In this podcast, Noah Rosenfarb, author of "Exit: Healthy, Wealthy, and Wise," and the upcoming book, "20/20 Vision: Who is Going to Own Your Company?" talks about:

  • His latest book;
  • Planning steps that business owners should take for the future of their company;
  • Options available to owners that want to sell their business to a family member and/or key employees;
  • Different kinds of security arrangements that owners can use with their key employees; and
  • His advice about the entire process of transferring ownership of a business.

About the Guest

Noah Rosenfarb is a Certified Public Accountant, Accredited in Business Valuation, and a Personal Financial Specialist. He is a Personal CFO and Holistic Wealth Coach at Freedom Business Advisors, which provides middle market business owners guidance on how to successfully transition out of the management and/or ownership of their company. Mr. Rosenfarb is the author of "EXIT: Healthy, Wealthy and Wise" and the former host of “The Divestopedia Exit Strategy Podcast” where he is both a contributor and an Advisory Board member.

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Josh Patrick: Hello. Today we have Noah Rosenfarb, CPA, AVB, PFS, lots of fancy letters and he has devoted his career to advising business owners on all things related to money. He is a tax, estate, financial planner for entrepreneurs. His firm, Freedom Business Advisors, provides middle market business owners guidance on how to successfully transition out of the management for ownership of their company. Mr. Rosenfarb is the author of "Exit: Healthy, Wealthy, and Wise" and the upcoming book, "20/20 Vision: Who is going to Own your Company?" Hey Noah, how are you today?

Noah Rosenfarb: I’m terrific, Josh. Thanks for having me on.

Josh Patrick: Well thanks so much for passing the torch on this show over to me. You did a great job with it for, how many years were you doing this show?

Noah Rosenfarb: It lasted me about three years is my guess and it just came time, I’m writing this new book and I’m engrained in the South Florida Market and I’m starting a new podcast for my local market called South Florida Entrepreneurs on Fire where we’re interviewing all the fastest growing entrepreneurs down here in Palm Beach Broward to Miami Dade County.

Josh Patrick: When do you think you’re going to launch?

Noah Rosenfarb: We just released our first book and 30 interviews. It’s up at and over on Amazon, "South Florida Entrepreneurs on Fire." It’s a collection of 30 interviews that were done not by me but by another member of the Entrepreneur’s Organization of South Florida in which I’m a member and so I’m doing it for that. It’s a nonprofit where we have 160 members. We’re all owners of our own business that do $1 million or more in revenue. We get together for learning events and then also kind of a mastermind group, peer group facilitation that we do once a month.

Josh Patrick: Tell me about this new book you’re writing. When is it going to be coming out first of all?

Noah Rosenfarb: We’ve got the outline down. We’ve got a lot of the content done and certainly, ideas are ready. I’m hoping for at least before the end of the year kind of thinking about 20/20 Vision. I thought the name might make sense given where we’re are in the timeline in history, but really the question for owners and the question that I think is the most important one that they need to answer is who is going to own their business in a few years. Based on their answer, they’ve got certain planning steps that they probably should engage in.

Josh Patrick: What kind of planning steps you think they should engage in?

Noah Rosenfarb: Well I would say that it certainly depends on the answer. When I think of the answers, I really only think there are four options. The first is “Nothing is going to change.” The second might be “I’m going to add my key employees or so to my key employees.” The third is “I’m going to add family or so to my family” and the fourth one is “I’m going to sell it someone else.” I want to bring in a private equity firm or strategic acquirer for all the part of it and today.

Josh Patrick: Of course there is a fifth option which no one likes to consider but it’s the one that most businesses end up getting by default and that’s liquidation.

Noah Rosenfarb: Right. Well nobody is playing it, right?

Josh Patrick: Well, you know, some should I think but that’s, you know, it’s a default option for folks who don’t plan at all. So what kind of planning do you think is important for these folks to do this to start off with?

Noah Rosenfarb: Well maybe it would be helpful if I kind of walk you through each individual based on their answer. So we’ll take the owner that doesn’t think anything is going to change, that their ownership is going to be the same now as it will be in four or five years. To me the most important thing for that owner is to make sure that if they get hit by the proverbial bus that the business is still going to survive. If something happens to that owner, it’s not just about who is going to own it.

A lot of owners I talk to, they say, “The business goes to my spouse” or “The business goes in a trust for the benefit of my spouse and my family,” but that’s may be who is going to own it, but who is going to run it and what’s going to happen on Monday morning when the employees come in and find out that you’re gone? Are they going to scurry off? We think it’s like “The herd gets spooked” and all of a sudden Monday morning they are on the phone, the competitors are calling and the good people might start running away.

Josh Patrick: How do you prevent that?

Noah Rosenfarb: I think the most common strategy that we use is the retention bonus. What we do most often, I’ll tell you about a printer that we worked with. He was in his mid-60s, still plans to continue to own the company into his 70s but obviously he is concerned. He goes and travels around the world a lot and he is on a lot of planes and every time before he gets on, he has always wondered about if he would make it back. What we did was we just looked at what his executive payroll was. In this particular company, it was about $900,000 of executive payroll. We said to him, “Look, if you want to get five years of term insurance for about $500,000, the cost was diminutive, maybe it was $4,000 a year."

For $4,000, he was able to set up this particular retention bonus pool. He set it up so that his key executives will get a percentage of that bonus pool if they were to remain employed by the company at different target dates. There are some subjectivity to it so it was discretionary on part of the owner, which would have been his wife had he passed away, but at least they knew there was money there, it’s kind of socked away and ready to pay them if they stuck around through the transition.

Josh Patrick: How does he structure this thing?

Noah Rosenfarb: In what sense?

Josh Patrick: Well if got hit by the bus, will they get a lump sum or do they get a piece of it as time? How does that retention bonus actually work? How do they get paid? What are the mechanics of doing it?

Noah Rosenfarb: It depends on the owner and what the owner’s goals are. We’ve seen certain owners that want to pay a retention bonus just the first 90 days. They want to pay a weekly bonus for the first 90 days and that’s because they already know and had communicated with their spouse who the right buyer is and they have an essence kind of buyer lined up and they just want to make sure the business can continue for those 90 days while they could have a sale or transfer take place.

I have other owners who said, “I want my kids to be able to run it. My kids are pretty young. They are late teenagers. They are just coming into the business." They might need 10 years before they are ready and so they might want a bigger pool of money to continue to have around just to make sure that that management team is there to coach and train the children until they are in a position where they could take over. It really depends on the owner and what their time frame is and really like I mentioned before, who is going to own it and who is going to run it and take a look at what would be required to meet those goals.

Josh Patrick: This retention bonus, would it make sense also if they have one of these employees if you’re thinking about doing a third party sale?

Noah Rosenfarb: It depends because if you’re thinking of doing a third party sale, you’re probably going to want to dedicate resources to other places like maybe you’re going to go from having reviewed financial statements to audited financial statements and if the people that are listening or anything like me, the clients that they work with, the businesses that they own have limited resources, so we’ve got to decide how do we allocate our resources most effectively. If we’re planning to sell it, so let’s take that fourth answer, somebody who is planning to sell to a strategic acquirer or private equity firm, we’re probably going to look to take our resources and do more value added consulting with the company, how we’re going to grow the value of the business the quickest, and the retention bonus, how would it impact the value of the business to the buyer. So we’re going to look for something that’s really going to have an impact on value.

Josh Patrick: Okay. When I sold my vending company, I had a stay bonus and it impacted the value of my company significantly because we wanted to do a $500,000 reduction because we have employment contracts up, up, up but we do. In some cases, it’s really valuable.

Noah Rosenfarb: Well for sure having employment contract, without a doubt, that’s part of the value consulting. I’m not sure if you read my book, the last chapter is 53 ways to increase the value of the company. We just go down a check list of what can owners do to help increase the value of a company and certainly employment agreements are pretty high on the list.

Josh Patrick: Why don’t we take a little bit of a turn and look a bit at what kind of options shall we have if they want to sell to a family and/or key employees, you know, internal transactions?

Noah Rosenfarb: I think the biggest challenge that my clients face when they want to transfer to a key employee is that inevitably, that employee doesn’t have any money. So the only way that that employee is going to be able to acquire an interest in this business is really if at some way it’s given to them over time by the owner. What we look to do is figure out how much time do we have? What are the cash flows of the company? How much can the owner afford to essentially grant to this employee? Usually, there’s one of probably a handful of different ways that the transactions take place, but the key is having growth. Without growth, it’s really hard to transfer a business to a key employee and get more value than if you just continue to own it yourself. We want to make sure that the business is growing.

We also want to make sure that the owner that enters into this agreement with their key employees still keeps their options open, meaning if they do want to add a family member later on or if they do decide to sell to a third party that they are not locked in seven, 10, 12 years, down the line being forced to sell their interest to this key employee. Ideally, we want to be in a position where after the first tranche of equity gets transferred, the key employees in the position to take a bank loan to finance the purchase of the remaining shares, in that way, the owner gets their cash, they are not on the hook waiting for a long term no payment from the buyer after they have already waited kind of seven years or 10 years to transition the beginning part of the equity.

Josh Patrick: What kind of security arrangements do you recommend that owners use with their key employees before outside financing is brought in?

Noah Rosenfarb: I would say the first test is really kind of, “Is this key employee ready to be an entrepreneur?” Maybe that question him a little bit away from security but is this person ready to be an owner? Usually the test I use is, “Are they and their spouse willing to sign essentially a second mortgage that their house is up for sale if they default on this note that you’re entering into?” If they can’t do that one seemingly, to me as an entrepreneur, if they can’t take that simple risk in a transaction that’s essentially risk free otherwise, they are probably not right for ownership.

Josh Patrick: What else would you recommend that they do if anything?

Noah Rosenfarb: So we do DISC Profiles. It just happens to be the profile test that my partner, Chris Roehm, comes with and so we’ll do a DISC Profile on all the partners in a transaction so making sure that the key employee and the owner both really do understand each other or understand how they think and understand how they could work together and what challenges they might face. I would say the combination of the owner already knowing that they want this person to take over, the employee being in a position where they are excited about the opportunity, taking a look at their personality profiles to make sure there’s not some underlying issues that might come up once they are in some fashion work peer to peer as opposed to boss to employee, then the last is making sure that employee has an entrepreneurial risk profile.

Josh Patrick: Can you explain what a DISC Profile is because I bet very few of the listeners actually know.

Noah Rosenfarb: I don’t know what the D, I, S, and C stand for. I don’t really know but it’s an assessment to understand people’s personality traits and if you type D-I-S-C into Google, you’re probably going to get a whole bunch of literature that will be more eloquent than me.

Josh Patrick: How do you use the DISC Profile when you’re working with it?

Noah Rosenfarb: We have clients take the assessment. The assessment is a tool. Usually it’s administered by some professional organization so we work with an organization that I think is based in Arizona. They administer the assessment. They give us summary of the results with interpretation and then we take that interpretation and come back to the clients and make sure that they agree with the assessment that they can see themselves reflected in the assessment and then how that might impact their working relationship. If you have a high D and a low D, how does that work together? Again, that’s not really my area of expertise. My partner is an expert in that.

Josh Patrick: Great. Let’s take another move and let’s talk about families selling or transferring business to a family member.

Noah Rosenfarb: Most of the clients that I interact with, when they want to transfer to family, they are not thinking about price and so if they are not looking to get the most value from that family member, what we really have to look at is what are the financial needs of the owner and how are those financial needs going to get met.

Josh Patrick: Okay. What are some of the solutions that you come up with?

Noah Rosenfarb: I think the first is figuring out how much money did they need from this business. I’ve had the good fortune of working with clients who were able to transfer their business to their children and they didn’t need any cash flow from the business and so we were just looking for how do we substantiate for the IRS and for state tax purposes the lowest possible valuation so that we could transfer to the kids with the lowest amount of cash coming back to the owners.

But on the flipside, there are lots of families I worked with where mom and dad had spent 30 years busting their butt building a business and they made a good living. They have saved some money. They put their kids through college and now the kids are in the business and they want to transfer ownership, but they still need the value of the company in order to retire. We’ve got to look at what risks are they willing to take to transfer the business to family and essentially rely on the cash flows of the company even though they may not be there. So it runs the gamut between an outright sale of stock that’s usually going into some vehicle that’s going to be discounted for state tax purposes and to the next generation to really fair market value that parents need and the children really are just the best buyers for whatever reasons.

Josh Patrick: Let’s assume that the family has no financial need, you know, the senior generation from the business. Do you have any thoughts on whether it’s better to sell the business to the kids or give the business to the kids? What tends to make a more successful family transition?

Noah Rosenfarb: Great question. So I think there are two parts of it. We can look at the numbers and just from a purely financial perspective, if we add the wealth generated by the first generation, the second generation, the third generation, net of taxes, what’s the best financial outcome, that’s one answer to the question but I think knowing you and knowing the type of work that we both want to do with clients, I think the better way to approach the question is what makes for happier, healthier families that have more success in the truest sense of the word not just financial. Is that right?

Josh Patrick: That’s certainly right. I have my own views on this but I’m really curious about yours.

Noah Rosenfarb: I think it really depends on the families, the values that the family has laid out for the children and for themselves to how they live their values, and it’s not so much that the structure is going to impact the future success, but all that being said, I think the children that pay for the business tend to have a greater sense of responsibility, a greater sense of value of the business itself, a greater value to what mom and dad have created than those that are handed in on a silver platter. Again, it could be values driven so I don’t know which is the chicken and which is the egg there. I think more families where there’s an emphasis on recognition for what has been created or what has been done and less of the sense of entitlement, those values tend to breed more happiness and success than the other way around.

Josh Patrick: All right, I think Tom Deans and I would both definitely agree with that.

Noah Rosenfarb: Yeah.

Josh Patrick: So how do you get kids ready to take over the business?

Noah Rosenfarb: Again, there are two sides to the coin. One is the leadership responsibility and the other is like the technical responsibility. On a technical training side, most of the families that I work with I’m encouraging them to have their children network with other children of other owners. So I kind of grew up in a family business in New Jersey, was fortunate enough that Fairleigh Dickinson University had a family business forum. I was able to go there, meet with a bunch of peers, other people who were in family businesses who weren’t owners, talked to them about the common issues that we face, and really prepare me for the leadership side and the transition side outside of the technical piece.

Inside the business, I had to grow up and my family business was an accounting firm. I had to learn how to manage and run an accounting firm. I never took over that business. I encouraged my father to sell it to a third party, which he did, and I went on and started another business. I encourage my clients to do the same thing, to educate their kids both technically and in the leadership qualities, and figure out if they are not capable of leading the company, then I never recommend that they transfer leadership responsibilities to their children, but I don’t mind and I advocate that ownership and leadership can be segregated. You can have family members that own part of a company and have no leadership in the company as long as the company can segregate ownership responsibilities from employment responsibilities.

Josh Patrick: Makes sense. We only have a couple of minutes left. When you’re thinking about this entire process of transferring ownership of a business, especially on a sustainable basis, what’s your final advice that you would give to our listeners?

Noah Rosenfarb: If you want to transfer ownership on a sustainable basis, I think you’ve got to create a culture in your company that creates revenue and profits in a sustainable way. It’s much less about the ownership, it’s much less about who is going to run the company, who is going to own the company, and more about how do we have a great value in the market place, how do our customers get served, and what are our processes around making sure that we’ve got raving fans, a quote of some book that I know I read at some point.

Josh Patrick: It’s probably a better idea to do the stuff you just talked about before you really think about selling your business.

Noah Rosenfarb: No doubt about it. I think the reason I started the show and the reason I wrote the book, and the reason that so many of the people that I speak to are in this field is because we’ve seen the devastation that happens with business owner families when they don’t plan in advance. It’s really a tragedy and so I think the planning community, we’re all here to support these owners in reaching their goals and the first thing is they’ve got to know what they want. If they know what they want, we’ll help them get there.

Josh Patrick: That’s great. Noah, I’m sure that there’s going to be people here who want to contact you. How would they go about doing that?

Noah Rosenfarb: I would say if you want to preview a copy of my book, send me an email, and feel free to connect with me on LinkedIn. It’s Noah Rosenfarb or you could visit my website,

Josh Patrick: Cool, thanks so much for your time today. I really appreciate it. I think we got some great information for our listeners.

Noah Rosenfarb: Great. Thanks Josh. Thanks for having me on.