About the Host
Ryan is an entrepreneur, podcast host of the show Life After Business and the co-owner of Solidity Financial. Having personally experienced the hazards of selling a business, he joined up with his friend Brandon Wood to educate others on the process. Through their business (Solidity Financial), they provide a platform for entrepreneurs called The Value Advantage™ that helps in exit planning, value building and financial management.
About the Guest
After long service as a United States Air Force officer, Todd
Ganos transitioned to independent practice in family wealth services in 1992.
He specializes in asset protection planning and complex tax planning for
families that own middle-market
companies. In particular, he focuses on tax mitigation for business
dispositions. Todd collaborates with a wide range of professionals that
touch business sales: exit planners, M&A advisors, accountants,
attorneys, and investment professionals. Todd holds
a law degree, an advanced legal degree in taxation, and a doctoral
degree specializing in finance.
Todd is a contributor to Forbes Magazine online; his column focuses on issues confronting families that
own middle-market companies.
In this episode, you will learn:
- How to play “nice” with the IRS
- When insurance may or may not be needed in estate planning
- Strategies on how to save up to 80% in taxes when you sell
- Conflicts to be aware of among advisors during a transaction
- What a ‘private letter ruling’ is
- Where an Exit Planner can help in your transaction
Welcome to Life After Business, the podcast where I bring you all the information you need to exit your company and explore what life can be like on the other side. This is Ryan Tansom your host, and I hope you enjoy this episode.
Welcome back to the Life After Business podcast, this is Ryan Tansom your host. Today's guest's name is Todd Ganos. Todd is a partner at Integrated Wealth Counsel. He is the brain surgeon of today's complex estate and tax planning. Through Todd and his team's skill sets, they claim that they can reduce the transition tax costs of selling your business up to 80-some percent and protecting your overall estate taxes by up to 90%. The way he does it is nothing like I've ever seen. His designations and his skill sets have come from a lot of different areas, which allows him to have this overall global view of planning.
It's not just his expertise that makes Todd unique, it's his approach and how he handles his complex planning that is something like I've never seen. Throughout the interview Todd gives us a lot of wisdom, and a lot of gold nuggets about what you should be thinking about when you're bringing on advisors to your team, the different possibilities that are out there when you're planning for a transition.
This episode of Life After Business is sponsored by The Value Advantage. The Value Advantage is a platform delivered via peer groups and/or one-on-one to help you build a valuable company that can thrive without you, while putting an exit plan in place so you have the options to sell when you want to who you want for how much you want. You're able to manage the business by the numbers, working the business as much or as little as you want, and you fully understand how the business impacts your personal financials. If you want to know more, check out the show notes or the website.
Without further ado, here's Todd Ganos. Enjoy this conversation because it is down to the truth about who you're working with and what you should be expecting and what kind of things you can do when you're planning. Todd, how are you doing today?
Very good. How are you doing?
Doing good. I appreciate you coming on the Life After Business show.
Well, thanks for having me.
I am really excited for today's episode because as the listeners will know we met each other at one of the exit planning summits. I got to watch your breakout. You've got a very interesting background. I couldn't wait to reach out to you and pick your brain, but also hear some of the expertise, and the stories that you've got. Before we kick it off we want to give the listeners a background of your expertise and also Integrated Wealth and where you guys play today in the market.
Sure. Sure. Our firm actually has been around for over 40 years. It was founded by an individual who had been a trust investment officer at let's say a major bank. Then approximately 16 or 17 years ago, I joined the firm. The firm was originally a wealth management firm. Very quickly, because I have a legal and tax background our clients began asking us about tax planning and estate planning and also serving as trustee. Very quickly the firm began to take on these other service roles, and eventually it became clear to us that our big value add was in the area of tax planning and trustee services. We began to divest our investment arm really now for a fair number of years our focus has been on the tax planning and trustee services.
Then in particular where our real focus is, is on the sellers of middle market companies. You might say, why specifically that? Well, as it turn out, 70% of all wealth in the United States, now this I'm going to tell you defies common belief, but 70% of all wealth in the United States is in the hands of first generation business owners. It is not the elite families because usually the kids blow the money. Only about 5% of all wealth in the United States is held by what a lot of political people call the elite families, only 5%. There's a huge attrition rate within family wealth. It became clear to us that if we wanted to really focus on preserving wealth, it was on helping these middle market business owners maintain their wealth. The big attrition comes with taxes. That's how we evolved.
That word I think always perks up everybody's ears, especially the middle market or anybody that owns a business because taxes are the things that ... It's really the one piece that makes it or breaks it or swings the needle.
Oh sure. Just to tell a quick war story, we had an individual call. There's ways to hold your ownership in a business. There's a way to structure the business itself, whether it's a corporation, a C corp, S corp, LLC, whatever. What had happened was this gentleman's father had died. The father had owned a business. At the end of it, they were going to see about 40 cents on the dollar of the value of the company between the estate tax and all these other things combined. It was just really a mess, it's a crying shame. That's all I can say is, that's the harshest example is 40% net proceeds.
That's a big enough gap to have some specific attention to. You mentioned when you're explaining your firm about the preservation of wealth. I think that term gets used so much. I know what you do is so comprehensive and so detailed. Can you give our listeners your definition of preserving wealth?
Well, as I mentioned we are not in the investment business. Whoever the individual's investment person is, they have their version of wealth preservation. What we do is we help families to structure the ownership of their business for asset protection purposes. If individuals get sued or whatever, we protect the ownership of the business from potentially opportunistic litigants. Then the second thing is, is to help preserve in terms of tax mitigation. Oftentimes, let's just take a California resident because California is the poster child for tax.
It's the most beautiful example when you're giving the case study, isn't it?
Yeah. If we're talking about a pure capital gain scenario. We're not, and I'll get into this in a second. If it's just a pure share sale and all we're looking at is capital gain tax, a California resident between state and federal are going to pay about 34% combined tax on the gain. One of the things that we would do is to reduce that combined tax rate to let's just say 24% on a gain. That's the simplest example where we might be able to eliminate state level income tax. The second area and I'll throw out another example, there was a gentleman who owned a garbage company. Not sexy, but it was a cash flow, let me tell you. In the Midwest and the thing was he had a lot of accumulated depreciation both in real estate and then property and planned equipment, a lot of trucks.
When you sell depreciated assets, you have recapture. Now on real estate recapture is a different rate than on non real estate recapture, but in either case it's higher than the capital gain rate. When the gentleman's CPA told him how much in tax he was going to pay, he said, "I'm not selling. I can't afford to pay those taxes." The effective tax rate for him was going to be close to 50% on the recaptured portion. There's things that you can do to mitigate that. To change that from, we'll just say this recapture rate down to a capital gain rate. These are examples where tax mitigation is reducing the effective tax rate. It's not the elimination of tax, betrayal uninitiated it's the reduction of tax.
I want to dive into that, because at the breakout session as I was watching your presentation. I think a lot of our listeners because me too at some point before really diving into this whole world. It's like okay what is it, because everybody thinks that their CPA can wave this magic wand and get rid of taxes. I believe that is untrue because you can't just eliminate taxes without doing the work that you do. I think your work is very unique because if it being cross-functional. By cross-functional, I'll let you elaborate on that.
To tee it up for our listeners, when I was watching you literally had this entire whiteboard bubble sheet going on in your presentation about how you were moving assets into different things in order to make this happen. It's more like in a Rubik's Cube than it is just getting rid of it without waving the magic wand on the tax return. I think to tee it up. Can you explain how you approach the cross-functional? I think it's a combination of your background and the education you got and how that affects the advice in how you're structuring these solutions instead of the siloed approach?
Okay. Well, yeah. What I like to say is this is very specialized. It is brain surgery. That now I'll say that there are a lot of attorneys out there and a lot of CPAs out there who work with clients. They tend to focus on the day-to-day issues. In fairness, they are the general practitioner. To give an example is let's pretend that we're talking with a CPA. We ask the CPA, "How many clients of yours have rental property?" "Oh, a lot." "How many times do you get a phone call every year where your client with the rental property says, "Oh, I just had to replace the furnace or the water heater. I want to know if I can do a 179 deduction on it or if I have to depreciate it over five years, seven years, 10 years? How do I treat that? How do I expense that?" If you ask a CPA how many times a year do you get that question?
They're going to say, "I get that 10, 20, 30 times a year." Okay, now ask them, "How many times do you get a phone call from one of your clients that says, "I have a $5 million business to sell, 10 million, whatever it is. I need you to do the tax planning." When we get into the larger numbers, they may say in my career I may have one or two, that's it. Usually the CPA is going to be very knowledgeable about keeping the books and the issues inside the company. Whether this property is depreciated this way or that way, but when it comes to the owner's perspective on selling the company, they don't really do that so much. This is where the specialization comes in. In fairness again to the CPAs and the attorneys out there.
What's going to happen is, is acknowledging that they get the call about the water heater or the furnace all the time. They don't really get the calls about, "I'm selling my business." Where they're going to spend their continuing education, is on the issues related to the depreciability of the water heater and the furnace. They're not going to go out and learn a very complex strategy that they may only employ two or three times in their whole career. That's why the typical CPA and attorney is going to be unfamiliar with this. Now we certainly do not want to take the place of the client's COA or attorney. This is where we get into this collaborative effort.
I want to dive into a couple of those thing because how many lines of tax code are there? I couldn't even begin to guess.
Well, I have a copy so nowadays I usually go online, but I do have-
It's the size of a tree.
There's not just the internal revenue code, that's for the Feds. You also have the states, but with the Feds you also have these things called tax regulations. If you think the internal revenue code is big, the tax regulations, which is how the IRS and the Treasury Department see implementing the internal revenue code. That is roughly five times the size.
It is big.
Then how many times does it change, and the reason I'm asking these questions is because when you talk about continuing ed, right? For our listeners who are the entrepreneurs and the business owners, their continuing ed as entrepreneurs, mine being an entrepreneur is market research, right? That's what you're constantly digging up on to see the new competitors, the new things that are bubbling up. The attorneys, the CPAs, anybody with a designation has got a certain amount of hours they've got to do every year. Where they spend their time like you said Todd is important because so many things change every year. That is like a brain surgeon to go back to your analogy. Not knowing that there's a new tool out that has 100% accuracy, and they're using one that's got 30%.
Yeah. When we talk about, and I'll use the broader term, disposition of a business because the disposition might be a sale to a third party or it might be within the family. Each of those two scenarios has very different planning methodologies. You're right, the tax code ... Well the tax code does have changes from time to time. Then the Treasury regulations can change, but what's really important is the tax court, the United States Tax Court cases. This is where the IRS will challenge a particular strategy that's being used. It's only after seeing the results of the court cases, because ultimately it's the courts that interpret the law. What did congress really mean when it put in section one, two, four, four? This is what the court says, "I see the language. What does that really mean?" The courts-
When you find out, you tell me.
Who are you going to be the first to do it, right?
Yeah. It's the courts that interpret the law. For example there will be some people who try to implement a particular strategy. Then the courts rule on the side of the IRS. On the other hand there are specific transfers within the family that when they occur in a certain way, and it's how the language is specifically written in the transfer document where the IRS has lost 100% of the time. The court, the tax court has just made it emphatically clear. Read my lips, " This is how we are going to rule on this going forward." If this type of language is used, this is how ... I've got to say there's been a dozen cases on this particular item. What one really needs to do. First off, what one really needs to do is when they're going to be doing the tax structuring for a business disposition, they really need to specialize in it. Whoever the professional is, they really need to do it all day long as opposed to, oh every other year someone calls me and I'll dig out the book and I'll read through it.
The other part of it is exactly what you were saying about the continuing education. Not that you're going to necessarily going to get a certificate with continuing education hours written on it. You have to look to see what's going on with the tax court cases to see what is going to hold up. Now the other side of it is and this is actually the way that we do business. Instead of, and I've got to tell you, there are a lot of practitioners out there that they approach it, "Well, you know this should work. Yeah. No. This really should work." Two years ago at a business exit planning conference, I sat down at one of the tables at lunch. They was a CPA there that said, "Oh boy, we have reason to celebrate." "Oh, what's that?" "Well, we just passed the six year mark on our transaction, this one transaction." That refers to a specific statute of limitations that deals with misreporting transitions. I thought to myself, "Is that the way you do planning? You know, my gosh."
What we do is, we circumvent all of this malarkey about, "Oh my gosh, what's going to happen?" There's actually a process where you can go to the Internal Revenue Service. It's what's called the Office of Chief Counsel, it's their head legal staff. You apply for what's called a private letter ruling. You lay it out in front of them and you say, "This is the transaction or the structure that we anticipate doing." It's an advance of the transaction or putting any money into a structure. You say, "We believe given this that it will result in tax characteristic A, B, C and D. What will happen is the IRS will respond to that individual and say that they either agree, disagree or refuse to comment on A, B, C, and D. Now if you then get a response back, that is an agreement with the characteristics that you in your ruling request say that ... If they agree with you, you're good to go, because once the IRS grants you that, they cannot then go back and say, "Oh, sorry. We're going to change our mind."
Because you got their approval.
That's right. I'm going to tell you, it's a different ball game. If an issue comes up in a audit, they have no idea what the taxpayers state of mind was. If they truly believed or if they were trying to pull something. On the other hand, if you go in advance to the IRS and lay everything out, essentially you're saying, "Mother may I." They're saying, "Well wait a second. This taxpayer is trying to do it right." They're coming to us and getting agreement on the principles ahead of time. What I have found is when you go for one of these advanced rulings, both the IRS and the Treasury attorneys and they are two separate entities. They are very collegial in the process. They say if there is a way for us to give this to you and help you comply with the law, we're going to help you out. It's just a different world when you go for an advanced ruling.
I'd love to see the look on their face when someone is not trying to pull one over on them and actually trying to with them, what their reactions would be like?
I've got to tell you, the IRS they have an entire team of attorneys who do nothing but review these things. I would say that in the course of a year, they probably release a couple thousand at least, private letter rulings because some of the rulings irrespective of a business disposition. It might be as an example General Electric going to them. Talking to them about some aspect about their own tax return or a foreign subsidiary or who knows? These letter rulings really cover any taxpayer, corporate, business, individual who is looking for in essence an advanced opinion on this particular item. I think the process is routine for them now.
It's routine for them, but not a lot of advisors. One thing that I want to demystify for our listeners is as we're talking about these "advance plannings." We're talking taxes, corporate structures, estate planning. All these different things that business owners either know because they got burned or they had someone else that was talking to them. I don't think a lot of these subjects are overly ... I hope really exposed to the owner. Just a little bit of a story, without going too much into it.
After watching your presentation, my dad and I realized based on the bubble chart that you had on that presentation is we had probably upwards of seven figures that we would have in our pocket had we planned correctly. It was a combination, there's no way we would have known, it's all hindsight bias. It was how you had the corporate structure and some estate planning with some trust and the tax planning behind it. There's so many different variables in it. Can you distill it down to if you're a business owner with these things, here's the architecture of what this advance planning looks like.
Okay. The first thing that I'll say is there is no cookie cutter solution. Everything is going to hinge on a specific business owner's specific situation and circumstances. You can't come in and say, " Go to Office Depot and get a standard form printed that they have there for sale for a lease or whatever." One little change can completely alter the structure that the business owner wants to have in place. That's the first thing. Before I get into a specific item, I want to piggy back on something you just said about that this is not overtly talked about. One particular structure that we use has been around for about 20 years. There have now been over 80, eight-zero, favorable rulings from the Internal Revenue Service on these structures, 80. This is I want to say that while it involves complex stuff, this is not like it's, "Oh my gosh new and exciting." This has been around for two decades now. Along the line of what you just said that what happened with your family.
We know an investment advisor in California who has a client and they had us talk with their client. The client had a medical device company that he ended up selling two years ago. He specifically asked his CPA about using a Nevada structure and that's what we use, a particular Nevada structure to help him save taxes. The CPA said, "Oh no, you can't do that." I mean, didn't even investigate it. In a similar case we know a principal, a partner at a reasonably sized CPA firm right in the heart of Silicon Valley with 80 people, so a pretty good sized CPA firm. When we were talking with this partner who had been practicing for 35 years said, "Oh my gosh, this stuff is real." This is when we were showing the list of private letter rulings on this one particular structure. I said, "What do you mean, oh this is real?" The CPA said, "You know last year we lost a client that had been with us for 20 years because another CPA firm was talking to him about this structure." We said, "No way. This is some crazy thing that these-"
They're making it up or whatever.
It's a scam, stay away from it. The fact is, is that there are structures, there are things that can be done. Excuse me, in the simplest case this does depend on the state of residency of the business owner. In general, there is a particular type of trust that one can create. Because the rules related to income tax and estate tax are different, you can actually create a trust that the assets of the trust still remain in Mom and Dad's estate for estate tax purposes. Mom and Dad get to decide who gets the money when they die, but for income tax purposes the trust pays its own income tax as opposed to Mom and Dad paying the income tax, and because the trust is a Nevada resident for tax purposes, it pays tax as a Nevada resident. By the way Nevada has no income tax.
Ain't that convenient?
Yes. Now, you're still subject to federal tax of course, but what you're able to do is and again this varies from state-to-state. If you're a California or Colorado resident and so on and so forth, Massachusetts. You are able to move your ownership of your company to the Nevada trust. It is not a taxable event when you do it. Then subsequently when the trust sells the business. It sells the business as a Nevada resident and you're able to side step state level income tax. That's the simplest of strategies. There's other things that come into play that you might be able to reduce the federal tax as well. Then there's the thing that I mentioned about recapture that would pull in another component of the ... Different from the trust itself to deal with recapture of depreciated property and so on. There's other little components that could feed on, but the simplest structure is Mom and Dad transfer their ownership interest into this trust. Then when the trust sells the business, you eliminate state level income tax. That's the simple example.
Which is a significant amount of money first of all. Depending on the size of the business. I think what you just gave is a perfect basic example of how all the different things matter from the corporate structure to where the ownership is residing to the estate plan and the trust plan. Again what you're advising on is a global family picture. You're not just doing a tax return or doing an estate plan. The biggest frustration I have with when I speak to owners is they've gotten ingrained in them through insurance salespeople or estate planners that you need to make sure that you have enough insurance to pay for the taxes when you die. That's what an estate plan is to people and it just drives me nuts.
One thing that I'll say is insurance has its place. What I also say is the skilled practitioner generally can design an estate in such a manner where you probably don't need the insurance is the thing. I'm not a real big fan of insurance, but the thing is there are absolutely situations where someone does need insurance. Again for skilled planners, you probably don't need it, and use other methods.
I wanted to jump in there too is I think insurance is important if you don't have the skilled people working on your side because you still would prefer to be covered. Whether you pay the skilled advance planner, like yourself or pay the insurance you're still paying for it, right?
I think one thing that I want to dive into a little bit with you is, I'm a big fan of follow the money and you find the motivation. I live all of my relationships like that. I do believe everybody is inherently good. You've got to figure out how they feed their family. Then you figure out, okay how is it that drives their continuing ed or what they're recommending for you and how they collaborate with their other advisors. Can you give an example how ... I don't know, I think you and I talked about some examples in the past where the different incentives conflict with the collaboration and over the general plan and what the owner can do to facilitate that because he's got to be his own advocate?
Okay. This is going to be a real life story. Oftentimes as I mentioned before, the business owners own attorney and CPA are unfamiliar with the issues related to M and A, mergers and acquisitions. A lot of times what will happen is, is that the CPA or the attorney will say, "Well, you know we need to bring someone in who's kind of a specialist in this area." I'm not going to mention any firm names, but I'll just say big firms. The big firms, I had an actual CPA, it was a tax partner in the Silicon Valley office of a major CPA firm. This person said to me directly, "You know, even though we might be retained by the business seller, we really don't care about them. We don't." Now of course we'll get to the conflict of interest and the ethics violations in a second.
I think it'll become very evident. He said to me, "You know and the reason is, is because that business seller has one deal in their life. Whereas if we are representing the buyer, which might be a private equity company. It might be a public, another company. They're feeding us 10 deals a year. That's where we get our revenue. That's whose interests we really look after. Okay?" In my mind, that's a professional ethics violation. A CPA told me about a deal that he was working on. In his particular case, he was representing the buyer. His job is due diligence. He interfaced with a specialist CPA who came in to help the seller out. What he saw the seller's CPA doing is, is re-categorizing a couple hundred thousand dollars of cash sitting in the company.
Normally, you sell a company, the owner keeps the cash and you sell off the assets. That's a typical transaction. Well, what the CPA was doing was saying, "No. That's backing up this liability over here so that has to go to the buyer." Well, no it doesn't do that. What was happening was and when the CPA that I was talking with who was really representing the buyer said, "Well wait a second. Why are you doing that?" He said, "Because the next time around, I want to get the assignment from the private equity firm that you're representing. I'm doing them a favor by giving them ... Re-categorizing this couple of hundred thousand bucks." Now I would argue that that crosses a legal line there.
You think? My God.
There are these conflicts and the same thing with the law firms. The law firm said, "Oh yeah, we'll handle your transaction for you." Owners have to know that if they are using a specialist firm. You need to use specialists. When you're using specialist firms, whether it's a CPA or it's a law firm. They get 10 to 20 deals a year from any big company who's buying other companies or private equity firms or whatever. They are naturally inclined to look after their interests rather than yours. I think that's something that maybe your own family has experienced. This is a big problem. It's a big problem.
I was going to say and I think your family has experienced it.
That's kind of what I was going to jump in with. What I experienced with my dad and I and I think I can relate a lot to our listeners. Even me, more so with just my age, when I was in all these meetings, because it was me and my dad in the trenches together. I'm sitting in these meetings with all these bankers, these M and A advisors, you've got business brokers, the attorneys, CPA firms. I always feel inferior based on my knowledge, which I should because they all should be way smarter in their designations than me. I think when I realized it wasn't just not only me and my age, but all owners, entrepreneurs are very control freaks.
We like to control the meetings, the situations, and the moment that we sit down in front of advisors, it just freaks you out because you're like, "This guy is going to scam me because he knows more than me." All right. Unfortunately some of these stories prove that point, however all of these people are necessary. There's a lot of really good people. What we experienced was, there was no one looking at the whole picture. We didn't know what questions to ask. "Hey, by the way we've got this corporate structure should you look at this?" It's not our job, but who's job is it then? How do you align all these people and hold everybody in check?
This is really where the exit planner comes in or the M and A advisor who is not the investment banker, who is not the CPA firm, who is not the law firm. This is a specialized advisor who's sole job is to really walk you through, walk the owner through the process. They don't have necessarily the conflicted interest that the others might have. Their real job is to walk you through the process. We are very familiar. My team is very familiar with the process. We don't want to do the quarterbacking. What we will do is from the sidelines. If we see something that does look a little strange we'll certainly tell the business owner. We really advocate the business owner have a specialized exit planner. Then what our function really is, is the tax and asset protection component of the deal, then the subsequent ownership of the proceeds.
I would say where we really go hand-in-hand with this is with the exit planner. As many investment banks and boutique investment banks who are familiar with what we do. Their real client is not the seller, it's the [crosstalk 00:44:30]. It's the buyer. It's the buyer. If we're talking about an actual investment bank, because their ready buyer is probably going to be a private equity firm. They go to the private equity firm with 10 deals a year, not all of them get done but that's who they're going to cater to. For us, we don't see the investment banker necessarily coming to us. If they think about it, maybe they will. Really the team really would be focused on the exit planner as the quarterback.
Or having someone that doesn't have someone else's hand in their pocket, right?
One thing that I want to touch on before we take off is, what I end up telling, and I'd like your validation or elaboration on this. What I end up telling the owners that I work with, well everybody seems to dive right into the technical stuff. They're like, "I can do this move or this tactic." It may or may not be applicable to them. It's all hearsay with these technical stuff. What I end up saying to people, owners because this is what my dad and I didn't do correctly is, "What do you want?" I know it sounds so fluffy and vague, but it's like what do you want to your legacy to your actual wealth, to where your business goes because I believe ... I've got three things I keep saying is if you've got the time, you've got the financial stability and you've got the effort left. You can really reverse into almost anything. How that's done is a lot of different ways. I don't know if you want to elaborate off of that or how you've seen interactions with your clients or examples about that?
You're actually bringing up a lot of different issues that come into play. The question of what do you want? Really so many times when a family owned business is being sold, they're ... First off this is the owner’s baby. It's like take your child going off to college and multiply it by 10. There's a lot of emotion that's going on. The thing that you said, you've got the owners try to control things a lot. The thing is, you're letting go here. There's going to be a lot of self doubt, "Am I doing the right thing and so on?" The other thing that happens is, in the broader family. In the broader family, whether it's a sale to a third party or if it's going to ultimately transfer over to a next generation. There's a lot of emotion that's going on in the family. If there is going to be a transfer within the family, there's going to be, I'll just say family dynamics going on.
Use your imagination, right?
Yeah, because if there's going be some family members who are in the business, some who are not. How do we all make things equitable for everyone in the picture? The human side of the equation is really the bigger thing. Get in touch with your feelings and all that fluffy stuff that you mention. It really ends up being the bigger part of it. The technical side of things is important, but the very issues you're hitting upon are really the main issues. The question is, what do you want to do the rest of your life? The more technical stuff, that I do on the tax and asset protection side is important. It gives the business owner the freedom to whatever it is they want to do. There is the important question. I know a couple different individuals who only specialize on the emotional side of M and A. They're not even doing the transaction. They're just handling the emotions of the family, so that's interesting.
I can relate, because it is all emotional, when it really comes down to the final goal line. Emotion drives the entire bus. That's why I say, " Once you figure out where you stand and what you want, you can technically reverse back into your wishes. Again, I know that's not what a lot of people like to hear because it's so vague, but figuring out the six inches between your ears is the most important part.
The other thing that I'll say is, is whether it's the soft side of planning or the transaction itself or the tax side of things. A business owner has to be thinking about all of these things well before they're thinking about actually doing the sale. With some of the tax things if you already have your buyer identified. You've forgone a lot of the tax savings you'd be able to do. I won't get into a lot of technical jargon. You need to actually have your ownership structure and whatnot, tax plan in place before you start to shop your business. It is essential. Similarly, addressing the emotional side of the sale and so forth.
What often happens is, is one day a business owner wakes up and say, "You know, I'm there. I need to sell." Then they start the process. There are things that can be done, forget about the tax stuff for a second. There's stuff that an exit planner can be doing like cleaning up the financials to get them at a point where the buyer looks at them and goes, "Ooh, this is great. As opposed to, what's this thing going on here." There's things that really need to be done before you start shopping your company. The more time you have ahead of the deal and so forth, the better off you're going to be, whether it's again from the tax side or any other part of it.
To just put a bow on it too, just in practical terms. I think it was an example you gave at the breakout session. If you were to go to the IRS to a private court ruling or whatever, or whatever you named it. You can't do that if you've already got a buyer to the table, because you have to have all the stuff in place, right?
Where it's not, "Oh, I'm going to move my corporate structure after I got my deal on the place because it looks like shenanigans, it's just common sense.
There's something called the assignment of income doctrine. I won't bore everyone with an explanation of it, but what it really means is if you've got a deal on the table, you're done. You're done. You're done. You need to do this stuff ahead of time. The stuff that I do, someone could have a structure in place, waiting there. Then when you then begin to shop the firm, then you're ready, everything's in place. This is the common failure for a lot of business owners. It relates to whether it's the issues related to the exit planning, what you do or the tax stuff.
You're saying, "You know what? I am going to do all that planning. Everything they tell me I am going to do. You know what? I got five years to go. I don't need to be doing it now." Then what happens is, is the letter comes in and it says, "We're going to pay you 10 times revenue for your firm." Okay, or whatever it is. The deal you cannot pass up because it's never coming again. You've said, "Well, but you know what? I'm not going to do any of this planning. Okay. You have to have all of this planning, the exit planning, the tax planning in place ready for the out of the blue offer that you cannot turn down.
Do you have any idea how many deals end up in motion because of the out of blue offer?
I don't. I did talk with ... In terms of percentage?
Yeah. The only reason I'm asking is because we get that, that was our situation. I know that's a lot of people's situation where randomly there's a third party, a private equity, a strategic buyer, some reason someone came across that person's company and then through an offer out there. I've got to believe that's a big percentage versus the people that actually bring their company to market.
Yeah, one individual who is an investment banker on the East coast, a boutique banker. We were talking about this very subject. While a percentage was not thrown out, he says it's very, very common. Maybe a quarter or a third of the deals that he sees are of this out of the blue. You're stuck at that point.
In order to keep on pace, what is one thing that we haven't touched on that you'd leave our listeners, business owners of the US with for things to take into consideration or things to do. What would be the one thing you should leave them with?
Well, really they need to be talking with an exit planner who's going to be the quarterback and really get that person online to help them through the process. That's what I would say.
I love the plug, by the way.
Yeah. No. You have the person who does nothing but help a business owner through the whole process. These are the steps you need to be doing. Before we even bring the investment bank person in the picture, we need to do all these things to clean up your books. Make sure payroll taxes are paid or if the business is a retailer make sure all of the sales tax is done, because just a quick note. Let's say that you sell stuff on the internet. Somehow, some way you sell stuff to, I don't know I'm just picking this up, Wisconsin. Wisconsin says that well, even though you're not present in the state you have a responsibility to collect Wisconsin income tax and forward it to us. Well, what if you haven't been doing that?
Okay. That's just a simple example of that or what happens. It could be an array of anything that could come up. What you really want to do is identify the little snags in your firm before you start selling it. It's like when you're going to sell a house. This is probably a great example. If you're going to sell your house, you don't let the buyer simply do the contractor inspection before you list the house you do your own contractor inspection. You identify where the leaky pipes are, whatever it is and you fix them so that when the buyer does their contractor inspection they say, "Oh, they've got a clean bill of health." Then the buyer feels real confident. That's what you want to do. The contractor inspection is the exit planner. Okay.
I love it. Todd, I appreciate the time and the wisdom today on the show.
Absolutely. It was great. For all those out in listener land, you definitely want to hook up with an exit planner and let them help you through the process.
Thanks again Todd, appreciate it.