SPEAKER_00 0:32

Welcome everybody to the Sandwich Bread Podcast. I'm your host, Tom Kaminsky. On the Sandwich Bread Podcast, we have conversations about life and money for the Sandwich generation. And I'm super excited to have on today's featured guest, Scott Leek. Hi, Scott. Hi, Scott. How are you? I'm great. How are you doing, Tom? Good. I'm doing great. Scott, first of all, what is your title? I was I was toying with that in the prep for the show, but it seems to be growing with each passing day. So what would be your current title for FB Transitions?

SPEAKER_01 1:01

I tell people I I have the same title as Chandler Bing, so you can call me a transponster. But uh no, my official title at FB Transitions is Director of Business Development, and I am now also the interim director of our EMS team, our equity management solution group. So been there for about five years. Actually, just had my five-year anniversary.

SPEAKER_00 1:20

Five years. Oh my gosh. Time flies. For the for the sake of transparency for the audience, I worked under Scott for a number of years at TD Ameritrade Institutional, a wonderful company. Both RIP, TD Ameritrade, and TD Ameritrade Institutional. But Scott was an awesome leader there. And I for a while wanted to have Scott on the show because he has a really unique perspective that I think translates really well to a broader audience. He spent almost 30 years in our space. Is that right? 30 on 30.

SPEAKER_01 1:50

It's really fun when my teenage daughter is around to tell them I started in the financial services industry in the 1900s.

SPEAKER_00 1:57

So Scott started, he invented financial services in the 1900s. But he spent 30 years, really around 30 years in the financial advisory space working at TD Ameritrade, helping launch their advisor services team, counseling hundreds and hundreds of independent financial advisors over those years, probably thousands. And for the sake of the broader audience, they're really all those independent financial advisors are small business owners. And a lot of them deny that and live their lives accordingly.

SPEAKER_01 2:24

Some of them are accidental business owners. We can talk about that a little bit.

SPEAKER_00 2:28

Yep. And and so Scott consulted to them for for years, decades. And with his latest transition over to FP transitions, he's now really closely, narrowly focused on business succession, business valuation, and practice management for independent advisors. Whereas his responsibilities at TD Ameritrade Institutional were more specifically tied to the custody component of the business. And so Scott, like myself, is a certified financial planner, CFP professional, which is a designation I often bring up on this show and hold in high regard. But Scott, also like myself, loves to learn and loves to continue personal growth. And he actually obtained the certified exit planning advisor designation in addition to a CFP. And I believe you did that after joining FP. Is that correct?

SPEAKER_01 3:17

Yeah, I just did that uh beginning of last year. And I got a lot out of that program. I mean, one of the the really interesting things I learned from it is there are eight ways small business owners in the U.S. can exit their businesses. And I would have guessed two. So there's a lot I got out of that program. And really how do I how do I play a good role in helping small business owners in this country, specifically in my world of financial services, but how do I help small business owners be intentional about the future, their business, their legacy, and and how do they ultimately take care of their family, their clients and harvest the value of the equity they've built in the business?

SPEAKER_00 3:54

Yeah. That was a fascinating component. You know, when I sat on your side of the fence, it would be really interesting to see financial advisory practices where the actual value of the business represented a huge chunk of the net worth of the financial planner that owned the business. And their whole career they spend counseling people on diversification and savings and carefully planning out their future. And then they get to their own retirement and they literally have all their assets in their business that they have to sell.

SPEAKER_01 4:21

Yeah, it's kind of like working with a doctor who smokes in a way. It's like, wait a minute. You you told me not to do this, and now here you are doing it. Awesome.

SPEAKER_00 4:29

I'm glad to have you on today, Scott. Our audience for this podcast is mostly comprised of sandwich generation individuals, not financial professionals. So we're bringing on to share more universal truths for the small business owner, listeners that might be out there about why you want to consider business succession, business continuity planning. And so uh with that, you want to dive into today's podcast? Absolutely. Let's do it. Awesome. Okay. So question number one for you, Scott. Why should somebody consider putting a business succession or business continuity plan in place? They're a small business owner, they're extremely busy, they might be growing, they might have employees to care for. It's just why should they even take that step?

SPEAKER_01 5:07

Well, let let's let's even take a step back from that. And I want to make sure that we're using the same vocabulary for everybody. So on the one hand, there's continuity planning, on the other hand, there's succession planning. And there is a distinction between the two, and you know, different people define them differently. But for the purposes of today's discussion, let's refer to continuity planning as having a plan in place in the event of unintentional exit, death, disability is usually what happens in those cases. Whereas succession planning, we're generally talking about a planned exit on your own terms, let's call it retirement. So it's important to have both of those plans. But if you had to say there's one that's vital to any business, it's the continuity plan. And so really what that's doing is putting something in place. And I want to be clear too, a plan needs to be written. So having a verbal agreement with somebody, okay, it's better than nothing. But these can these things, when we're talking about small businesses that can be worth millions of dollars, you're very likely going to be looking at a court case if you've got things that are not properly documented in written form. So what we want to do is encourage people to have something written in place that simply says, in the event of my death or disability, this is what's going to happen to the business. And so you have a lot of stakeholders in any small business, and we're making sure they're all taken care of. So the owner, first and foremost, is being taken care of, or at least their estate is being taken care of, because you're coming to a predetermined, essentially MA transaction. So you're you're agreeing that somebody's gonna come in and buy the business and take it over in the event of your death. So your family, your estate is still getting value for what you've built, even though you might not think like I want to get rid of it now. It has some value even before you get to that end goal. If you had that, you know, you get hit by the proverbial bus, it's something in place that says, my family's gonna get taken care of for this value. The next thing is you're gonna make sure that if there's any employees, that they're taken care of too. So you have somebody comes in who is now owner of the business, like making sure that everyone's gonna get their paycheck next Friday, you know, and and that they've got jobs. So you're looking out for the staff. And then ultimately you want to make sure that the clients of the business are being taken care of as well. Like, you know, small example of this, but like I remember when my dentist retired and I did not get I don't know if he sold, I don't know what happened. I don't know if he sold the business, I don't know if he had a successor. I just called one day and like phone was disconnected and I didn't have a dentist anymore. And it's like, I don't want to start.

SPEAKER_00 7:35

And you've since lost three or four teeth in the Oh my God.

SPEAKER_01 7:38

I don't, I don't, I mean, I I I hate the fact that I have to go and like find a new dentist. So it's it's a nice kind of last thing you do for your clients of making sure that they're taken care of in the event anything happens to you. And and particularly like for someone like you, Tom, who legally has a fiduciary duty to put your clients' hit of interest ahead of your own. That's something that I really tout to our clients in financial services, at least, that if you're a small business owner, you have a fiduciary duty to your clients. And I think making sure that they don't have to go shop for another advisor because something happened to you is part of that duty.

SPEAKER_00 8:15

Yeah. Yeah. And I can speak to that a little bit. When I launched my business, officially Twin Robins was launched roughly two years ago. I had an immediate continuity plan in place. But I was launching a business essentially from scratch. And so the initial continuity plan was basically to coordinate working with my wife and take over my client relationships. And here's the path that I want you to follow. A lot has changed in two years' time. And I've gone through a much more rigorous process of developing a detailed continuity plan with the involvement of attorneys and insurance agents. And basically, there's just a lot more complexity to the process. And I'm a relatively small and simple business, but you get in the weeds on it, it's not simple. And as the business continues to grow, thankfully, we've had enormous and wonderful growth over these last two years. The needs in the continuity plan is going to immediately evolve. Like as we're drafting the plan, I'm already looking at it going in 12 months, this clause is going to have to change.

SPEAKER_01 9:12

And keep doing it over time. Like it's not a one-time event. So I think that's an important point, too, is you know, when we draft continuity plan documents for our clients, we put a two-year expiration on them. And, you know, simple one-page form to renew it, but it forces them every two years to go, is this still the continuity partner that I want to buy my business if something happened to me? I mean, what happens if something happened to them? What happens if they retired? And making sure that the value of it is still accurately described because a lot of times these plans can get very specific down to the dollar amount. Again, you're sometimes pre-negotiating an MA transaction. Yeah. And so you could get very specific. You can say, well, I'm going to buy the business for a multiple of the revenue of the business. So if the business generates a million dollars a year in revenue, you can say, well, whatever the revenue was for the trailing 12 months, they're going to buy it for 1.5 times revenue or two times revenue or whatever the multiple is that you need to figure out in your industry makes the most sense.

SPEAKER_00 10:11

Yep. Yep. Yeah. It requires flexibility but specificity at the same time. And that can be very difficult. And I think to your point, renewing at least two every two years, renewing the whole process, evaluating and reading every document is fairly essential.

SPEAKER_01 10:27

So now and and in your case, Tom, correct me if I'm wrong, but the the the person who you have in place or the company you have in place on the other side of your continuity plan, your your business is going to be worth seven figures when you pass away. If, you know, let's just assume you're going to pass away at some point in time. I don't think you're immortal as much as I'm going to be able to do that.

SPEAKER_00 10:48

I'm going to fight the good fight.

SPEAKER_01 10:49

So so whenever whenever that moment comes for you, it's a substantial amount of money. And you don't necessarily want to expect that individual or that company to just have that on hand to be able to fork it over to pay your estate. And so one of the nice kind of tricks you can do is that whatever that amount is you've agreed to, the person on the buy side buys a life insurance policy on you. And those premium payments should be not that big of a deal. But in the event of your death or disability, all of a sudden, boom, they've got a million dollars in cash because of that life insurance policy. And they just had to pay, you know, a couple hundred bucks a month or or less just to make sure that they could do that. So there's a way to make it really, really affordable for our all parties. But the trick is if you do it as a snapshot in time and you're going to say in your contracts, like, well, we're going to buy the company for $2 million, like, okay, well, two years from now, is it going to be worth $3 million? Is it going to be worth three and a half million? So you might want to have to check that value every so often and up the value of those insurance policies if those are involved.

SPEAKER_00 11:49

Yeah. And an added wrinkle for folks like us that are doing brain work is disability. You know, you could get in a serious accident, not be dead, and have a business that needs your brain, you know, to continue to sustain itself.

SPEAKER_01 12:03

And I hate to say it, but statistically at age 41, that's more likely than your premature death.

SPEAKER_00 12:08

Absolutely. Far more likely. And so we had to, just like I when I evaluate my client's own personal financial planning needs, I had to account for both death and some form of disability. Then we had to get in the weeds on defining disability, right? Because I might proudly say I am not disabled. I my brain works just as good, but not be in a position of capacity where I can actually make that call. And so we have in the claw in the agreement built out definitions of disability and and you know when that payment, because then I would receive disability insurance versus life insurance when that would kick in, essentially. Yeah. So there's the further we got, the more wrinkles emerged.

SPEAKER_01 12:47

Yeah. And and that's why it's good to go through this with the help of somebody in your industry, whatever your industry is. There's got to be somebody in your industry that's equivalent of what FP Transitions is for financial services that can help with, you know, making sure those things are right. Just because you know someone who's an attorney doesn't mean they're the right person to help draft legal documents for this. Like you wouldn't want somebody who's a one of the injury attorneys you see on the billboards on the highway. Like that's that's not the person to call to help with this.

SPEAKER_00 13:15

Right. Right. Yep. So let's then transition into taking those first steps. I think we've talked, done a good job framing, you know, the pros and cons of of making the decision to at least get a business continuity plan in place. But maybe it's time to get serious about what's next for the business, put a succession plan in place. Daunting, right? What are those first pieces that people should put in place to begin the journey of developing their succession plan?

SPEAKER_01 13:41

Well, I actually I want to address both of them. I mean we'll I'll focus more on succession, but I think one of the first places to start is well, who is my plan partner going to be? So whether it's continuity, whether it's succession, you you got to start with who do you trust? Who do you want to even approach to have this conversation with? And on the continuity side, it can be somebody internal to the business right now that is one of your employees. Yeah. It could be an outside company that is, you know, for all intents and purposes, a competitor. It either one works. The the and there's pros and cons to each, and we can we could probably do a two-parter on on all of this. But I I think if you're thinking long-term succession, building that legacy, the company name and and the way everything's done, the culture survives, it has to be an internal person. And one of the really important things you need to ask yourself before you approach this with that individual is do they have the will and do they have the skill to be a business owner themselves? One of those can be overcome, one of them cannot. So, and that's all the more reason to start early. If they have the will, if they're interested and they're driven to have the roles and responsibilities and the rewards of being an owner, great. You can teach them the skills. Again, the earlier you start, the more you can train them up and help them understand, even if they only own five or 10% of the company, what does it mean to be an owner? What are these responsibilities we have to do now? How is this so different than just being an employee? How do we work as partners? Now, the nice thing is if you're the primary owner and you sell someone 10% of the company, well, guess what? You outvote them on everything. So you still have total control over the company. And you, you know, with properly documented uh paperwork on this, you know, you create kind of that continuity plan within your corporate governance documents. So you might be structured as an LLC, you're structured as an S-corp. And, you know, a good attorney is gonna help you structure what is the agreement if anything happens to one of the two shareholders or one of the two members of the LLC. So that gets baked into your corporate governance documents. It doesn't have to be a separate document anymore. But that's something that you're gonna want to think about of, well, what happens if my successor, who let's say for now is just owning 10% of the company, what happens if five years into it, they're like, I don't like being an owner? What's the formula for them selling back their shares to you? You know, can they sell them to anyone they want? Do they have to sell it back to you? Those are all the types of things that a good attorney, like someone who kind of specializes in labor law and and corporations, that's someone who's gonna help you figure out what are all the right terms and conditions to put in those documents. But again, start early, identify who's a really good fit. If they don't have the will, that's that's not something you can change. If they don't have the skill, that's something that you can coach them up and and get them to be just like you. Just because they're not seemingly an entrepreneur right off the bat, well, you might not have been at the same age either. And you don't have to replace yourself. You can replace yourself in in in multitudes. So we really recommend people bring in multiple new owners, particularly as the business is getting really valuable. The way you get someone to afford five, 10% of the company is you sell it to two or three or four employees. And collectively, they need to be able to replace you. They don't have to replace you in in each individual person.

SPEAKER_00 16:53

Awesome. Really good. Okay. This is awesome stuff. We'll obviously link in the show notes to everything we've discussed and and kind of put frame these ideas up and put them in and a couple of actionable steps for you guys, uh, the listeners. Let's talk for a few minutes before we wrap about pitfalls. Can you share a few pitfalls that you see when you're consulting to business owners? Let's just pick the top two or three because this could be Yeah.

SPEAKER_01 17:18

I mean, uh again, the biggest one I said it early, it has to be written. So a verbal agreement, a handshake, it's it's not it's not enough. It's better than nothing, but it's not enough. So having it well written and and Tom, you brought up a really, really important point too that I think a lot of people miss is when you're doing something like disability, making sure disability is defined because you can have that situation. We've had it come up with with you know people that have called us and asked for our help on these things where we've got founder and they have had like, you know, the the second generation owner coming in as well. The second generation is the continuity plan. Owner has a stroke, the second generation owner, we call him G2s. The G2 is saying he is not able to continue to serve clients anymore. And the founder's going, Yes, I am. Well, how do we just determine this? Well, we have clearly defined in our continuity plan this, this, this, and this are the criteria for disability. Does he meet those criteria or not? It is completely objective. There's no subjectivity to it. It could be something as simple as we need two doctors to sign off that he's disabled. You find two doctors that agree, then okay, you're done. So however you want to define it needs to be defined. That's one of the things that can really end you up in in court.

SPEAKER_00 18:31

Great. All right, cool. What else? What other come on, you gotta have some some more war stories.

SPEAKER_01 18:36

Oh, I've got plenty of war stories. I mean, and and and and yeah, I mean, we get we get calls all the time from firms where maybe there's a G1, there's a G2, and they haven't put anything in writing yet. And something happens to the G1, and the G2 saying, okay, well, you know, to the to the widow, I'll give you this much money for it and I'll take it over. And in in our case, in in this one particular client case, the the widow's like, well, but the valuation said it was worth this. And it's like, well, that's what it was worth when Mike was alive, and and it's not worth that because he's not alive anymore. He had way more of the client relationships than I did. We've already lost some clients. I'm not paying you full price for a business when we've already lost some clients. And they went back and forth and back and forth. And what ended up happening, he's like, okay, well, I'm gonna go across the street, start my own company, and I'm gonna call all these clients that I know, and they're gonna go with me instead of whoever you find on the street to buy the company for pennies on the dollar. So it again, just really important to like, you know, you never think it's gonna happen to you. But I mean, if you're listening to this, you're you you've hopefully heard enough from Tom about the importance of planning. This is just one more step of planning.

SPEAKER_00 19:40

Yeah. Yeah. Thank you for sharing that. I mean, I like to, you know, you got the stick and the carrot. That was the stick section of the uh episode. And the carrot section is awesome because it gives you this lightness and this this empowerment. You know, if you if you proactively address this, it's a really positive thing for your business potentially. Like you said, folks with that that bring on new owners thrive in their businesses in many cases. And the alternative path is you pass away and leave a mess for your spouse to hopefully figure out.

SPEAKER_01 20:10

You've put so much work into this business, it's worth something. Like you deserve to harvest the value of that equity you've created. You deserve this.

SPEAKER_00 20:19

Awesome. I think we have some great takeaways from the show. First and foremost, start today for any business owner. Really start the start the journey today. If you haven't already, don't feel anxiety about it and let that anxiety stop you from moving forward. Just start today, get the process going. I tell that was a good idea.

SPEAKER_01 20:34

Or if you have or if you have an old continuity plan, go dust it off.

SPEAKER_00 20:37

Clean it up. Yep. Spend that time. If it's been a year or two years or three years, dust it off and make sure it's still current. And then, you know, start by if you don't have a partner, start identifying those partners internally, externally, take those initial steps and you know, then work with a qualified individual to build the legal and governance infrastructure, the right type of attorney to help get all that in place or just partner. And then when it comes to valuations, you know, seek out orgs and professional designations and areas that might align with your niche industry to kind of help help with that journey as well. Don't just use, you know, tablecloth, word of mouth multiples that make you feel really good. Seek out, seek out reality with a with an expert in your space. So really good stuff, Scott. I really appreciate your expertise and experience. It's been an an amazing asset for this show. I enjoyed it, Tom. Thank you. Thanks so much, Scott. Thank you, everybody, for tuning in to another episode of the Sandwich Bread Podcast, and we'll catch you on the next one.