Doug Houser:
From Rea & Associates Studio, this is unsuitable, a management financial services podcast for entrepreneurs, tenured business leaders, and others who are ready to look beyond the suit and tie culture for meaningful, measurable results. I'm Doug Houser.
I hate to be the one to break it to you, but none of us are getting any younger. Of course, nobody likes to be reminded of this fact but when you are a business owner, thinking about what will happen to your business when you reach retirement age can be especially anxiety-inducing.
Today, Joel Guth, CEO and founder of Gryphon Financial Partners has seen countless owners grapple with this type of situation over the years, and he helps clients approach future liquidity events holistically. On this episode of unsuitable, Joel will reveal how three simple questions can uncover your ideal course of action. Welcome to unsuitable, Joel.
Joel Guth:
Thank you.
Doug:
Great to have you here. Our mutual friend Chad says hello as well. I just spoke with them on the phone beforehand so he says to say, "Hi." I loved when we got together last time in terms of hearing about your approach to business succession and succession planning. We hear so much about that these days. So talk a little bit about I think the unique approach that you and Gryphon take.
Joel:
Well, first of all, thank you for having me, looking forward to doing this. For us, we've worked with over 50 families who've sold privately-held companies and hopefully, we've learned a few things as we've done it. For us, it really comes to a couple things. It starts with what's the real goal? What's driving the idea of embarking on a succession plan? And then it really is helping the owner think through what they want to accomplish, what life will look like afterwards, and what is life going to entail when they're no longer the CEO or the owner of the business?
Doug:
Yeah. So it's attacking or thinking about those emotional things and all of that that comes sort of with that transition.
Joel:
It is. I think we lose sight sometimes of how much of our identity is tied up in our job, who we are, who we are as a person. If you ask a business owner many times who they are, they identify as the owner or the CEO of XYZ Company.
Doug:
Sure.
Joel:
When you are no longer the owner, who are you and what are you going to do with your life? Many of them are selling their businesses in their 50s and have 30-plus years to live and trying to recreate themselves and find fulfillment in a next journey is very difficult.
Doug:
Yeah. So I think that part of the approach, in terms of thinking about that aspect, it's just absolutely wonderful. You don't see that enough. We see that all the time when you're with business owners, they're focused on, "Well, I want to get this multiple or whatever." That's what they seem to hear with their peers and friends, and they don't think about those things enough.
Joel:
Obviously, being a money management firm, all of the money issues are very important and certainly need to be addressed. I think we addressed that really, really well. But we always emphasize that the money you've created, the wealth you've created is merely a tool. That's not the end-all. It's a tool to go do what you want to do with the rest of your life. So, who do you want to impact, whether that's family, whether that's the community, whether it's a specific organization? How do you want to impact them? Then, something as simple as, "What are you going to do with your time?" Because we forget we're replacing 60 or 70 or 80 hours a week that you were working isn't an easy task.
Joel:
At first, it is because you do your bucket list. We're going to travel, and we're going to do this. What we've seen, and I'm sure you guys have seen it as well, is around that 18-month timeframe, they really start to struggle with day-to-day activities. We will take them through an exercise of, "Well, I'm going to golf." "Okay, well how many rounds?" "Twice a week." "Okay, so there's eight hours, maybe 10 hours as you sit and have a drink with your buddies after your golf." "Well, I'm going to work out more." "Okay, so well there seven hours, right? An hour a day. So now we've got 17 hours, so we still need to replace 53 hours. What are you going to do?"
Doug:
So you get that granular with them.
Joel:
Sometimes, if somebody's really struggling because we don't know what we don't know when we embark on a journey for the first time. For most entrepreneurs and business owners, they will sell one business in their life and they've worked at that business for a number of years. So they haven't had free time and liquidity, and so they don't know what life looks like. So the more they are struggling to envision the future, the more we try to get granular so that they can start to think through what they're going to do. Sometimes, they conclude that maybe selling the business isn't the right path because they will be unhappy. Maybe the economics right now, we have record-high multiples. You have a lot of money in private equity that's coming after privately-held businesses.
Joel:
So from an economic standpoint, it's easy to argue today is when you sell your company. But at the end of the day, why did you create the business in the first place? Many times, it was because you were passionate. Maybe you wanted to create a legacy. Maybe you wanted a great place for people to work. Maybe you wanted to create something for your family. And just because it's the right economic decision doesn't necessarily make it the right personal decision. So we've had clients who've gone through that process and discovered, "I would be really unhappy if I sold my company."
Joel:
The statistics are a little overwhelming in terms of the number of business owners if you look out two, three, five years, who are unhappy and who regret selling their business. So for us, it really is right to get the foundation correct and it's critical to understand, "I'm going to do this. This is why I'm doing it. This is what life will look like when I'm done. I'm going to be as happy or happier when I exit."
Doug:
Yeah. I applaud you for that approach. It's something I've sort of learned the hard way in my career too in dealing with clients that have approached transactions and looked at liquidity events. I never thought about those types of things when helping them through that process. But in recent years, I've started to embrace that much more because it is important. You hear from clients, I know we have clients that have even done say an ESOP transaction where they haven't exited, but they've cut back from say 75 hours to 35 hours. Again, what do you do with those hours? So I think getting that granularity and you sitting down doing that is fantastic. So then do you develop a model, you start there and sort of back into what they need and want from there financially?
Joel:
We do. I think that, again, the economic piece of it sometimes is easier because one, that's where their head is. And two, it's what we do every day. So we do spend an inordinate amount of time understanding how much do they need to walk away to do everything that they want to do? We help them start to recast what life will look like because many of them will buy a second home, maybe a third home. They're going to travel. They're going to spend time here, there, and everywhere else. So you have to put a lot of thought into what life will look like for spending purposes and what kind of cash flow do they need. Then, obviously, the structures are working with the accountant and attorney on estate planning and making sure all of the kind of nuts and bolts of the transaction are done correctly. We think about it in terms of, "What do you have? What do you want to do? How are we going to do it, and what do we need to get it done?"
Doug:
Okay. Then, once say the transaction is done, you still continue to work with that individual or that family to try to maintain those goals. Right? It can be fluid probably, I'm sure.
Joel:
Yeah. It is fluid. We just had a meeting with business owner the other day, and we have a list of things that we think will happen that he doesn't think will happen or she doesn't think will happen.
Doug:
Interesting. What are some of those?
Joel:
I'm not going to buy any toys. Life's going to be the way it is. Invariably, they go on a vacation and while they're on a vacation, "We've decided to buy a house in Florida, or we're going to buy a house in an Arizona. Or, I really do want the new car so I am going to do that." I joke that when you take people who have the DNA to create a valuable business and you give them money and free time, they're going to do something. They're not going to sit at home and do nothing.
Doug:
Excellent point.
Joel:
So they always underestimate the liquidity they need. They also overestimate their risk tolerance because they go from having a job that they're in control of where they've controlled their paycheck for maybe 20, 30, 40 years to now where the market forces are driving their net worth. They're not in control the market forces, so they overestimate how much risk they're willing to take. So the ongoing work with them, we think about it in two segments is the initial stage is the setup and helping them adjust to life post-sale and having all this liquidity, and how do you go about investing it, how do you invest it prudently? And then it's life after that 18-month window where they start to think about what will the rest of their life look like, and how do they settle into the rest of their life, and where are they going to spend it, and what does the cash flow need to sustain that over a 30-year period?
Doug:
Sure. So, how often do you meet with somebody as you go through this process? I mean, everybody's different, of course, but what's say best practice in your mind?
Joel:
Great question. So initially, we meet with them a lot as we're trying to get the setup right. That may be monthly for a 12-month window. But then once we get into kind of more of a steady state, we meet quarterly and then we have monthly touch-base calls so that we are kind of in-tune with what's happening, what's changing. You said it very, very well. It is extremely fluid in those first two or three years.
Doug:
Okay. Okay. Now, we always try to tell our clients, "When you're thinking ahead of some type of liquidity event, or succession, or transition, no matter what type of it is, whether it's an internal or external, at least try to start two years out." What are your thoughts in terms of best practice with regard to that?
Joel:
We always say two to three years. If we can get a two to three-year runway, it allows us to get all of the planning done and assemble the right team, legal, accounting, that we need to get everything executed the way we want it executed and then begin hiring the investment bank and begin the process of going to market. So, ideally, we would love to have three years, but we would say two is kind of a minimum to get it done and get it done without rushing.
Doug:
Yeah. You see some firms out there that tend to become, I would say, very transaction-driven and they focus on the event and they seem only interested in talking with folks when they know that event is a close let's say. And then once the event happens, it's bye-bye, gone and we hardly see you anymore. I mean, I think that leaves a poor taste in some folks' mouths out there. Obviously, you guys don't operate that way. I think the approach is why we have you here today and it's awesome. That kind of holistic approach.
Joel:
For us, it's also where we've had the most success. Many of these business owners had an advisory board when they were running their company, and we encourage them to think about their professional team as their advisory board as we move forward. You mentioned Chad, so we've gotten to know Chad because Chad is part of that advisory board for a couple of our clients that we share in common. So we think it's critical that we're meeting as a team on a regular basis with the client just because you're paying all these very smart people, we might as well have them around the table adding value to your situation and no one person has the best idea in any area. So that ongoing maintenance for us is where you really ensure success.
Doug:
Now, this also makes me think about the rest of the folks that have an interest in it, whether it's family or other folks say within in the company. How often do you get the rest of the family members involved and around the table? Is that common?
Joel:
It is. Now, some of that will depend on the size of the pool of wealth we're dealing. With the larger the pool, the more often we will have second and third generation together. But we try to do it at least annually. Some of that is an education process because getting the matriarch and patriarch to begin to open up and share their vision and an idea of what kind of wealth we're dealing with with the second or third generation sometimes can be tough. As you know, many entrepreneurs and business owners play things very close to the vest.
Joel:
We think that once you've created that liquidity, there may be trust accounts involved that at some point, the second generation is in charge of or they're going to have the benefit of. So the sooner we can start to educate them not only about the financial markets but also about the values of the family, and how this wealth was created, and what drove the wealth, and what the driver of the wealth hopes happens longer term, the sooner we can do that the better. So we would say at least annually. We do have some families that do it on a quarterly basis.
Doug:
Okay. Now you're getting into more of that legacy, what's the meaning behind all of that? Sometimes it doesn't always translate from generation to generation, right?
Joel:
I'm sure you guys see it as well. For our clients, the biggest once they've sold the company is how is this wealth going to impact my kids? Some of the things we don't think about is the kids may have owned a share of the business when the family was running it, but mom and dad had control of the distributions. So they could decide whether to distribute, not distribute. Once you started doing your estate plan and you've established trust and you put liquidity into those trusts, handling and managing the distribution sometimes aren't as efficient in terms of the way mom and dad wanted it done because now you have liquidity and you have options. So that legacy is really driven by mom and dad beginning to share what's important to them and sharing their desires.
Joel:
We will say that of the capital you have, the financial capital is the easiest to handle about how we're going to leave it. But that moral and ethical capital, which all of us worry much more about our kids and who they are in terms of their ethics, their moral, their character, their trades, than we do the finances. But I think we focus most of the process with a family is around the financial capital. Really, what they really care about is they don't want to ruin their kids because they've created this wealth.
Doug:
Yeah. I think that's awesome in terms of you thinking about that and trying to draw that out for families and business owners. I know we've encountered situations, we'll sit across the table and they'll say, "Here's what I want to do. I want my kids to run it or whatever." They haven't even asked if their kids want to do that.
Joel:
Yeah.
Doug:
I'm sure you've run into those kinds of things too. The kid may say, "I'm not interested in running the business."
Joel:
We had an instance where the father sold his company, and his vision for his retirement was helping his son run a business.
Doug:
Wow.
Joel:
His son looked at him when he showed up and said, "Dad, I didn't want to work with you. I started this business because I didn't want to work with you. I'm sorry. You're not welcome. I love you, but I don't want you here every day. We couldn't work together." The father was heartbroken, and it was a situation that we came into after they had sold the company and it was liquid. We really do think that that's a situation where if we had been involved two or three years earlier, we would have discovered and asked the simple question you just brought up, which is, "Have you asked your son?" You know?
Doug:
Yeah. Yeah. Yeah. We've both experienced those kinds of stories. Yeah, it's just communicate and let's deal with it sooner rather than later.
Joel:
Right. Right.
Doug:
So we talked a little bit upfront about the three key questions that if you're a business owner, you want to sort of ask yourself or to ask. One of those is, "When do you want to sell?" Right? Is that the first thing that you lead with?
Joel:
Yeah.
Doug:
Where do we go from there, once we have, "Okay, say I want to sell in three years"?
Joel:
The next thing we ask him is, "Ideally, in a perfect world, who would own it?"
Doug:
Okay.
Joel:
You alluded to an ESOP. Many times, you go through the, "Well, geez, I don't think my kids want to own it. Boy, it'd be great if my employees could own it." And then you end up with the reality of the employees owning it and some of the risks that are associated with it. Then, if you're going to sell it to an outside party, what does that look like and how do you feel? So really it's, "When do you want to sell? Ideally, who would you want to own it when you're done? What would you like your involvement to be? Do you want to sell it and on the day you close, you walk out? Or, do you want to sell it and be involved for a couple of years?" Just trying to help them understand once they've made the decision to sell, who would they feel good about owning it and how often do they want to be involved?
Doug:
Yeah. Every situation has its own right answer. But I think as we talked through about making sure that they have some way to remain relevant and how do they identify themselves post-transaction, that is so, so critical.
Joel:
It is. One of the things that we have found and we try to have a very thoughtful discussion around is so many companies now are being bought by private equity. There are many benefits to a private equity firm owning you. But sometimes, for the right person, that's a disaster because you may own 20% of the new entity but you don't get to make the decisions. You have a private equity firm and maybe a board of directors that decides, and that's a real shift for an entrepreneur to find out that, "I can't invest in an area of the business that I think is prudent, and I have to get approval." So just talking through, "Okay, what would it look like if you are sold to a private equity firm? How does the reporting work? Who are you talking to? How often are you talking to him? How are you going to feel calling and getting approval?"
Joel:
On the other side, if you sell to a strategic buyer, "How are you going to feel that maybe they changed the branding, maybe they shut one or two locations, maybe they fired key people?" So there is no utopia when it comes to it. Every case is very different and very driven by the goals and the personalities of the owners.
Doug:
Yeah. I think that's sage advice is setting those parameters upfront, and talking through that, and not just focusing on, "Hey, we're going to get this transaction done for you."
Joel:
We would like to think we fill a unique spot in the market in that the banker comes at it from the aspect of, "I need to get the deal done, and I need to get the deal done for the most amount of money for the family I can." That's absolutely what you want them thinking.
Doug:
Sure.
Joel:
The legal team comes at it from, "How do we structure it and make sure the family's protected and make sure all the legal structures are in place?" I think where we have filled a really good gap is to help the family think about, "Okay, yeah, that's the most valuable deal. But is that the deal that's going to fulfill the most of your goals? And is that the deal that's going to allow you to walk out under the terms and circumstances that you really desire? And if it's not, maybe that's not the right deal." Then, once we know you're leaving, then you really start to embark on who are you going to be once we're out of here?
Doug:
Yeah. I think that's a unique approach for a financial partner like you guys to have.
Joel:
Oh, thank you.
Doug:
So I applaud you for that. Because of that, you don't necessarily take on all comers. Right? It's got to be the right fit for you.
Joel:
It does. It does. So we spend a lot of time upfront with them getting to know us and us getting to know them to make sure that we're the right partner, and can add value, and we feel fulfilled in what we're doing.
Doug:
Yeah. Just briefly, we want to talk maybe a little bit about trends that we're seeing in the market. Do you still see a lot of private equity money out there and deals continuing to happen along those lines?
Joel:
We do. I mean, private equity firms are raising record amounts. The amount of money that's on the sidelines to do deals is at a historical high. You have lending rates and banks kind of very, very willing to lend money. Some would argue maybe at levels that aren't prudent. So I think there's a ton of liquidity. It's easy to get deals done. Multiples are at all-time high, and I think that trend continues until the economy slows down.
Doug:
Yeah. Well, it's good to hear from you. I think these are just wise, wise tidbits that you've shared with us today. I would encourage anybody who's thinking about succession, transition, and some of those life changes to make sure they have a partner like you that really thinks holistically about this whole process. I think that's invaluable.
Joel:
Well, thanks for having me.
Doug:
Yeah, absolutely. I appreciate it, Joel. If you want more business tips and insight or to hear previous episodes of unsuitable, visit our podcast page at www.reacpa.com/podcast. Thanks for listening to this week's show. You can subscribe to unsuitable on iTunes or wherever you like to get your podcasts, including YouTube. I'm Doug Houser. Join us next week for another unsuitable interview from an industry professional.
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