dan Prisciotta: Michael I can't tell you how many clients, they just kind of they all that knowledge is in their heads the businesses dependent on them.

 

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Dan Prisciotta: They haven't figured out how to transfer the knowledge from their brain to their children and their key people and now they're 65 or 70 or 75 or 80.

 

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Dan Prisciotta: And you're not doing the kids any favors right.

 

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Dan Prisciotta: And I think when yourself any favors you want to be able to you know enjoy life is a lot of deferred gratification is you know in building a closely held family business and at some point, you want to you want to be able to enjoy that.

 

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Dan Prisciotta: Okay, so that's the first path the second path is, if you have partners and co shareholders, the existence of a buy sell agreement, a current buy sell agreement, a written buy sell agreement.

 

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Dan Prisciotta: is critically important, and if you haven't had an independent review of it meeting someone other than the Attorney who drafted.

 

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Dan Prisciotta: And and i'm not impugning the Attorney but have a second set of eyes, look at that agreement every couple of three years, because the tax law changes business values change personnel change.

 

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Dan Prisciotta: You know it's good to keep that current what I find also when they're all partners and co shareholders, they tend to often be around the same age.

 

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Dan Prisciotta: Which means they want to retire at the same time, we had a business that we were working within the Midwest the order 11 partners, they were all within 234 years in a row.

 

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Dan Prisciotta: And one guy says, well, I want to retire you buy me out, no, no, you buy me out know you buy me out.

 

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Dan Prisciotta: And it just wasn't enough cash flow to make all these internal living buyouts happen so you know what did we do we looked for in this particular instance and i'm not saying this was the answer.

 

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Dan Prisciotta: But we look to private equity to infuse capital everyone got there by out and the company perpetuated.

 

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Dan Prisciotta: With basically silent partners and a management team that the owners put in place to run it and serve their clients, so you know partners co shareholders interesting the third path is employees and we have seen such an increase, we have actually.

 

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Dan Prisciotta: Closed this year for aesop's employee employee stock ownership plans, where you can essentially sell your business to your employees so it's everybody right.

 

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Dan Prisciotta: And they all get a piece of the pie, you know there's different ways to do it, you can take back, and no one.

 

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Dan Prisciotta: can be leveraged nice out where he saw trust brings in a bank, you get paid at closing and now the company.

 

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Dan Prisciotta: Out of cash flow pays back the Bank and then redistribute stock to your employees and now they all have an ownership interest.

 

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Dan Prisciotta: You will be amazed, the effect that it has on your employees now and they become an essence minority owners, through their ISA plan.

 

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Dan Prisciotta: There are a number of amazing income tax benefits estate planning benefits we're not gonna have time to go through it today.

 

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Dan Prisciotta: But an Aesop is something that is becoming increasingly popular and I think when the tax laws change and capital ratings rates go up and ordinary income rates go up.

 

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Dan Prisciotta: I think you're going to see a surge in employee stock ownership plans now just one other adjunct to, that is, you may have 235 key people that you want to see have it a larger ownership stake well.

 

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Dan Prisciotta: Since the Aesop shares are allocated based on payroll your keep keep people more highly compensated they're naturally going to get a greater allocation, but if you really want to jumpstart it.

 

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Dan Prisciotta: You can do a combination management buyout and ISA So if you have, for you know great executives and you want to either give them a stock bonuses stock grand or allow them the option to buy additional stock.

 

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Dan Prisciotta: That will jumpstart them and give them a greater share of the stock again buy sell agreement all those things become very important.

 

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Michael Palumbos: love it.

 

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Michael Palumbos: Real quick, I want to just go back to the buy sell agreement, and then a comment on the steps on the buy sell agreement, one of the things.

 

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Michael Palumbos: That I noticed tripped up a lot of people is.

 

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Michael Palumbos: Failing to put a real value or valuation inside the buy sell agreement, and so you know.

 

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Michael Palumbos: I just went through an experience, where the fit there was family turmoil they decided that they were going to part ways there you know looked at the buy sell agreement and the family that was staying in the business.

 

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Michael Palumbos: was like it says book value that's all you're getting and and we were in that you know and and the other person's like book The book value, you know just hired an attorney.

 

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Michael Palumbos: But failure doesn't hold up so if you're you know just real quick if you're a buy sell agreement says that book value is what you're going to utilize the valuation the business, more often than not, that number is not going to hold up.

 

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Michael Palumbos: Properly as Am I correct and you know.

 

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Dan Prisciotta: The book value in 99 out of 100 businesses book value is not reflective of fair market value so you know, not only does it hurt.

 

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Dan Prisciotta: The shareholder when the shareholders family who's been bought out, I would even question if it hold water with the irs because one of the advantages of a buy sell agreement is to quote Unquote.

 

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Dan Prisciotta: Try to take value so when the irs comes in upon someone's passing and they go to levy the estate tax, we want to have a reasonable.

 

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Dan Prisciotta: value that the irs is going to buy into and they're going to come back and say no book value is really not reflective of fair market value.

 

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Dan Prisciotta: But I think what's even more important is the impact that it has on real life people right what is What impact does it have on the remaining shareholders.

 

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Dan Prisciotta: The family and book value, a better approach, as you well know, Mike was some type of a formula and it's usually some.

 

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Dan Prisciotta: Multiple of net income or E, but a or some other recognized formula, it could be discounted cash flow, or it could be appraisals some buy sell agreements could say, in the event of a triggering events.

 

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Dan Prisciotta: Okay retirement death disability divorce, whatever you know there's going to be an appraisal and maybe there's two appraisals, and if they're too far apart, you get a third appraisal right.

 

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Dan Prisciotta: or there is a stated value in the buy sell agreement and every year the owner sit down and say Okay, we agree on this value we sign off that's our annual meeting done.

 

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Dan Prisciotta: And if you fail to have an annual meeting, which happens once in a while right that annual meeting doesn't always happen, so there needs to be a backup formula that makes sense, so I tell you buy sell agreements or more.

 

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Dan Prisciotta: contentious a war fluid they even will I mean a buy sell agreement needs to be reviewed on a constant basis, and it can be amended and updated as needed.

 

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Michael Palumbos: out real quick if anybody wants to dive more into buy sell agreements remember there's an episode with the family big show with.

 

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Michael Palumbos: don park Hill and Oh, my goodness, Paul hood and Paul has.

 

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Michael Palumbos: Written many books on buy sell agreements and don park hill done a lot of work in the buy sell agreement and the business owner market space so find that episode.

 

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Michael Palumbos: My comment on aesop's real quick and then i'll and want to get back to where you're at right now, one of the things that I think you know.

 

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Michael Palumbos: We need to be you know thinking about is the fact that whether it's an ISA up for a transition to the family.

 

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Michael Palumbos: I still need to make sure that I have a strong leadership team, because the Aesop that's the biggest fear, so if I don't have a strong leadership team that it doesn't that it doesn't have you know that they don't keep that.

 

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Michael Palumbos: Going and it depends my retirement might depend on that and that goes back to that conversation I said in the beginning, where you know pop that CEO he needs to be coached with the leadership team, because the CEO that's not their job.

 

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Michael Palumbos: they've never position that data they never hit you know, taking that stuff they were an entrepreneur they got stuff done they knew he or she knew how to run a business and how to make widgets or how to service a client like there was no tomorrow bad.

 

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Michael Palumbos: With.

 

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Michael Palumbos: A new nine out of 10 times, training and teaching and building a leadership team that could run it themselves that's that takes a little coaching and it takes some outside help to do that.

 

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Dan Prisciotta: It takes outside help it takes an investment of time and energy to do that, and that leads me kind of to the to the fourth exit path is I think we're.

 

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Dan Prisciotta: You know, Michael you were saying earlier, well, how do you determine which exit path is right for you, I think.

 

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Dan Prisciotta: You know, obviously, if the children are not interested in the business or if they're just great kids but they're not quite you know CEO material.

 

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Dan Prisciotta: It becomes obvious, but I see a lot of instances where owners and i'm not casting judgment, I mean it's fine, but you know their management teams, but with them 35 years.

 

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Dan Prisciotta: You know, and in essence they're all approaching that retirement age and they don't have the next rung of management.

 

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Dan Prisciotta: And that's where they'll say hey it's time for me to cash out, you know check please we're also seeing a lot of clients being opportunistic and I see that in a positive way.

 

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Dan Prisciotta: they're seeing that the m&a market these days is just so frothy I mean buyers are paying exorbitant sums to buy closely held businesses.

 

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Dan Prisciotta: Right equity groups or form they raise capital and their mandate is to go out and purchase closely held businesses.

 

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Dan Prisciotta: Strategic buyers, you know they can grow their business either organically or through acquisition and more and more they're finding it's much more.

 

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Dan Prisciotta: it's quicker to get to their growth goals by acquiring businesses, so we are seeing just outrageous prices being paid, I mean frankly equity strategies group is having its best year ever this year.

 

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Dan Prisciotta: And you know we're seeing all these businesses getting sold and getting sold at such high prices will do a marketability assessment when we're going into an engagement.

 

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Dan Prisciotta: To get our arms.

 

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Dan Prisciotta: Around valuation and ranges and look you never know to go to market what it's going to sell for but I gotta tell you that.

 

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Dan Prisciotta: we're selling these businesses are selling, for you know anywhere from you know 50% to to almost double what our market ability assessment, you know averages Ben so we tend to be on a conservative let's under promise and over deliver.

 

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Dan Prisciotta: But the market is is increasingly hot and I don't see that hat that slowing down anytime soon even even if capital gains rates do go up, I still think that there is going, you know it's about supply and demand.

 

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Dan Prisciotta: I think that there's so much money so much capital out there chasing so few high quality businesses that the demand for those businesses continue to go up.

 

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Michael Palumbos: yeah you know you and I talked about, and in my last family business book club, we read Tom dean's book every family's business.

 

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Dan Prisciotta: I know time.

 

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Michael Palumbos: yeah good guy, and so one of his philosophies is that every family business should be sold.

 

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Michael Palumbos: Now that doesn't mean that can't be sold to the next generation but his point was real simple is if the next generation isn't willing to put their own you know equity into the business, then they really don't have the belief of where they can take it, you know.

 

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Michael Palumbos: That was what he was taught and his family.

 

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Michael Palumbos: And so.

 

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Michael Palumbos: three generations in a row built and sold a business and but here's the neat part is every time they built and sold the business they capture that wealth.

 

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Michael Palumbos: Right, and so it was really actually protected the family's wealth.

 

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Michael Palumbos: Because they kept buying you know or building and then selling selling a business, so you know right now you're you're 100% correct the m&a market is just on fire, and there are there are stories and things that are happening that you know.

 

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Michael Palumbos: Just it's unheard of nowadays i've seen some of the numbers, and so this even though you may have somebody that half heartedly, I want to say, or even wholeheartedly says, I want to do you know, want to keep the family business going it may be in the family's best interest.

 

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Michael Palumbos: Long term thinking about two or three generations from now to say.

 

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Michael Palumbos: Maybe now's the time for us to tap out and explore what that what that world looks like.

 

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Dan Prisciotta: Social and a little bit of outside the box thinking you know the sale of business is you're saying Michael it doesn't mean the end of the business.

 

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Dan Prisciotta: And Tom dean's point is also you know it's the family wealth that's the legacy, not necessarily that not necessarily the family widget manufacturing company.

 

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Dan Prisciotta: But we've had a number of instances where prior to selling the business, and this is why you want to have some some time.

 

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Dan Prisciotta: You know, maybe an answer is to give some of the stock to the children or a trust for their benefit, so that when the company is sold there's proceeds going to mom and dad this proceeds going to the children and that wealth is distributed.

 

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Dan Prisciotta: or you may want to sell a business in such a way that the children stay on in a management capacity, maybe there's an appointment agreement, maybe there's an understanding with the buyer.

 

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Dan Prisciotta: we've had situations where we've had businesses that were selling and there might be five or six bitters at the table to buy that business.

 

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Dan Prisciotta: The seller doesn't necessarily always take the highest price right they might say, well, I like buyer B or C better than buyer a because buyer B and C.

 

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Dan Prisciotta: are going to keep my children in management positions keep my employees we've been loyal to be for all these years, not changed the name of the business not change the location of the business so.

 

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Dan Prisciotta: All buyers are are not created equally whether it's you know private equity and private equities changed a lot to more and more these private equity groups have hired operations people.

 

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Dan Prisciotta: and family business consultants that will help stay in that business and manage it and grow it so it's not you know black and white binary.

 

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Dan Prisciotta: If I sell the business the family businesses done I don't believe that I don't see that happening.

 

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Dan Prisciotta: Unless it's something that you want to see happen, which is okay we're going to cash out and move on and maybe the kids take their proceeds.

 

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Dan Prisciotta: i've had a lot of business owners of the business to say you know what this business has become such a headache.

 

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Dan Prisciotta: You know i'd love to start a simple business with my son or daughter, you know there's the next chapter in our lives, the next phase in our lives that we're looking forward to.

 

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Dan Prisciotta: we're seeing things coming down the road, whether it's competition regulatory issues can't find workers right.

 

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Dan Prisciotta: Nobody wants to work anymore so there's a lot of challenges that people are facing that with a liquidity event is a little bit of a breather and maybe they move on to the next chapter so.

 

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Dan Prisciotta: Again it's entirely up to the client the facts and circumstances the family values that's going to dictate which exit path is going to be pursued.

 

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Michael Palumbos: love it and.

 

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Michael Palumbos: I as a quick story to share you and I spoke about one of my clients and we we were working on getting them introduced to you to talk to you, and they refused.

 

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Michael Palumbos: and

 

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Dan Prisciotta: They knew me is that what happened.

 

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Michael Palumbos: exactly they they you know it was, but it was they they're feeling was that they didn't need a broker.

 

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Michael Palumbos: That they you know they wanted to do it on their own, they knew their business better than any broker could ever know their business.

 

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Michael Palumbos: And it's just the way this business works Mike So this was a business that was valued in the neighborhood of you know, north of $30 million, it was a nice family business there was two generations working in the business.

 

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Michael Palumbos: And you know and and there was ownership, not necessarily all equal, but it was enough out there, that you know at that, at a 33 to $35 million sale everybody would have been a okay.

 

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Michael Palumbos: yeah they ended up selling the business for about 26 $27 million because why you know the answer this.

 

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Dan Prisciotta: I knew this I knew the punch line before he even said it was i'm cringing about how much money they're leaving on the table yeah.

 

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Dan Prisciotta: And and and also the distress it causes and when someone tries to sell their own business oftentimes confidentiality is breached and the Ikea we could do an hour on why you know why you shouldn't be your own cardiac cardiologists are your cardiac chick Corea illogical a surgeon.

 

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Dan Prisciotta: I could give you a war story on war story, we had a client, about a year and a half ago got an offer unsolicited from a competitor and launch the reassure the offer was for $40 million and.

 

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Dan Prisciotta: Everyone agreed roundly that's a great offer the owner thought it was great offer the CFO the accountant the lawyer, everyone thought was a great offer we were brought in to do a market ability assessment.

 

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Dan Prisciotta: And we brought in several investment bankers and we crunched the numbers and spoke with the owners and we spoke with the advisory team and said yeah 40 million is a fair offer it great offer, but we think we can do better.

 

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Dan Prisciotta: So what we did was we kept that $40 million offer warm and alive.

 

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Dan Prisciotta: And quickly circled around the industry because the investment banker had very specific contacts and knew where to go and how to do it efficiently and created a competitive auction environment.

 

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Dan Prisciotta: Right, so you know the old saying, where you have one buyer you have no buyer you know competitive pressure, whether it's real competitive pressure was a perception of competitive pressure we had real pressure we created a bit of a bidding war, the price went up to 4045 5055.

 

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Dan Prisciotta: And our investment banker called the final bitters and said, this company is going to sell the next 48 hours, give us your final and best offer.

 

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Dan Prisciotta: And i'll never forget one of the bitters said to our investment banker where Do I need to be, and he says, I don't know, but your your number better have a six in front of it.

 

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Dan Prisciotta: So it's sold for 62 million that the deck client have any qualms about paying that investment banker his fee, I assure you, he did not.

 

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Dan Prisciotta: write a book with him, he says, Dan there's no way we got to 62 million without the investment banker so.

 

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Dan Prisciotta: yeah I would caution, if anyone is thinking about selling their business, you know yeah I agree as entrepreneurs, I get it.

 

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Dan Prisciotta: And no one knows your business your industry, better than you you're the five star general will bring you onto the field of battle when it's strategically optimal to do so.

 

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Dan Prisciotta: But you want to have an investment banker that's in the mud in the fray and is not afraid to be bad cop versus your good cop, I mean there's so many ways to play this.

 

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Dan Prisciotta: But if you want to not only get the best deal, the best terms, protect yourself from post sale liability.

 

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Dan Prisciotta: The list goes on, as to why a professional investment banker who's been there, done that really should help you handle that transaction yeah but, but again it's it's all based on what you want to do, and if that's the path that's chosen that you want to put your best foot forward.

 

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Michael Palumbos: To greed yeah and in my clients case like I said I could not get them to turn in you know make that turn and understand that they lost six to $7 million, maybe even more.

 

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Michael Palumbos: And the reason why they lost the money was because they weren't prepared for sale and so that's The other thing that people don't realize that there's a preparedness that needs to happen.

 

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Michael Palumbos: packaged properly and the planning that goes into it, you know their books weren't ready, they were a family owned business, they did their books, a certain way.

 

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Michael Palumbos: They all have these little things that they didn't realize and and the company just came and they were professional buyers they had bought other ones, just like them, and they just kept ticking them, you know.

 

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Dan Prisciotta: it's a different.

 

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Dan Prisciotta: Elias I mean there's just so many things that can go wrong, and if the deal doesn't happen now you got to live in the world with these people and other people might know your for sale it's just not it's not a good scenario so hey well.

 

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Michael Palumbos: it's it's.

 

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Michael Palumbos: we're coming to the end of the the our top of the.

 

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Dan Prisciotta: hour here.

 

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Michael Palumbos: parting thoughts things that you want to you know, want to add, and then, when once you've done that, if anybody has any questions i'm happy to grab those as well.

 

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Dan Prisciotta: yeah I guess my parting thought would be.

 

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Dan Prisciotta: as it relates to succession and exit planning, you only get one chance to do it right there's no do over there's no mulligan for many of our clients it's, the most important single financial decision they're going to make in their life it impacts so many areas, areas of their life.

 

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Dan Prisciotta: I would say, you know it's it's so important to prepare as far in advance, as you can surround yourself with competent objective advisors, with a process and a proven track record to get results I think that's, the most important thing.

 

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Dan Prisciotta: And really.

 

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Dan Prisciotta: it's tough I know emotionally.

 

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Dan Prisciotta: financially to get your head around all the moving parts, but I think if you if you do in the fall typically it doesn't have to be overwhelming it doesn't have to be.

 

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Dan Prisciotta: It We certainly don't want to be in a position where you put it off and put it off until it's just too late, so I think I think that's, the most important message is start on it as soon as possible, stay with it, and I think you'll have the best possible outcome great.

 

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Michael Palumbos: Dan pre shot, I thank you for joining us on the family biz show i'm Michael.

 

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Michael Palumbos: Michael from family wealth and legacy in Rochester New York and appreciate everybody joining us today have a great day.

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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