The earlier you plan for life after exiting your business, the more successful your transition will be. Determine your post-exit goals and work towards a number that helps you achieve your preferred lifestyle. Anna Felix, Smart Money Strategist with StrongHold Wealth Partners, talks with host Laurie Barkman about long-term incentives that owners might consider to retain and reward key employees.
Listen in to learn more about:
- Find the number; how much do you need to live on after exiting your business
- When to find out what your business is worth
- Employee retention and golden handcuffs
- How much should an employee expect to receive
Show Links:
- Annafelix.com
- Grab a copy of “The Business Transition Handbook” for yourself at https://amzn.to/3Hqj2eo
- Download the official workbook to help you plan your transition as you read at https://thebusinesstransitionhandbook.com
- Follow the Succession Stories YouTube Channel
- Connect with Laurie Barkman on LinkedIn: https://www.linkedin.com/in/lauriebarkman/
- Subscribe to The Business Transition Newsletter. Text Transition to +1-646-495-9867
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About Succession Stories Podcast
Succession Stories is an award-winning podcast guiding entrepreneurs from transition to transaction. Hosted by Laurie Barkman, author of “The Business Transition Handbook: How to Avoid Transition Pitfalls and Create Valuable Exit Options.”
Learn more about Laurie’s strategic business transition planning and M&A advisory services by visiting: https://thebusinesstransitionsherpa.com
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SHOW SPONSOR: STONY HILL ADVISORS
Stony Hill Advisors works with owners like you to get ready and maximize value when you’re ready to sell.
Visit www.stonyhilladvisors.com/podcast for a complimentary business valuation.
Transcript
Laurie Barkman:
Anna, thank you so much for being with me today on Succession Stories. I’m excited that you’re here and it’s really cool how we met, I think we should probably start there. Share with the audience, how did you find me?
Anna Felix:
I was recommended by someone. We were in an event together and she had talked about what a great professional you were, how we should connect because you work with businesses, I work with businesses and so I connected with you on LinkedIn and I think I also had heard one of your podcasts, and I’ve just loved your energy and the things that you express that you had done and so we connected and it’s been a wonderful conversation since then.
Laurie Barkman:
Yeah, absolutely, and I want to give a shout-out to Robyn Crane, because I think she was the host of that show and, certainly she’s got a strong following of women, financial advisors, and you’re one of those. The topic for today is really interesting. We, on this show, have covered financial topics for business owners, and what they’ll think about in their business transition over time for their personal transition, their business transition, and there’s financial, and some advocate and Exit Planning that really a professional business owner, someone who’s thinking about their future, that’s where they should start is financial so I’m excited for our conversation, because I want to go a little bit deeper about that. Let’s start with you and what’s your story? How did you get into being a financial services adviser to business owners and other professionals?
Anna Felix:
Probably not your traditional path. I literally call this my second act. I started off in education and linguistics. Intelligence and financial things were important to me but I just never really thought about investing money, what were the best ways to do that. It just wasn’t a thing that I focused a lot on but that changed very dramatically when I became a widow. About 12 years ago, that happened, and all of a sudden, all the things that I didn’t know about money, the things that I was not aware of, became very important to me, it was like, “Oh, my goodness, I’m 42 and I need to figure this out. And I need to figure it out quickly,” there were some immediate decisions I needed to make and so I felt very unempowered around this whole thing about money and went looking for help and I kept getting the same similar thing. First of all, you’re not my ideal client, because you don’t have a lot of money. Second of all, I really don’t have the time to answer your questions and the last gentleman I met with, he said, “You know, I don’t have time to answer your questions and quite frankly, you don’t need to understand this stuff. You just need to marry a rich guy,” and I just couldn’t even believe that he’d actually said that and so it was leaving that appointment, walking back to my car, that the idea occurred to me that maybe I should just become the person I was looking for. I didn’t know if that was possible, didn’t know what that looked like but I thought, “I know that I could do a much better job of this,” and that’s really where it all started. I actually entered the industry about three years after that epiphany that day.
Laurie Barkman:
After you picked your jaw up off the floor after that person told you to just get married or something, you started your career and your journey and how you help people. Let’s talk about this topic of very few people know what they need to have in order to live the life they want to live after they stop working.I don’t want to call it retirement, it just might be a different life stage. Maybe they’re still working, but they’re working in a different way. Maybe they’re a business owner, they want to sell and start another company or they want to truly just travel around the world or they just want to be with their family. How do you help them look into the future and figure that out?
Anna Felix:
Again, it really depends on as you just pointed out what their plans are, but, but it’s important to look ahead at you know, what is whatever that lifestyle that I’m going to be doing? What does that look like? What am I going to need to generate an income on a monthly basis to do those things that I’m planning to do? If that’s 20 years down the line, then we need to add inflation into that too. I mean, we really want to come up with a number. I find that most people haven’t even thought about…if they’ve planned what they even want to do, and many haven’t even done that, they really haven’t looked at what that number looks like? What am I going to need to generate? Monthly for that? That’s a really good place to start, what does that look like, and then figure out, “Okay, what do I have in place? And what is that going to generate, so that then we come up with that number of what I need to do in the next 10,15, 20 years, whatever that timeframe is, to get to that number?
Laurie Barkman:
It should not include your personal residence because you need a place to live. Unless you downsize eventually and then that could become part of the, let’s say, your asset list, if you sell your $5 million dollar mansion, and downsize to a $1 million dollar mansion, that could be part of your nest egg.
Anna Felix:
Of course, that’s a consideration and that’s why it is so important. I have to say that so many times when I ask people, because that’s really kind of where we start, what’s the plan? Where are we getting you to? What is our ultimate goal? Many times, they’re just like, they haven’t even really thought that through very carefully and so it’s great that I can spark that initial conversation, because, we can’t achieve a goal that we don’t have insight and so really looking at that and what is it? Many times they’ll stop and, “I never even thought about it like that, this is what I want to do. But I never thought about what that looks like money wise? What do I actually need to generate to do that?” so it’s great that that conversation can be sparked, because the sooner we have that conversation, the sooner we know where we’re going, the better it is.
Laurie Barkman:
If we look at a business owner’s total picture, there’s the personal assets, as we just talked about, and then there’s the business and what the business might be worth and they’re a percentage of that so perhaps they own 100%, just to keep the math simple. If we are the entrepreneur, and we’re the founder, when we first launched that company, it’s not worth very much so it’s going to be a low percent of our total pie but over time, as that business grows and becomes more valuable, it could very well be that the business is the largest piece of that total pie. Is that what you’ve seen?
Anna Felix:
Yes, absolutely. That’s correct and many times, I want to say, 80% of the businesses that I’ve worked with, they’re really counting on whatever they can sell that business for, that’s what they’re going to live on and then they’ll tell me, “That’s my plan, I grew this business. It’s really successful and that is my plan.” Of course, we don’t have any numbers in there, it’s just, “Whatever I can get that to is what I’m going to have to live on.”
Laurie Barkman:
Do they know what their business is worth? Typically?
Anna Felix:
No, not in what I’ve seen, and that’s where what you do is so important, because it’s your baby, it’s you really, it has so much value, and you believe that it’s worth this much and maybe it is, but maybe it isn’t, and the sooner that they get a valuation that they speak with someone like you to know, “What, can I realistically expect from this?” What is truly the value not through your own eyes, because, you know, the business owner’s value is going to look a lot different than you know what it might really be on paper.
Laurie Barkman:
Absolutely. When should a business owner start thinking about this total picture and their potential transition to the next phase of their life?
Anna Felix:
Well, a lot sooner than they typically do. I would say, having this conversation a good 10 years before you sold your business would be great. Just because there’s a lot of moving parts to it. There’s a lot to take into consideration and the sooner that you’re having that time to figure all those things out, it’s going to be much, much easier.
Laurie Barkman:
Absolutely. What are some of those things that business owners have not yet thought about? Is it more on the contingency planning side? Is it on the business value side? Is it on kind of managing the ups or managing the downs or both?
Anna Felix:
I would definitely say both; kind of all of that that you’ve talked about. Obviously, it’s going to depend a lot on the type of businesses but it is–just recently I had a conversation with a business owner that they feel like they had two or three very key employees in place that they were hoping would eventually take over the business. That was kind of how they saw it but one of the scary things was that they hadn’t actually had that conversation, or really looked at what they were doing now and today to ensure that those employees would even stay with them and so that’s one of those things like, if this is going to be something 6, 7, 8 years down the line, it really needs to be talked about and really worked out and figured out, how is that going to look? That was what I told the business owner, if you haven’t had that conversation with these people, and they’re so integral to your business then…the point is that, if we haven’t had this conversation, if we haven’t talked about what the plans are this many years in advance, then what if that employee leaves and that whole plan goes away? It’s super important to have the timeframe to do that.
Laurie Barkman:
That’s a great topic, let’s dive into that topic. This comes up quite a bit in conversations I have with clients, it’s come up on the show, our people are everything, especially if what we say to increase business value, is to make sure that you are not the linchpin for everything that you’re not solving all the problems and the sales process isn’t 100% dependent on you, as the owner because a business that can’t survive without its owner is going to not have much value. It’s important to have the key staff, it’s important to have second in command, and people that can keep things moving forward. If you’re not there yet, maybe you’re never allowed to take vacation, because things would just stop in their tracks so to this economy we’re in and the state of employee mind shift that’s been happening over the last couple of years and employees wanting different things and making different choices. Retention is so important and I won’t call it loyalty. I think it’s just changing preferences. If you’ve got this master vision for your transition, and it involves other people, but you haven’t yet had that conversation, it’s kind of important and it’s a tricky one and there’s no one answer. It’s not one size fits all, but you’ve seen it work well. What are some of the things that an owner might consider for incentives, long-term incentives, and the mechanics of some of those things? How do they work?
Anna Felix:
If you make it, and I call it when I speak to business owners, golden handcuffs, if you make a plan for them a succession plan, let’s say that is irresistible, that obviously, they’re with you. Now they love what they’re currently doing, and you just really make the deal so sweet, but they’re not going to want to leave ever, then that can be a really helpful thing and one of those things and what I help them do is create a financial plan for them a retirement plan if you will, that you know if you stay 10 years, or whatever the timeframe is that they come up with, this is the plan that you have that is tax-free retirement, it has so many wonderful components to it. No other offer is going to get that employee to go somewhere else and that’s typically what takes people somewhere else is, “I’m gonna get this bonus,” or, “There’s not a lot that can be offered much more than that,” but the type of plan that we can help them implement for that employee just makes it so that, “I can’t really go anywhere else because he would never be able to do something like this for me.”
Laurie Barkman:
This sounds too good to be true and I’m not familiar enough with your industry. Can you just give a couple of examples?
Anna Felix:
Yeah, so what we’re looking at is we call it a Kaizen Plan and we’re looking at getting the bank to fund your retirement plan along with you so essentially, you put in five years’ worth of money, generally somewhere between $25,000 and $30,000 a year and then the bank funds it for that time that you’re funding it, and five additional years so total of 10 years.Essentially, you are three times using the amount of money that you could put away in a plan, and you only have to do it for five years and then you let it grow an additional five, and then in year 15, you pay back the bank, their loan, and you get to keep all the rest of it, and it all comes out to you tax-free so it is income, that the taxes have already been paid on it so you’re pulling it out, it’s not gonna affect your taxes later on, in retirement, and the thing is, it’s, it’s three times more than you could ever find that yourself so it’s leverage that you’re not going to get in any other situation so if your employer is offering this to you to, “Hey, you know, stay here be part of the company, this is what we will contribute for you for these five years,” It’s phenomenal, it’s there, it really cannot be beat.
Laurie Barkman:
Let’s say there’s an employee that’s making, I don’t know, we could just use rough numbers just for conversation, $100,000, $200,000, whatever number we want to pick, and they’re offered this benefit, what could be that retirement nest egg that they’re looking at, at the end of that you said five years, or was it 10 years?
Anna Felix:
In year 15 is when they would start pulling it out but it only gets funded for five, it grows another, 10, and then well, very close to $100,000 a year tax-free, again, depending on the numbers and how much we’re actually putting in there but they have a minimum of $1.5 million worth of life insurance. It’s also tied to that and then with that comes living benefits so if they were to get sick or something were to happen to them, health-wise, there’s like another fund of money, it does not come from that cash value that’s growing, there’s another fund of money that can be used for that so really anything that could happen to them, I say if you if they have a long life, short life, sick life, all of those eventualities are going to be covered and that’s really something that if you don’t have those things in place, you just never know what can happen.
Laurie Barkman:
If an employee is making $100,000, annual salary, just rough numbers, after 15 years, they’ll walk away with what type of number? Of course, this is just with lots of caveats that we don’t know for sure but just in your experience, what typically might they expect?
Anna Felix:
Yeah, I mean, $75,000 – $85,000 tax-free money coming to them on an annual basis.
Laurie Barkman:
Annually.
Anna Felix:
Yes.
Laurie Barkman:
After the 15 years.
Anna Felix:
Correct.
Laurie Barkman:
That’s based on their life expectancy, you said there’s life insurance tied to this also?
Anna Felix:
It’s not based on life expectancy, it’s just part of what comes with that plan. Because it is written in a life insurance policy, that’s why we’re able to grow that money tax-free. That is just an additional coverage that they have that comes with it and it really makes so much sense for the employer, as well. Because what if that key employee of yours gets sick, and something happens, knowing that they have coverage for anything that could happen to them moving forward? Could be a big help for the business as well, again, those are the things that we don’t know what could happen but if you have these things in place, then you’re able to deal with them in a much easier fashion.
Laurie Barkman:
Wow, so it’s a defined benefit for a period of years once they retire from the company, or once, so we’re incentivizing them to stay with us for the next 15 years, which is a pretty long period of time and if we go back to the other question I asked you, which is, well, before you’re looking to sell your business, when might we start really fashioning all of this and you said 10 years so they line up? The more time you have the more options you can create I’ve had some conversations with people they say, oh, I” want to sell my company in five years,” and then they never have a plan really in place written down or articulated is just in their head and neither have they come up with any of these golden handcuffs and they haven’t had conversations with their key people so it’s kind of a recipe for success if we can line up all these pieces, right?
Anna Felix:
Absolutely. Aain, if you have a plan, and you have a path of who knows something like COVID, could happen, something else could happen to affect your business but if you have a lot of these things in place, navigating any other changes that come in, could make such a huge difference.
Laurie Barkman:
I was looking into Kaizen because when you and I talked offline. For our pre-call you mentioned it and I wasn’t familiar, and I did find a little bit of information. Again, I’m not an expert on it like you are so using it with golden handcuffs is one mechanism and what I saw generally is that it could also benefit an owner by funding other types of business liabilities, such as key person buy-sell agreements, succession planning, as we’ve talked to you about these key people. Do you have any experience with that type of application also?
Anna Felix:
Yes, absolutely. That can definitely be used in any of those modalities, especially key man, something that I’ve used it for before so yes, it can really make a huge difference in those different types of succession planning.
Laurie Barkman:
For people that might not be very familiar, maybe we can just spend a minute on key man, key person, why is that important? Also the buy-sell agreement side of things.
Anna Felix:
Who is going to–if you have that idea of my key employees, that key person taking over the business, then this gives them the ability to have access to funds where whatever that secession plan is, are they going to pay this much towards it? How does that work? It sure makes it much easier for them if they have these plans in place, these funds available, so what if that gets triggered two years sooner? Would that key person have the ability to have the funds to implement the plan that was put together, these types of plans, having access to this type of money, the cash value that’s in those policies, makes it possible to navigate those things and figure out what, if we have to do something a few years earlier, what if it gets prolonged? What if one of those people gets sick? All of those types of things? What if the owner decides that for whatever reason, they want to back out sooner when you have these types of plans in place? It makes navigating that much easier.
Laurie Barkman:
You work with a lot of women business owners, are there any other common themes that emerge?
Anna Felix:
Well, I would say that for women, it is much, in my experience, it is much harder for them to let go of that business, even though they feel like, someday they do want to walk away from it. When I said earlier, it’s their baby. I mean that that really is the case and so I think that having these types of conversations makes that much more of a reality in their head, if they’re truly looking down to, “Okay, yeah, this is what I need to do,” and it helps them come more to terms I guess we want to say with, “If I truly want to walk away and benefit from this business that I’ve grown, then I definitely need to plan for it more,” and I think that when women realize that that will help them do that, then they’re much more open to having these type of conversations earlier on where they meant, “I really don’t want to do this. But yes, it makes perfect sense that if I at least have a plan in place, it doesn’t mean I have to follow through exactly. Maybe I can still extend it more if I don’t want to sell it right then and there. But I have a plan in place and I can do it if I need to.”
Laurie Barkman:
Gotcha. You are a wonderful resource and I’m sure that people will want to reach out to you. You’re in California, but you work with people all over the United States. What’s a great way for them to get in touch with you Anna?
Anna Felix:
Well, they can go to my website annafelix.com, and what I always recommend is just book a time with me and we’ll have a conversation. See if we’re a good fit. I feel like that just makes it a lot less stressful like there’s no preconceived ideas, no requirements. Let’s just have a conversation and see if it looks like we’ll work well together.
Laurie Barkman:
Awesome. As I asked everyone who comes on the show, do you have a favorite quote that inspires you?
Anna Felix:
I have many, but the one that’s sitting on my desk is: “The ladder of success is best climbed by stepping on the rungs of opportunity.”
Laurie Barkman:
That is a great quote. Thank you so much for joining me today. This was awesome to learn about these techniques and opportunities to help business owners really think through how they can keep their key people and I really appreciate you sharing your insights.
Anna Felix:
Awesome. Thank you so much for having me.
Laurie Barkman:
To our listeners, thank you so much for your support. Catch Succession Stories on your favorite podcast player or YouTube. If you want to maximize the value of your business and plan for future transition, reach out to me for a complimentary assessment at thebusinesstransitionsherpa.com. Join me next time for more insights from transition to transaction. Until then…here’s to your success.
