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Episode 78: Strategic Compensation Planning for Family Business Executives

In this episode of the Family Business Show, host Michael Palumbos from Family Wealth and Legacy in Rochester, New York, welcomes Mark Bronfman from Bold Value. Mark is a specialist in strategic incentives for growth and succession planning in family businesses. Throughout the episode, they delve into various aspects of strategic incentives and how they play a crucial role in the growth and succession planning of family businesses.

Mark Bronfman shares his journey from being a classically trained strategy management consultant to specializing in strategic incentives. He highlights the importance of understanding the unique needs of privately held business owners and how strategic incentives can significantly impact their businesses' future.

The discussion covers various topics, including the differences between executive compensation and strategic incentives, the concept of a personal endowment, and different types of equity structures like profits interest and synthetic equity. They also touch upon the significance of human capital as a vital asset in the 21st century for creating value in organizations.

Michael and Mark discuss the challenges and opportunities in aligning and motivating employees through strategic incentives, especially in the context of family businesses where dynamics can be more complex due to family relationships and generational transitions.

Overall, the episode provides valuable insights into the nuances of strategic incentives and their critical role in the continuity and growth of family businesses, emphasizing the importance of tailored strategies to address specific needs and goals.

Watch the entire episode!

Episode 78 Transcript

 

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Michael Palumbos ChFC, CBEC: Welcome everybody to the family business show. I am your host, Michael Columbus, from family wealth and legacy in Rochester, New York,

 

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Michael Palumbos ChFC, CBEC: and today I've got a really exciting show for you. Um! We are joined by Mark Bronfman. Um from bold value, and Mark is a specialist. He's one of the specialists that we reach out to and and partner with when it comes to strategic incentives um for growth and succession, planning within family businesses that we serve so welcome, Mark.

 

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Michael Palumbos ChFC, CBEC: Thank you, Michael. Pleasure to be here.

 

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Michael Palumbos ChFC, CBEC: Um! But there's you know

 

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Michael Palumbos ChFC, CBEC: you. You've been in this world, and in this industry for a bunch of. You know many, many years. Tell us what that journey looked like for you, and how you know. One thing led to another led to another to where you are today.

 

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Mark Bronfman: Thanks, Michael. So, um. I am a classically trained strategy management consultant in the first half of my career.

 

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Mark Bronfman: So I went to Penn State University, got my mba at Darton, at Uva.

 

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Mark Bronfman: Uh went into management, consulting

 

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Mark Bronfman: uh after a couple of years as a Cpa. With cooper's and live brand way back when, if you remember that that that name

 

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Mark Bronfman: uh and um

 

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Mark Bronfman: uh was in uh, uh, really an international role working with clients and

 

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Mark Bronfman: um Asia Europe us

 

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Mark Bronfman: a premier set of clients. Uh, and I had the opportunity. Um,

 

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Mark Bronfman: my employer accenture went public.

 

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Mark Bronfman: Uh I was. I had the opportunity to take my winnings and and and go we we we We had a partner to leave program. This was at the end of the recession. And

 

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Mark Bronfman: what was it uh two thousand and one, and uh, uh, they! They started to move partners over to to Asia,

 

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Mark Bronfman: and my wife was not going to move to Asia at all. She was not going to move to Singapore. It's not going to move to to Seoul,

 

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Mark Bronfman: and you know, and and we had done well enough. So um uh like a lot of other people. I had a liquidity event, which was which was great. And then I had a question of so now i'm in my mid-s. What am I going to do? What's my identity?

 

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Mark Bronfman: And uh, uh, sometime, when when we have more time, i'll tell you the story about how I actually ended up at Sage Mark. Uh, but it was referral from someone in the insurance industry.

 

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Mark Bronfman: And uh, and and and people had had

 

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Mark Bronfman: I told me that financial services was a great place to be. And since Mark, by the way, is is a is a division of like in financial advisors the platform that both you and I are affiliated with.

 

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Mark Bronfman: And um. As I went around the the financial services industry

 

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Mark Bronfman: and try to find out where I might find a a great home. Several organizations said: We aspire to be like sage mark. So I said, Well, if you despite the like stage, mark, I'm just going to go to stage Mark right, and I joined, say, to Mark in two thousand and three

 

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Mark Bronfman: uh I found my business model around privately held business owners in two thousand and five made Chairman's Council two thousand and seven, and been there where bit in there, uh since. Uh Chairman's Council, as you may know is, you know, the top advisors inside of like a financial advisors.

 

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Mark Bronfman: Yeah, uh, and um

 

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Mark Bronfman: and one myth is that if you've got a Cfo you've got. You don't need an outside party to help you through succession planning,

 

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Mark Bronfman: and that can not be wrong. But that can not be more than this than the truth. Um, One of my coaches, said Mark. You're going to be able to use your services your background, your financial document for companies that maybe are twenty-five, thirty-five, forty million dollars.

 

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Mark Bronfman: Once you hit the fifty million dollars in revenue they're not going to need you. They have a Cfo.

 

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Mark Bronfman: They got the whole thing covered,

 

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Mark Bronfman: and as I got into it and realized that on topics of leadership,

 

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Mark Bronfman: on topics of ownership, on topics of stewardship, the entire arc of strategic incentives really need to be brought into the four, and I've been doing it ever since. Uh, so I bring a very unique set of skills and management, consulting

 

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Michael Palumbos ChFC, CBEC: uh and financial advisory services to our clients and privately help businesses

 

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Michael Palumbos ChFC, CBEC: clients when you were there, and because I think it really translates well into what you're doing today.

 

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Mark Bronfman: So W. When when you're dealing with um uh large clients, My clients uh my published clients back then included companies like Sony Samsung Disney best buy,

 

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Mark Bronfman: you know, really a a set of a-class clients, very politically driven organizations a lot of people who have initiatives. People move around from place to place, and one of the things that I learned to go do was to manage a multi stakeholder environment

 

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Mark Bronfman: and working in strategic incentives for middle market companies. You have to be able to be like Switzerland. You've got to embrace the needs of your family, your executives, your company.

 

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Mark Bronfman: You may even need to embrace the needs of potential acquirers or venture partners. And so the ability to zoom out

 

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Mark Bronfman: and have everyone there feel like you. You don't have a favorite in the in the game. But you're there as a facilitator is a key lesson that I learned in management consulting

 

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Mark Bronfman: and like they're not like it. A lot of financial advisors grow up in a environment where they just have a single client

 

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Mark Bronfman: and never have to deal with the question of different objectives.

 

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Mark Bronfman: Uh, and I guess the other element of it is um, you know, at at accenture at Deloitte, where I was very financially driven organizations uh, very financially driven projects and

 

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Mark Bronfman: um, the ability to to to to get into with my Cpa background in into financials, the the financial statements uh valuations. Um,

 

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Mark Bronfman: really getting into the core of what creates value inside of organization is is is not a typical skill for financial advisor. So with all those kind of things i'm able to bring my me and my team are able to bring a great level of value.

 

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Mark Bronfman: And what really makes things exciting

 

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Mark Bronfman: is when a client turns to you during the project at the end of the project. And they say, Mark, you don't understand how much value you've brought to the equation.

 

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Mark Bronfman: I've been looking for someone like you for a long time,

 

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Mark Bronfman: and you know clients don't always say thank you. And when they say thank you, it really matters.

 

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Michael Palumbos ChFC, CBEC: Yeah. And you know what's really interesting is you said when you were working in those politically motivated organizations. You know there's lots of silos and lots of different players in that arena, and it is so true.

 

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Michael Palumbos ChFC, CBEC: With the middle market businesses as well, It's just different. It's, you know, like we were talking before the show started is, You know I was working with a family that has multi-generation. So one generation is talking about what we don't want to give you. X amount of dollars, and the other generation is like, Yeah, but we're trying to retire. And so you know, there's that

 

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Michael Palumbos ChFC, CBEC: that that you know ying and yang happening there the to get, you know, the push and pull, and then on top of that there's employees that are wondering. Are they going to make it through this transition. Is this going to happen? And when you have those

 

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Michael Palumbos ChFC, CBEC: dynamics, and you know there are

 

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Michael Palumbos ChFC, CBEC: heavy emotions on top of the political silos that you might have from the you know, different family members, especially when you get. You know what I found is when you get to the third generation, and not everybody was raised in the same house, and so there's different value

 

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Michael Palumbos ChFC, CBEC: pieces that are brought to it. And on top of that there's emotions, you know, if you get to be President, Dad loved you more, and so you have to. There, there's being Switzerland is a really great skill that we bring to the table.

 

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Michael Palumbos ChFC, CBEC: Um! The other thing that i'd say is that you and I, you know, at Sage Mark Lincoln Financial Um. One of the things and the reasons why

 

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Michael Palumbos ChFC, CBEC: I've chosen to, you know, plant with this company, and stay with this company all the years that I've been here is because of initiatives like the Business Intelligence Institute, where you know people like you and I get together, and we talk about. You know. How do we best serve these business owners? These middle market businesses are really,

 

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Michael Palumbos ChFC, CBEC: you know I,

 

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Michael Palumbos ChFC, CBEC: for how do I say this? But it's um. Oftentimes they need

 

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Michael Palumbos ChFC, CBEC: the services that a family office would bring to them. They need somebody taking that thirty thousand foot view, and everybody looking at them from the perspectives of you know, not just transition and business and and strategy, but also in terms of my estate planning and my text, track, strategies and retirement, and all these other different pieces,

 

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Michael Palumbos ChFC, CBEC: and but most of their value. Most of their network is in the business, so they don't have the hundred million dollars to start this, and so we kinda and you know I know how you work when we we work a lot. The same way in is that, you know we may come at it from our specialty, but we're always looking to bring in the accountant. We're looking to bring in the attorney, so that when we're making

 

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Michael Palumbos ChFC, CBEC: and helping the client make decisions and we're educating them about things it's always about. How do we get the highest and best out of their hands that they have right

 

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Mark Bronfman: right. And and you know, if if there's one

 

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Mark Bronfman: uh superpower

 

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Mark Bronfman: that I've got

 

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Mark Bronfman: It's being a collaborator

 

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Mark Bronfman: and everyone needs to know their own superpower. And when someone for us asked me that question. You know, about a decade ago how to think about it, but it it really works out Well, we're not here to replace other advisors. We're here to create a fabric of advisors, to solve an issue to solve a problem.

 

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Michael Palumbos ChFC, CBEC: I love it. That's a we. We have that same, you know, mentality as we're going through. I just sent an email to a a new attorney that we're. We're doing some estate planning work with. And I said, You know, let him know, I said, just as an fyi a little different than other advisors. I'm very collaborative. Really want to be engaged, so that if there's something that I know about the clients objectives or goals that they didn't tell you. You don't miss, and if there's something that's going on, you know, from their tax perspective we can bring in the account, and they're happy to talk about this stuff

 

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Michael Palumbos ChFC, CBEC: so that we're all on the same P. As we're doing, helping the client, you know. Get to from Point A to Point B.

 

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Michael Palumbos ChFC, CBEC: So let's talk about what you do at bold value today, and you know that that middle market that you serve, that we serve.

 

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Michael Palumbos ChFC, CBEC: Um, you have this really unique special approach to how you serve and how you You know how you show up, for people talk about that a bit if you don't mind.

 

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Mark Bronfman: Sure. So uh, we have this practice that I call strategic incentives,

 

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Mark Bronfman: and it has three pillars to it, the pillar of leadership, the pillar of ownership, and the pillar of stewardship and writing on the arc of the full business experience, business, the full business owner experience. We're able to bring those three things together.

 

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Mark Bronfman: And what does that mean? You know many of our clients, our professional services companies were companies that live and die by human capital.

 

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Mark Bronfman: And these days human capital is probably the single, most important, biggest asset that any company would ever have, and more than just struggling with the executive compensation issues of how to attract and retain talent

 

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Mark Bronfman: it's. How do you weave

 

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Mark Bronfman: strategic incentives into the issues of goals

 

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Mark Bronfman: of um

 

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Mark Bronfman: growth, succession, and keeping the end in mind.

 

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Mark Bronfman: One of the things I love to say is that there's there's There's many exit strategies, many succession strategies.

 

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Mark Bronfman: But if you know which exit strategy you're working on, and this i'm gonna walk through four of them that'll tell you an awful lot about how you want to reward on the front end,

 

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Mark Bronfman: and and and so so before I do that I just want to distinguish between executive compensation and strategic incentives because people get them conflated, and think that they they are the same exact thing.

 

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Mark Bronfman: Executive compensation answers the question of

 

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Mark Bronfman: How are your peers paying? What are you paying? How do you provide long and short term incentives?

 

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Mark Bronfman: And it it it's it's it's relatively sterile it's. It's relatively mathematical, and It can be almost hands-free.

 

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Mark Bronfman: Every company has a strategy as to what amount of short term, what amount of long-term incentives but that's about as far as executive competition goes strategic incentives tries to weave it into the larger strategies of the organization.

 

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Mark Bronfman: You know, really, where is

 

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Mark Bronfman: the goal? The opportunity, uh, in in regard to culture,

 

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Mark Bronfman: Uh, in regard to in in regard to a career path

 

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Mark Bronfman: regard to what really creates a value, and one of the greatest myths

 

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Mark Bronfman: that we have is that all e but uh

 

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Mark Bronfman: is equal, and the more proper that the company has, the more valuable it is. And that's not necessarily true, because strategic incentives understand that you may have a software product,

 

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Mark Bronfman: and the services business and the software products may trade for lots of May, maybe trade for a whole lot more than the services business as well.

 

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Mark Bronfman: And so, if you just re re reward on cash

 

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Mark Bronfman: and reward based on your financial statements, you're not going to be able to do a good job. So I I've I've really distinguished this thing. The whole difference between strategic incentives and executive compensation

 

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Mark Bronfman: and and and keeping the end in mind. We talk about four different succession pathways, and these are really important, Michael, and if there anything, any anyone walks away with it's understanding these four.

 

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Mark Bronfman: So the first one is moving towards a change of control,

 

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Mark Bronfman: and that I know you work with family owned businesses. Some failure businesses, you know. Say that once we hit a certain milestone, a certain size, et cetera, or certain value. We're going to sell.

 

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Mark Bronfman: Some would want to be there perpetually, but that's a different kind of objective from a second kind of succession pathway, which is a perpetual business.

 

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Mark Bronfman: We think about the perpetual businesses like partnerships, law firms, accounting firms, engineering firms, architecture, firms.

 

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Mark Bronfman: They may may not have family in them, but they necessarily are organizations that uh, want to stay at least two to three to four generations of management. Generation management is probably seven to ten years.

 

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Mark Bronfman: A third succession pathways keep it in the family,

 

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Mark Bronfman: and when you want to keep it in the family. You typically have a generational gap between those that are older have learned the business and those that are younger than not yet ready, and the key issue with a with a keep in the family businesses. How do you bring on professional management

 

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Mark Bronfman: and give them a reward that doesn't mess up your estate, planning

 

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Mark Bronfman: and all those kind of elements like that. And then a four succession path is an esop,

 

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Mark Bronfman: an employee stock ownership plan, which is a way to get some liquidity out of a business keep control management control over it.

 

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Mark Bronfman: Uh. And that requires a whole different kind of

 

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Mark Bronfman: uh incentive plan because of the gyrating value of a nesop as you go through the recapitalization of the asap over time.

 

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Mark Bronfman: So, So, knowing whether or not you are going to do strategic incentives around around change and control

 

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Mark Bronfman: around um A perpetual business when now you could do it around family owned business, or when I do around. Nesop is critically important, and with that end in mind, then you can come back in and have a better view of executive compensation, huge incentives, and make the whole thing work together,

 

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Mark Bronfman: and and and we've had clients turn to us and say, we've just never seen an approach like this, and and thank you so much for doing it.

 

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Michael Palumbos ChFC, CBEC: It's, you know, as we talk about, we're both in the business exit planning space,

 

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Michael Palumbos ChFC, CBEC: and and that's really one of the most important conversations that we have with the client is helping them to understand the you know, the the best, the the number of different options they're available there and then helping them to get through to understand what is their objective, Because it's, you know, Simon Sinek begin with the end in mind right if we don't know where you want to go. How are we going to know if you got there?

 

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Mark Bronfman: That's right.

 

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Michael Palumbos ChFC, CBEC: So very important, very, very important. Thank you. You know it's interesting, and you don't know you and I haven't had this conversation. So i'm gonna I. You come at your work Um, from the strategic incentive position which I love, and I I have a a a quick story to tell you. I have a guy that runs a small engine company that I know of.

 

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Michael Palumbos ChFC, CBEC: Every single employee in the business

 

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Michael Palumbos ChFC, CBEC: is compensated, based on the work that they do as well as their hourly wage. And so here's a guy that runs his business one week, a month in town, three weeks a month in his home in the South,

 

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Michael Palumbos ChFC, CBEC: and i'm from, you know. So in his business is in upstate New York and and I'm, you know we talked about it, I said. You're one of the few that understands that you're incentivizing people from a strategic, you know

 

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Michael Palumbos ChFC, CBEC: place that's helping them to understand that they're not just a cog in the wheel. They are the wheel, you know. They are what makes the business run, and you've aligned them Um, in a way that you know keeps people incentivized to do a great job for you, and to be able to run the business without you there, and I think that's a lot of the people's goals. And again, you know It's How do I

 

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Michael Palumbos ChFC, CBEC: work on my business, not just in my business. How do I not have to have all of the the stress of being the entrepreneur in the business? How do I run this more as the Ceo and the alignment of you know strategic incentives, you know from your perspective. Does that incredibly well, And you know you and I have talked before we, you know, talked with, You know some of our clients in the past, and we'll do that some more in the future. I come at it from a standpoint up.

 

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Michael Palumbos ChFC, CBEC: These entrepreneurs were really good at doing something. Okay, whether it be running, you know, a sheet metal, or you know, demolition, or you know, most of my, you know a lot of my businesses are in the um

 

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Michael Palumbos ChFC, CBEC: construction world, real estate development, whatever their Widget. Whatever their thing was, they got really good at it. And then they, you know, they were benevolent dictators, which I, you know, and they they were really good with their people, but they told them what to do when they kind of controlled everything.

 

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Michael Palumbos ChFC, CBEC: And now they're thinking about succession, and they haven't built teams, and so I come in and help them with

 

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Michael Palumbos ChFC, CBEC: moving from that benevolent dictator to a you know, strategically aligned team on the future of the business. I believe that the two of us, if you partner those two pieces together just uh really really helps a a company. So we we're gonna talk some more about a lot of the you know what you're thinking about, and how you do things, and I can't. I'm looking forward to bringing that in for a lot of the people that you know we talk to, because

 

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Michael Palumbos ChFC, CBEC: it just fits hand and glove when you can get them aligned around the vision and the culture of the company, but then also pair their incentives strategically and match them together. It's like Now you're you know you're not just preaching to the choir, everybody singing, you know.

 

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Mark Bronfman: So could I tell you two stories on on this? Um

 

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Mark Bronfman: One's a story about how

 

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Mark Bronfman: uh there's a disconnect often between equity, structure and ownership and executive compensation, and the second story is about getting synthetic equity which is determined. I'll define down deep in the organization.

 

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Mark Bronfman: So I walk into a prospect.

 

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Mark Bronfman: I ask him how he pays, and how he's organized all that kind of stuff, and it comes out that

 

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Mark Bronfman: he's got three key people, two owners that are fifty, fifty, and one guy who's a

 

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Mark Bronfman: key up and comeer who's got four percent of the company in stock options.

 

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Mark Bronfman: And I ask, I must call him Phil. It's not his real name.

 

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Mark Bronfman: But I asked Phil Phil what's wrong with this picture? Fifty, fifty, and four percent stock options,

 

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Mark Bronfman: and he says nothing. I love it.

 

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Mark Bronfman: And I say, what happens, Phil, when the when the four percent stock option holder exercises

 

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Mark Bronfman: they go from being a four percent stock option holder to a four percent equity owner,

 

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Mark Bronfman: he says. I guess they owned four percent of stock.

 

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Mark Bronfman: And I say, okay, So

 

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Mark Bronfman: what now has happened to the value of your own stock,

 

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Mark Bronfman: and he says what I said, Well, I've looked at your shareholders. Agreement

 

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Mark Bronfman: and minority shareholders have a twenty-five percent discount off of their value.

 

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Mark Bronfman: So as soon as this four percent stock option holder exercises your shares go down by twenty-five percent in value. Did you know that.

 

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Mark Bronfman: But I say worse than that.

 

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Mark Bronfman: Who now has the control

 

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Mark Bronfman: over this company?

 

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Mark Bronfman: He says, What do you mean?

 

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Mark Bronfman: I said. Well, if you have big decisions to make, sell the company

 

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Mark Bronfman: do a big acquisition, et cetera. Who's the swing vote,

 

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Mark Bronfman: and he thinks about it. He thinks about it, and he takes his head, and he starts banging it on the desk and saying, Okay, I give up.

 

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Mark Bronfman: But that's an example of how people just don't understand the interconnection between capital structure and executive compensation.

 

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Michael Palumbos ChFC, CBEC: Yeah. And and to your point before talking about. You know, the Cfo's job is not to read that stockholder agreement or the bicycle agreement, and to understand how the structure works there, their job is to be focused on. The financials make sure cash Flow is going. Well make sure that there's, you know, cash to grow and do all the things that need to be taken care of.

 

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Michael Palumbos ChFC, CBEC: Um! It's why we you know why we have a job. But I think it's really important that we make that note again that there's a distinction. You're the chief financial officer of the company

 

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Michael Palumbos ChFC, CBEC: that doesn't necessarily mean that you've got. You know that you built the skills around. You know the the shareholder agreements operating agreements and um strategic incentives, and you may have some things where you took a class,

 

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Michael Palumbos ChFC, CBEC: but you've got twenty years. I have twenty years of of doing these things, and so we've just seen more. And like when somebody selling a business or somebody's doing strategic incentives, you know

 

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Michael Palumbos ChFC, CBEC: you're doing this once once you once you want to work with somebody that's done this many, many, many times.

 

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Mark Bronfman: Okay. So are you familiar with the private Equity firm? Kkr:

 

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Mark Bronfman: I am okay. So they have a partner by name of peace. Stravos, who now has a not for profit entity called ownership works.

 

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Mark Bronfman: They are trying to solve what we've already solved. What we're already doing is giving

 

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Mark Bronfman: slices of equity

 

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Mark Bronfman: to every rank and file person inside of the organization on the upside. Private equity. Firm, as you know, their their their typical game plan is, they come in. They buy an organization. They hold it for a period of three to five to seven years and then sell

 

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Mark Bronfman: Yeah, and you know, five, seven, ten years ago that may have been viewed as um mafiavellian.

 

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Mark Bronfman: I think now it's viewed as a a very good way of doing business, because they are involved in so many transactions.

 

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Mark Bronfman: And uh, uh, so peach Stravos, uh, you know, is is is is is is raising the flag that

 

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Mark Bronfman: that by giving slices of equity to everyone in your organization, especially blue-collar organizations, you can have people who are more responsible and rewarded for innovation a spread to core for really value creation inside the organization.

 

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Mark Bronfman: Well, we've done this using synthetic equity, and i'm going to. I'm going to. I'm going to define that term. Now,

 

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Mark Bronfman: um people know what equity is. Stock options true stock as corporation stock See Corporation stock, llc. Et cetera.

 

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Mark Bronfman: Synthetic equity is a mathematical equivalent to equity, but it's paid out as compensation, not property,

 

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Mark Bronfman: and can be almost any calculation. You want to be any financial calculation, so you can say if if i'm running a business uh, and and I've got a a set of car dealerships, and it's worth a hundred million dollars. I'm going to give any slice above one hundred million dollars, or

 

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Mark Bronfman: any amount that I wanted. If you can articulate it, you can do it with synthetic equity. And and so what we've done recently for some clients is uh partitioned off

 

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Mark Bronfman: five, ten, fifteen of the overall upside value of the organization, and given that to every single person inside the organization

 

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Mark Bronfman: Now that pays off only upon a change of control. Why is that? Because it's much too complicated to try to pay that off per perpetual company, et cetera. But but for a company that says i'm going to be selling,

 

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Mark Bronfman: you know, in the standpoint of three, five, seven, ten years,

 

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Mark Bronfman: and people who can get a piece of it.

 

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Mark Bronfman: It makes a lot of sense, and and it really shows from the heart as to what you really made of.

 

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Mark Bronfman: Not every company is going to go. Do this. Some companies don't have that level of

 

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Mark Bronfman: size and scale.

 

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Mark Bronfman: Uh, but we're using synthetic equity in a way that really changes the culture of organizations.

 

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Michael Palumbos ChFC, CBEC: Love it, I mean It's Jack's tax, the great game of business. Get everybody involved, and, you know, make them, You know, have ownership thinking. And that brings like you, said the innovation to the organization, and gets everybody aligned um in how they're doing things. So it's not always about the silos about my or you know my group, my my people, that report to me. It's what's best for the business, because we're all getting compensated based on that

 

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Mark Bronfman: strategic or the synthetic equity. Rather. And I love that very good. So the other thing that we do really well together on you, coming from the personal planning side and everything else you're doing. And and our team coming from the business side is you can't do a work.

 

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Mark Bronfman: Strategic incentives without really understanding the the family structure, the family wealth,

 

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Mark Bronfman: and what you have achieved. One of my clients coined the term personal endowment which I love, which is What's the amount of money I need to have in order to endow my family with enough money that they're okay for us of the lives.

 

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Mark Bronfman: And once you know that personal down in number let's call twenty million dollars for just sake of having a number out there.

 

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Mark Bronfman: Anything above that,

 

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Mark Bronfman: as a law of the measuring returns to the family.

 

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Mark Bronfman: And so you know, you often say you have three places. You could leave your money. You can leave it with family charity. The Irs, I say, why not a fourth one?

 

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Mark Bronfman: And the fourth one is the people that got you there. The fourth one is the people that got you the wealth? Yeah. And And and this runs off of the classically trained work of Daniel Kahneman

 

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Mark Bronfman: in his famous book, Thinking Fast and Slow around prospect theory,

 

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Mark Bronfman: which is a in one way the law dimensioning returns.

 

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Mark Bronfman: But what we do is we tailor? These business owner

 

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Mark Bronfman: value sharing techniques to the personal uh endowment that families need. And that's why I work mostly with the upside. Because that's That's the law of the mission returns,

 

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Michael Palumbos ChFC, CBEC: we having a dollar more. It really doesn't make a difference. I love that concept. So when when we're talking with business owners, you're right. I always is three places where your money can go and go to the Irs. It can go to taxes and go to get your or your family. But there's a fourth bucket there that is just eye opening. You can go to your the employees, The people that help you build this, you know,

 

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Michael Palumbos ChFC, CBEC: organization at a much higher, deeper, meaningful lot, level that could really change their lives. Not just change your family's life,

 

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Mark Bronfman: right? So one way of doing this and it, and and this is not a recommendation. This is just. Every situation is different. Uh, one of the designs that we've put together. Uh is a split dollar insurance contract,

 

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Mark Bronfman: where

 

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Mark Bronfman: the beneficiaries of of of the of the Um insurance policy are the executives themselves. So if the patriarch passes away,

 

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Mark Bronfman: and there aren't um

 

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Mark Bronfman: with the the the people inside the family to take it over, and the family doesn't want it,

 

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Mark Bronfman: and the life insurance proceeds, goes into a trust for the benefit of these uh executives. They use that as seat capital to then buy out the company.

 

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Mark Bronfman: Now that is not executive compensation. You never, You would never ever get that from executive conversation, right. But but but when the Patriarch says you guys are being uh lined up to be able to buy out the company, and i'm and i'm doing that for you that makes all sense of the world.

 

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Mark Bronfman: But I'm keeping all the power in this, because

 

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Mark Bronfman: once I set this up, I can determine year by year, whether or not I want to have

 

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Mark Bronfman: the uh insurance proceeds going into my family.

 

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Mark Bronfman: We're going to, you guys, I get. If it goes to you guys, you guys are going to pay the insurance premium value each year. I'm a bonus you up for that. But these are examples. You know where you just end up at a place that's different than what you expected. We came into a um,

 

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Mark Bronfman: a a engagement recently

 

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Mark Bronfman: Um.

 

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Mark Bronfman: Where a construction company in Washington. Dc.

 

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Mark Bronfman: Uh wanted to help around executive compensation,

 

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Mark Bronfman: and very clearly it became clear that

 

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Mark Bronfman: that the owner was fifty-seven years old, wanted a pathway to exit,

 

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Mark Bronfman: and we ended up doing an esop

 

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Mark Bronfman: with a stock appreciation right plan attached to it

 

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Mark Bronfman: for the executives wet really scratches all the itch,

 

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Mark Bronfman: and you never would have gotten there, you know, from a standpoint of just doing a a um,

 

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Mark Bronfman: a competitive, pure compensation study.

 

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Mark Bronfman: Strategic consensus is so much broader, the arc is so much more important and so much more impactful to A, to to Apis's owner. And And that was the situation where we brought in Dan Pristiana uh of Equity Strategies group to do the Esa

 

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Mark Bronfman: and um, and the client could not be happier.

 

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Michael Palumbos ChFC, CBEC: Yeah, and it's, You know one of the things the the Aesop. Thank goodness, I think ten years ago there was a a misnomer that you know It's it's too complicated. There's too many moving parts. Not you know there was. There was a lot of downplay, I think, on the East, up, I think, in the last ten years, even maybe in the last five years. You know more specifically where people are starting to really realize that the Aesop is a powerful, powerful tool.

 

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Michael Palumbos ChFC, CBEC: Um, and can really make a competitive difference in the business. It can be an alignment of, you know the the employee um engagement just so many good things when it's done properly again, you know, like. I'm. A big fan of family philanthropy.

 

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Michael Palumbos ChFC, CBEC: I believe that family philanthropy can be a sandbox for teaching entrepreneurship to young children. Okay, i'm talking about as young as five years old, six years old. You can start teaching leadership skills and communication skills by utilizing family philanthropy. So that's where I come from. But I always tell my clients that said, Do not start

 

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Michael Palumbos ChFC, CBEC: a family foundation

 

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Michael Palumbos ChFC, CBEC: just for the tax purposes.

 

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Michael Palumbos ChFC, CBEC: There are some, you know. Don't do this for you. I don't. I still want you to be thinking about the community that helped you to be successful. It has to be coming from the heart first, and then you'll get all of the side benefits that come with. And I think the same thing is true with the nesop is, Don't be doing this just because of how the benefits work for you. Think about all of the people that are involved, because it really makes a big benefit to everybody. There is work that goes inside of anise up, but it's so worth it when it's done properly.

 

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Mark Bronfman: Yeah. And these apps are probably uh not right for most companies.

 

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Mark Bronfman: Um. One of my dear friends took his business. Aesop. He was a client

 

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Mark Bronfman: uh and um, you know they were in a weird situation where,

 

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Mark Bronfman: if they were to sell the company on the outside.

 

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Mark Bronfman: Every one of the logical buyers had some conflict of interest that would not be able to take the full set of revenue that they were offering. But a financial buyer and Aesop could.

 

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Mark Bronfman: So they were an organization that if they sold to one of the big four, one of the Big six accounting firms consulting firms they were they. It was a conflict around being able to take all that revenue, and these up, was the right answer,

 

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Mark Bronfman: and and and they also were a company that went from an Llc.

 

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Mark Bronfman: To a C corporation to do the asap,

 

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Mark Bronfman: which worked out very, very well for them, and it did the one thousand and forty, two, and all those kind of geeky things we talk about here,

 

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Michael Palumbos ChFC, CBEC: and that I mean. That's the fun part about for you and I. You just said magic words. Me i'm a geek, and i'm okay. I love because it's that geekiness that makes me look into weird. You know, potential solutions that somebody didn't think about. We We just had a client then, you know, I tell people all the time, and you mentioned insurance earlier. You and I are not insurance sales people by any means. We help people buy

 

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Michael Palumbos ChFC, CBEC: insurance a lot of times because it's just the only solution. So this family was going to transition one child's taking over the business. It's a twenty million dollar business, and he's getting it gifted to him.

 

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Michael Palumbos ChFC, CBEC: But he has three siblings. How do you think Thanksgiving dinner is gonna look well, you know. And so what we ended up doing? And Dad had put left all the money in the business for many, many, many years. That's what his, you know. Decisions were. So he didn't really have a ton of money. So when he leaves

 

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Michael Palumbos ChFC, CBEC: he needed to be able to

 

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Michael Palumbos ChFC, CBEC: have a nice retirement. And so we put together a nice different comp program for him, and we did a split dollar with a trust for a What a giant! What? He was! A twenty million dollar life insurance policy! And this is again. Not a recommendation. This just worked for this family, and so the son is now paying. So he is now paying It's not just gifted to him. He's paying Dad's deferred comp and he's paying the insurance premiums on a twenty million dollar life insurance policy, so that when

 

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Michael Palumbos ChFC, CBEC: Mom and Dad pass the his sisters, you know, have cash right, and it's in trust for them. And so it was just that. How do we take? You know all the different things that are out there. You tell me what you're trying to do, Don't. Don't tell me how to do it. That's where I think a lot of our clients sometimes get wrapped around the app so as they want to tell you what. What if we did this, or what if we did them like? Just tell me what you want, and then we'll tell you how,

 

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Michael Palumbos ChFC, CBEC: because we want to try on two or three or five, or maybe seventeen different ideas to help you think through again. We go back to what we said and what's the highest and best used most attention and effective way to manage and work with your capital,

 

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Michael Palumbos ChFC, CBEC: and when we talk about capital, you and I talk about not just your assets, but we to your capital as your people and your family, and it's the social, and it's, you know, the relational capital that you have, that you bring to this thing, and we want all of those pieces of capital

 

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Michael Palumbos ChFC, CBEC: to be right up there.

 

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Michael Palumbos ChFC, CBEC: I I I want to ask you. You know

 

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Michael Palumbos ChFC, CBEC: I've looked at your website, and really anybody that you know wants to take a peek at both values website, you'd just be blown away with the articles and the writings that mark is put together. I reference it probably at least monthly, just so that you know um, and going through to be able to help have conversations.

 

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Michael Palumbos ChFC, CBEC: Um, you where you and I are slightly different. I only have probably about five or six clients, and we only take on one or two a year. It's just, you know, key clients. I do have. You know people that don't fit. You know our you know our core customer, which is that middle market business owner. But when I serve them we act like that outsourced family office.

 

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Michael Palumbos ChFC, CBEC: And so there's just so much work to do on a regular basis, for you know people that are go, you know, doing this stuff that that's enough for me. So I don't have a lot of swings, so to speak. I don't think you know where you you know, because you collaborate really well with other teams like ours, you know. Advisors bring in and say, Oh, I have a situation. Can you help me think through this?

 

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Michael Palumbos ChFC, CBEC: And it's just, you know, like i'm looking at one right now. The top forty executive rewards a pathway to strategic advantage. I have referenced this one, you know one piece, one document, probably fifty times in conversations with people just to help them understand

 

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Michael Palumbos ChFC, CBEC: The world's big in this world of you know, incentives and strategic, you know, thinking, and it's you can be equity based, or it can be cash based, and it's just. It could be immediate. It could be, you know later and deferred so many things. I love it.

 

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Michael Palumbos ChFC, CBEC: Um,

 

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Michael Palumbos ChFC, CBEC: you talked about. You know another concept that I've heard you talk about. I'm hoping that you'll spend a couple of minutes talking about profits interests

 

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Mark Bronfman: Do you mind sharing with, You know, with us what that is, and how that might work for somebody?

 

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Mark Bronfman: Uh, and we're called frequently by other attorneys, by other financial advisors from Cfos, from board members about profits, interest, and what profits interests are

 

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Mark Bronfman: is a type of equity

 

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Mark Bronfman: which is upside equity,

 

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Mark Bronfman: that you don't have to pay anything for it is granted to you

 

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Mark Bronfman: it's only available inside of an Llc. Tax as a partnership.

 

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Mark Bronfman: So if you know, i'll see taxes and s corporation, it doesn't work

 

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Mark Bronfman: uh we talk about that. There's three ways of transferring value in a privately held business, sell, pay, convey. You can sell ownership to a key executive

 

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Mark Bronfman: such as we, such as stock. We should just stock.

 

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Mark Bronfman: You can pay it to them

 

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Mark Bronfman: uh a as as conversation, so you give it to them, and then they they pay tax on that compensation amount, or convey it, which is to give value to an executive at no cost to them. That's what a profits interest is.

 

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Mark Bronfman: So you are, uh you are giving the upside

 

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Mark Bronfman: of an amount. So if if you have a business that's worth ten million dollars,

 

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Mark Bronfman: the threshold values ten million dollars, and you can't use any discount for minority interest, someone who has a five percent profits interest.

 

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Mark Bronfman: When the when the business goes from ten million to thirty million, it's gone up twenty million dollars.

 

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Mark Bronfman: Five of twenty million dollars is one million dollars.

 

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Mark Bronfman: They can sell that.

 

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Mark Bronfman: And, Michael, do you think it's taxed at ordinary income or capital gain?

 

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Michael Palumbos ChFC, CBEC: Capital gain

 

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Michael Palumbos ChFC, CBEC: is taxes, capital gain. You get it right. You get five points for that, but it's probably the only type of equity that you that that you didn't pay anything for, and it's Wow,

 

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Mark Bronfman: but it but it but it but it's property uh profits. Interests are mostly used in self liquidating situations. What do I mean by that

 

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Mark Bronfman: uh people that are doing real estate partnerships that it's going to be You're You're You're building a real estate. Um strip, mall, and you're gonna you you're gonna sell it in in three to five to seven years.

 

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Mark Bronfman: Okay, you might get profits, interest to the people that are helping to go build this and three to five to seven years. Once the whole thing sells, then it'll pay out as as a capital gain.

 

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Mark Bronfman: Alternatively, you can use it as a junior partner role.

 

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Mark Bronfman: So you get profits interest. You get your value up to it, and then you convert it from profits, interest to capital interest, which is class a shares, if you will.

 

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

 

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Michael Palumbos ChFC, CBEC: I would think that would make you know you're changing uh control changing the the type. So you're saying it's i'm i'm assuming it's not. It's not a taxable event. You can take that that that that one million dollar value, And now, uh, contribute it to the company

 

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Mark Bronfman: and get your my your million dollars of capital interest. So it it plays a lot of key roles. Um, We have used province interest in many situations.

 

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Mark Bronfman: Uh and um,

 

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Mark Bronfman: you know. Uh, they are complicated animals, because you have so much flexibility, and in in in how you put things together.

 

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Mark Bronfman: But when you are trying to use a convey strategy

 

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Mark Bronfman: uh profits, interest is a great approach. Let me share with you another conveyed strategy, and this is one that is uh, sometimes talked about as a pop. I plan. Have you heard of the pop? I plan absolutely. Yeah, to help walk us through this, because this is phenomenal.

 

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Mark Bronfman: So, and i'm not going to go into the the the the gory details. But let's say that you want to. Uh You've got a key,

 

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Mark Bronfman: a family member,

 

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Mark Bronfman: a key executive, someone that you want to convey value to, and you're not in an Llc. Taxes partnership. You can't use profits interest.

 

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Mark Bronfman: So what you do is you seed

 

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Mark Bronfman: a small amount of capital

 

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Mark Bronfman: small amount of capital, so that you can. You can have this key executive. Have some ownership. Let's presume that the founder has ninety-nine shares,

 

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Mark Bronfman: and now you see one.

 

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Mark Bronfman: So now it's ninety-nine and one that's the capital structure.

 

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Mark Bronfman: Using this redemption. Strategy

 

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Mark Bronfman: let's say the company now redeems ninety

 

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Mark Bronfman: shares

 

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Mark Bronfman: from the founder

 

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Mark Bronfman: the new share table is nine and one

 

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Mark Bronfman: first question, Michael, what is that? What percentage of the company does? The founder now own

 

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Michael Palumbos ChFC, CBEC: founder owns ninety percent,

 

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Mark Bronfman: ninety percent Very good. Some people say that that that he sold out off ninety percent of the business because he went from ninety-nine to to nine. Right. But it's the it's the shares that are left because the company re redeemed them. So now you have nine shares plus the one.

 

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Mark Bronfman: So now what percent of the company does the Executive now on. Now the Executive owns ten. So how much tax did that executive pay in order to go up from one percent to ten percent

 

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Mark Bronfman: zero Bob, Kiss

 

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Mark Bronfman: That's phenomenal

 

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Mark Bronfman: uh per year, and you can use this to go from ninety-nine to to to eighty to to you know, uh

 

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Mark Bronfman: twenty of eighty is sixteen, so you can bring it down to sixty four, so you can do that year over year to really shift the balance of power,

 

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Mark Bronfman: and that all goes back to the whole concept of prospect theory. Why would I do this?

 

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Mark Bronfman: I would do this if you want to flip the ownership

 

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Mark Bronfman: and use the a key thing here is that you're using the triple a account The accumulated adjustments account. I think i'm getting. I know i'm getting geeky here, so excuse me for doing that,

 

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Mark Bronfman: but using the the um aaa account as redemption, capital, not distribution capital. It works off of three hundred and one and three hundred and two of the tax code. But those are redemption strategies. So Profit Centrist is a redemption strategy.

 

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Mark Bronfman: The um

 

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Mark Bronfman: redeem and accrete

 

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Mark Bronfman: is a is a redemption Strategy sometimes called the pop. I plan, but just learning, sell, pay, and convey, and how you can use all these different techniques is something that our team does all in the context of of of the broader arc. Right business owner, experience.

 

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Michael Palumbos ChFC, CBEC: And that's why you know, we we partner with a specialist like you, because this is where you shine, and this is what you do when you you know you. You dig into them. I've heard of the plans. But again go back. I have five to You know seven families that I serve

 

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Michael Palumbos ChFC, CBEC: as my core, you know

 

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Michael Palumbos ChFC, CBEC: customers, so I just don't see fifty different scenarios like you do. And so, you know, when I partner for the M. And a work we bring, you know Dan, appreciate it when or niece up, we bring down, and when we're partnering, when we talk about strategic incentives that's we're bringing in gold value. And Mark Bronman and we just. You know we appreciate that geekiness because it's it's legal. It's tax it's business. There's

 

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Michael Palumbos ChFC, CBEC: so many different aspects of what we need to look at. For. A client. There's not one person out there that can know it all.

 

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Michael Palumbos ChFC, CBEC: It's just too hard, but it's like you know where where we shine is that you know, we have enough knowledge in all these different areas that it's like. Oh, wait a minute. This is a mark, Bronfman. Specialty. Hold on one second. Let's get Mark in here, and we can do that, and it's beautiful.

 

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Mark Bronfman: So if if someone wants a primer on sell paying convey, they can pull down the article entitled Equity Rules from the Bowl Value Website, Right? And so yeah, it's bold value.

 

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Michael Palumbos ChFC, CBEC: Spend some time. Take a look at the articles for inspiration. Look at his book that look at the blog.

 

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Michael Palumbos ChFC, CBEC: Um, there's just It's just packed full of information, I will say, and I don't, you know. So for somebody that's in the industry that knows what you're doing, even looking at, you know, reading some of your articles. I'm like you lost me. So if you, if you're looking at this folks and you go to Mark's site, and you're like Oh, you know that it's It's just know that there's

 

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Michael Palumbos ChFC, CBEC: It's a specialty. It is. What Mark does you know for years now to really help people think through these areas, and this isn't an endorsement of for your you know, for what you do or anything. It's just the fact that it's. You know

 

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Mark Bronfman: It's not bragging, if you do it, you know what I mean, and so You've been doing it for many, many years now, and we appreciate it. So let me finish up with one story which reinforces the whole concept here of human capital,

 

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Mark Bronfman: because it's all started with the idea of attract, retain reward people because human capital is the asset

 

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Mark Bronfman: in the twenty first century to creating value for an organization.

 

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Mark Bronfman: So one of our larger clients brought us in

 

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Mark Bronfman: uh to help with

 

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Mark Bronfman: a carve out plan for key executives, and it took us probably the better part of nine to twelve months to figure this out. It's a very complicated situation.

 

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Mark Bronfman: They had

 

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Mark Bronfman: put in a you a our plan, a you an appreciation, right plan

 

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Mark Bronfman: that almost killed the company.

 

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Mark Bronfman: It it was it's it's It's a plan like a soar plan, stock appreciation, right plan that people can exercise that will, and when they do that,

 

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Mark Bronfman: the company needs to cough up the cash. And this ended up being a growth story company of a large amount of equity value, but a small amount of cash,

 

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Mark Bronfman: not not not quite a dot, but of that ilk. So we had to come in. We had to shimmy that plan out and replace it with something else. And this company basically uh ended up selling for two point five billion dollars,

 

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Mark Bronfman: eleven of the capital of of the of the business went through our plans, so it would end up, being almost three hundred million dollars, and went through the plans.

 

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Mark Bronfman: And There were two comments that came out of this one is when the white Shoe law firms went through the plans. They said The plan is flawless,

 

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Mark Bronfman: but more importantly than that,

 

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Mark Bronfman: the you, the chief human resources officer, said this plan was a lifesaver.

 

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Mark Bronfman: This plan was the glue that brought everyone together and and and created fairness in environment. And you guys did a great job. And so if you're looking for tools around strategic consensus again, more than executive compensation, right to align and promote

 

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Mark Bronfman: and fit in with with with with the personal financial planning for your personal download and all things we've been talking about.

 

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Mark Bronfman: Give us a world. Give us a call through Michael. We had to reach us both valuecom

 

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Mark Bronfman: and uh,

 

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Michael Palumbos ChFC, CBEC: so I just thought you'd like to hear that story.

 

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Michael Palumbos ChFC, CBEC: Um! The one thing that they all can agree upon is that the battle for talent right now is big Um. And so when you're talking about attracting and retaining a players top talent. It's things like in strategic incentives are going to make the difference for that talent for a lot of these, you know, for a lot of these companies. So when you're fighting against, you know the big boys that might have more cash to throw at people um, you know, utilizing strategic, and

 

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in that middle market space just makes all the sense in the world.

 

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Mark Bronfman: Michael, this has been a heck of a lot of fun. I really appreciate it, and I appreciate, and I appreciate you spending the time with us.

 

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Michael Palumbos ChFC, CBEC: Um, ladies and gentlemen, Mark Bronfman from bold value. My name is Michael Columbus, from family wealth and legacy, and Rochester, New York. And you've been listening to family business show. Have a great day, everybody. We can't wait to have you on. Listen to the next episode. Take care.

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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