Succession Planning – Tim Smith

Tim Smith:
In life, what could I be doing? I’d like to monetize? What can or should I be doing to prepare for that? And my simple answer to people is there are several parts to it. You have to put your head inside of the head of a potential buyer. Why would they want to buy you? How would your company gather its stock or just its assets? How would that fit into what they have today? And that typically involves knowing a lot about your competitors because you may have complementary business lines or you may have the same line and your business would just sort of be added onto their chassis.

Dana Robinson:
Exit Plan is a podcast for business owners and those who want to be business owners. I’m always in search of the lesser known stories of entrepreneurship in the Exit Plan Podcast. You’ll hear stories from startup to sale and hear from the professionals who helped business owners achieve their exit. Hosted by me, author and private equity manager Dana Robinson. Along with my co hosts and guests, you’ll hear real stories, tips and tools that will help you plan for the exit you want, whether you are still working as a day job or running a business. Let’s get started with this episode of the Exit Plan Podcast.

Dana Robinson:
Hey everybody, welcome to another episode of the Exit Plan Podcast. I’m excited to have Tim Smith on today. We’re going to be talking to him. He’s a wealth manager and has some expertise in helping entrepreneurs along their journey. And as all you all know, you got to figure out how to optimize your business to get a great exit. And along the way you should also be thinking about how you’re creating wealth outside of the business and, and setting yourself up for success. Tim, thanks for coming on.

Tim Smith:
Thanks for having me. It’s great to be here.

Dana Robinson:
So your sort of headline out there in the universe is Innovative Wealth Management Strategies for Today’s Entrepreneurial Exit Plan. I love it. It fits the theme of, of the podcast. And I’ve had a couple of wealth managers that have come on the podcast that all have sort of a unique emphasis. Let me give the disclaimer that probably everybody should hear. Tim is probably got a license in what he does and is not giving any specific financial advice to anybody who’s listening on this podcast. Everything he talks about here will be illustrative and for information and educational purposes only. How’s that for a disclaimer, Tim?

Tim Smith:
Pretty darn good myself. I was, I was going to kind of go there if you hadn’t, so I’m glad you did it.

Dana Robinson:
Yeah, I was a lawyer for 25 years, so I’m always. And I was a FINRA Series 79 licensee. I know there’s a lot of regulations, so we’re going to talk about stuff that you have expertise in, but none of this is particular to somebody else. If someone wants your advice, they need to engage you, but let’s. Let’s figure out how’d you get to be doing what you’re doing. I want to know more about Tim Smith as a person, as a business person, before we start talking about the stuff, you know, how to tell people about.

Tim Smith:
Yeah, it’s. It’s a little crazy. So I was a child actor singer in New York City for a number of years, and I sang in musical theater and opera, and I did a lot of television commercials. And you can go on YouTube and if you can imagine me with hair, you could probably figure out who, you know, find some of my commercials because they’re still there.

Dana Robinson:
Cool.

Tim Smith:
And when I was halfway through college, I started taking some business classes. I think I kind of had an inkling that I wasn’t really going to make a life of acting. You know, I had actually been an actor unprofessionally and professionally since I was five years old. So, you know, I was just ready for a change. And I found business and finance and in particular investing, you know, to be just really fascinating. I had made some money as an actor, and I had invested it into the stock market, and, you know, I sort of had the bug, I guess you might say. So I started in 1985, which really is starting to feel like a long time ago now.

Dana Robinson:
It was. I was there. I was there.

Tim Smith:
Yeah, you’re alive, too. Okay. So now I know how old you are, at minimum. Minimum. So I, you know, I started with a financial planning firm in Northern New Jersey, and I got my certified financial planner designation. And for 10 years, I just, you know, drafted financial plans. I managed and recruited some other financial planners to that firm. And I.

Tim Smith:
But while I was doing that, I began to. While the firm had somewhat centralized the asset management function, I started to sort of veer off on my own with, you know, trying to use some things that were a little more advanced than what I’ll just call the simple approach that was being used at the time. In 10 years into it, I started my own investment advisory firm. And, you know, I, as. As people do, they think I’m going to be an entrepreneur. I’m going to just, you know, manage money and play golf. And within a couple of years, some other friends wanted to join me from the old firm, and I Had had a non compete because I had been a shareholder in that firm and that non compete ran out. So I allowed them to join me and I started a broker dealer entity to accommodate that part of their business, which I wasn’t doing.

Tim Smith:
And the two companies basically became, you know, a, a boutique financial services platform. Now about 100 advisors nationwide in about 50 offices, overseeing a total of probably about $15 billion. About 10 of that is not directly under me, but something like three and a half billion is. So ten and a half, something like that, maybe 14 billion. And you know, we, I have staff and compliance officers and you know, all the things you would imagine. So I’ve been enjoying that ride. I have been through, you know, the possibility of a sale one time and was jilted at the altar.

Dana Robinson:
Oh.

Tim Smith:
So I not only have experienced many clients going through a process of sale, but I’ve been there myself and experienced the worst of what, you know, can happen with it. And now I’ve stepped back from management a bit and I’m doing a couple of other things besides the asset management work that I still do. And I’ll be happy to explain to you what’s a little unique about that. Yeah, so I also have something called the Financial dad, which is a podcast like yours. It’s for financial literacy for young entrepreneurs, creatives influencers about entrepreneurialism as well as financial planning topics of personal finance. So it’s, it’s financial literacy education, basically.

Dana Robinson:
That’s great. We need it so bad.

Tim Smith:
Yeah, yeah. I mean, you know, kids get virtually nothing in school. And one of my kids who did have some high school financial literacy, when we talked about doing this podcast together, she said to me, oh, is that what that was? I don’t even remember any of it. You know, so you get it in high school. You don’t remember the things that you need to remember by the time you’re out of college. And you know, it’s, it’s not a, not a great thing. I personally believe we need a lot more life skill training in college and probably a little less academics, but you know, let people shoot arrows at me for that one. So we did.

Tim Smith:
I’m doing that. I do still some singing. I’ve done a lot of singing over the years, believe it or not. I’ve sung for three US Presidents and I’ve sung in Europe and here. So, you know, I’ve had a, I’ve been a politician, a political activist. I’ve, I’ve had a quite a rather varied life, I guess you might say. And I just like to have a lot of balls in the air. I’m most comfortable when there’s a lot going on and I’m creating and, you know, building something.

Tim Smith:
It’s just my nature. I guess you might say you’re very lucky.

Dana Robinson:
You’re an entrepreneur who managed to grow a business beyond what most entrepreneurs actually can. I mean, that’s remarkable. To grow your own practice to 100 advisors. When most entrepreneurs have too many balls in the air and end up, you know, with the lack of discipline, I guess the wherewithal to push through and grow.

Tim Smith:
Yeah, I can tell you that. Well, two things. First, I do have partners in the business who are money partner, silent money partners only. And they are the most wonderful people on the planet. They’ve been terrific to work with over the years. So part of the growth, at various points in our growth, you know, we just needed more money to fuel. We were growing at 40% a year at various points. And you know, our choice was slow the growth or put more money in.

Tim Smith:
Yeah. And keep the growth rate going. You know, so since we had the flow to support that growth rate, we, they were kind enough to continue putting in money. So, so I had that. And you know, I just, I think early in my career I did have a sales manager. And that manager saw this aspect of me that was, you know, let’s call it many balls in the air oriented.

Dana Robinson:
Yeah.

Tim Smith:
And he had a sit down with me where he said, you know, it’s great to have a lot of balls in the air, but there are crucial moments when you have to focus and be disciplined and, you know, have your plate clear so that you can do what has to be done to get to where you’re trying to go. You know, you have to have your, your primary goal or goals as opposed to just sort of enjoying life, because I like to have a lot going on. And so that was a wonderful lesson. And that particular manager taught me many, many wonderful lessons. He was wonderful in many, many ways. He could be challenging in other ways. But you know, on the whole, my experience of learning from that particular guy was tremendous. And I, I credit a lot of my lifetime success to him giving me the more of the business philosophy or, or, you know, ins and outs of how you have to handle yourself to succeed in business.

Tim Smith:
And as you said, you know, resilience, for example, you know, when you’ve got challenges, when you have down times and bad times, you have to have a mindset of resilience that you can push through this. You can come out the Other side better off. There will be a better day. You know, it’s not the end of the, of the whole thing. And you know that those were wonderful life lessons for me to learn in my late 20s and early 30s. Yeah. That I think really set me up for the, the success, such as it is that I’ve had so far.

Dana Robinson:
That’s. That’s amazing that before we start talking about entrepreneurs and what you know, about how to help them, I’m interested in. And like, you’re singing, you know, never. Never. I don’t think I know a professional singer. What do you. Are you with a troupe? Are you with a quartet? Are you. Do you just get invited and you’re a soloist? I.

Dana Robinson:
I’m just curious. And maybe our audience will track you down and follow you as a. Follow your Spotify.

Tim Smith:
I’m a soloist, although that makes me sound like I want to sing in a choir. I’ve sung in many choirs and I enjoy singing in choirs like church and things like that, you know. But most of what I have done is one man programs about Irish culture and music. So I’m a tenor and tenors are relatively rare. My voice, when I sing has a lot of the, the lilt and the timber of an. What you would think of as an Irish tenor, if you’ve ever seen, you know, like the three Irish tenors, for example. So I have a kind of a similar sound to all of that. And I am mostly Irish.

Tim Smith:
My full name is Timothy Liam Smith. And you know, if you Google that, you can find me singing the national anthem at events and, you know, things like that on YouTube. So, you know, mostly it’s been Irish stuff. I’ve developed a few other shows. I’ve actually produced a couple of things. One is a potential Broadway musical that we’re still working on, you know, things like that. But from a singing standpoint only. My most recent work was.

Tim Smith:
I’ve always been fascinated by Jesus. And not that I’m not theologically a Christian, but I am fascinated by the human part of it, what it would have been like to live the life he lived, have the experiences he had, you know, be killed, etc. So I composed a show that is about his life. It’s biographical. It’s different from your average theatrical because it’s much more. Stays much closer to the stories, if you will, and doesn’t veer off for theatrical, you know, effect and things like that. Like Godspell, just as an example would do. So this is a show that I’m hoping to package up with other Singers eventually and market and we’ll see what happens with it.

Tim Smith:
You know, so like I said, I got a lot of balls in the air and I, I just like life, living life this way. I’ve always, you know, other than the times when I needed to focus, this is how I’ve always been.

Dana Robinson:
I love it. No, and I think most, most entrepreneurs and business operators are always, you know, that we’re unemployable in a lot of ways. And, and you know, and some of that has to do with our. Something innate that says I got to do something else. I mean, I’ve written a bunch of books and taught and, you know, the, the, the ways we give back and express ourselves and create. It’s, I think, a common theme for entrepreneurs. All right, so entrepreneurs is an avatar of yours. They’re, you know, they’re my, they’re where my heart is.

Dana Robinson:
It’s, it’s a place I’ve spent most of my life. I’m in fund management now. But even that we act like entrepreneurs and, and not traditional Wall street kind of fund managers. As you sort of think about the listener who’s running a business, maybe never met a financial advisor, wealth manager, like, introduce what you do and, and talk through some of the things that you would talk me through if I was coming to you as an entrepreneur with a business.

Tim Smith:
Yeah, sure. Well, so I would say there would be one very broad aspect to it and then probably a couple of narrow but deep aspects to it. So the broad aspect would be that financial planning as a discipline involves a comprehensive look at people’s really their entire financial lives. So it encompasses things like cash flow and budgeting for many people. Investment management, getting kids through college, financial independence planning. Can I retire one day? What kind of benefits can I offer through my business to maximize retention of employees, let’s say, or to help retain key employees or attract key employees, wills and trusts. What type of instruments do I need there? What type of and amounts of insurance would make sense for me to have if I hope to leave my business to someone else one day? What is the plan to accomplish that? Business succession planning. So, you know, you get the picture.

Tim Smith:
It’s, it’s a really broad series of things. And when you get your certified financial planner designation, you have to take six different tests in six specific areas with depth of knowledge demonstrated in all of them. So, you know, that is the first thing that I typically will talk about with people. With an entrepreneur, the conversation a lot of the time will focus on estate planning in particular. You know, if I die with the business. What happens, how do we transfer it to someone else, what needs to be in place for that to happen, etc. And in particular, if there are other partners or, and, or children in the business. Once there are children in a business, all of that, you know, rises exponentially in terms of complexity and even more complex, when there are children in the business and children not in the business, there you run into a whole slew of issues of, well, if the business is the largest asset of an estate, how do I make sure that my kids who are not involved in the business will get something of value and that my kids who are involved in the business will not only get something of value, but will then also be able to control the direction of the business.

Tim Smith:
But you’re always going to have frictions of, you know, this, this group has control, this group just wants money or income. You know, there are often conflicts that, that can create and add spouses to the picture.

Dana Robinson:
Yeah.

Tim Smith:
And spouses don’t have the tribal family connection that the siblings would have typically. So that, that adds a whole new dimension of potential conflicts and problems. So that’s from a death standpoint, you know, that’s the kind of thing that we’ll end up talking about disability as well. From the standpoint of in life, what could I be doing? I want, you know, I’d like to monetize, you know, I want to sell at some point. What can or should I be doing to prepare for that? And my simple answer to people is there are several parts to it you have to think about. Put your head in the inside of the head of a potential buyer. Why would they want to buy you? How would your company and. Or either its stock or just its assets, how would that fit into what they have today? And that typically involves knowing a lot about your competitors because, you know, you may have complementary, complementary business lines or you may have the same line.

Tim Smith:
And you would. Your business that you’re trying to sell would just sort of be added onto their chassis, right?

Dana Robinson:
Yeah.

Tim Smith:
So you have to be thinking about how would someone else see this and take it over? So the next thing I think you have to be thinking about is how would this get valued? And learning something about business valuation is a really crucial element of that. So do you own real estate as a part of it? Do you own patents or other intellectual property as a part of it? Are you. Do you have something where you’re the only one who’s got it? You have a franchise type of a thing in the marketplace, if not A franchise itself, and that would have a premium value because of that, or are you a commodity, you know, operation where you’re competing on primarily service and price, let’s say, against other companies who have almost the exact same thing as what you have, you know, so then you get into questions of typically cash flow. So one of the things that you learn when you’re studying investments in finance is that most companies, whether they’re public or private, their. Their profits and. Or some kind of a concept of their cash flow, there’s a series of different ways of defining all of this, okay? But somehow that profit or cash flow has to be tied back to a value, and that value has to be realistic in the marketplace. Now, when we say in the marketplace, you know, for example, if you want to sell to a public company and that public company is valued at 20 times their own cash flow or their profits, okay, you’re not going to be able to sell for 20 times your cash flow to that company. You know, maybe you’d get half, something along those lines, half of that.

Tim Smith:
All right, but what’s going to happen is part of the reason that they will do the deal is that if they buy you at 10 times cash flow, then they’re automatically adding value for their shareholders of the other 10 times that cash flow or profit number. And that’s a major motivation for them to enter into the transaction to begin with. That’s a big reason why they would do it. And so you almost have to think of this as a series of ladder steps. You know, if you’re the smallest guy on the ladder, you’re going to sell for the lowest, what’s called multiple, the. The lowest times that number, four times that number, let’s say something like that, or five times that number. The next guy up on it is going to try to sell it for 10. And eventually the guy who sell.

Tim Smith:
Who purchase. I’m sorry, if somebody purchases it at 10, you know, they’re going to do that because they’re already public and they’re at 20. So everybody along the way is going to try to not only have a bigger, better business by the transaction, but they’re going to be looking to create value automatically in the transaction. And that’s going to help them with their shareholders or other stakeholders, and it’s going to help them with banks if they’re trying to finance it. You know, it’s just. It’s just the way of the world.

Dana Robinson:
Dana Robinson here.

Dana Robinson:
Quick plug for my book, the King’s Fly Swatter.

Dana Robinson:
You can see it Here, behind me. If you’re watching this, I’ve got it in my hand.

Dana Robinson:
It’s a beautiful hardcover book printed to.

Dana Robinson:
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Dana Robinson:
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Dana Robinson:
Let’s just start there.

Dana Robinson:
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Dana Robinson:
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Dana Robinson:
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Dana Robinson:
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Tim Smith:
Have the right expectations of valuation sort of based on where you are in the pecking order. I hate to put it that way.

Dana Robinson:
Yeah.

Tim Smith:
But it really kind of is what it is. There’s a pecking order to this. And you know, if you’re at the bottom rung of the pecking order, you’re not going to get the top valuation metric, you know, the top way that something can bid. So don’t go, you know, if you’re a one million dollar company, don’t go looking at a billion dollar competitor and say, oh yeah, they, they have a multiple of 15, 18 times net profit. So my net profit is $100,000. I should be able to get a million eight for this company, that’s not a wise way to look at it. That’s going to be too high a number. So being realistic about valuation, learning about valuation, learning about different ways things are valued is crucial to optimizing your value.

Tim Smith:
In particular, if you have, as I said earlier, real estate, intellectual property, intangible things, maybe you have two or three executives who are just absolutely tops in the industry. That might be a reason why somebody would pay more to get your company is because they’re getting better management than they even have now. So you have to have reasons to justify what that valuation is going to be. And you have to think about. And by the way, there are books on this. I mean, there’s information out there on this. I. I’m not, you know, I’m not creating something out of thin air here.

Tim Smith:
You know, I had to go through this. I’ve been through this process. So I’ve had these types of conversations, and I’ve had them with buyers, and I’ve had them with my lawyer who is a transaction specialist. That particular lawyer is a transaction specialist. And that, that firm that I worked with for that transaction was wonderful in educating me about a lot of this stuff as a way of making sure that I wasn’t, you know, being totally unrealistic about what might be possible in the marketplace. You know, so a buyer will pay a premium over the market when there is something else that they are getting that is adding to the picture, enterprise value, for example, strategic fit of some kind. And so anybody who’s hoping at some point to monetize has to be looking at their market of competition. And also, I mean, some other player that might want to be in this business that you’re in that isn’t in the business now, but there may be a player from the outside who’s looking for an entry point to the business that can be even better because they’ll want the whole business and they’ll, you know, they’ll put money into it and grow it and that kind of thing.

Tim Smith:
So that’s a way of getting a premium price as well. If you sell to a competitor and all they want to do is, you know, take your salespeople and customers and put them on their chassis. That that could end up being the lowest price possible because it’s the simplest transaction and it adds the least value in a, you know, broader sense to the whole picture. So those are the kinds of things, you know, that you need to know going into it. There are also some tax considerations that come into play. If you have an S Corp versus a C Corp. You may qualify for a pass through to you as an individual of for example capital gains income. If you say there’s a purchase of goodwill as an asset.

Tim Smith:
I don’t want to get deeply into the technical stuff, but there are tax issues and obviously the best tax situation is something where you have no tax, but for the most part you’re aiming for long term capital gains if you can get it. And that’s typically achieved by either selling the stock of the company itself or selling stock of an S Corp or other pass through type entity, limited, llc, limited partnership, something along those lines. So being aware of what the tax hit could be is important. A, so that you’re not, you know, blindsided near a closing and go what I have to pay taxes or you know, how much it’s going to be ordinary income, you know, earn out, for example, an earn out could end up being ordinary income depending how it’s structured. So that’s the worst of all possible outcomes. The second reason why the tax hit and the valuation really become important is because you should also be talking to a financial advisor, a financial planner, somebody who can help you take what you expect to receive net of taxes and put that into the context of your long term financial needs. So for example, if you’re 59 and you know, you’re hoping to, you know, tour the world for the next 20 years, well listen, $10 million seems like a lot of money. But then you take 3 million off for Medicare and long term capital gains and state taxes and you know, you got a million dollars of debt that has to be paid off or whatever.

Tim Smith:
Now you’ve got 6 million, that’s $300,000 a year. You know, with inflation, $300,000 a year isn’t going to be that much in 10 years to spend $50,000 a year traveling the world, right? So you, you really have to make sure that you know what it is your this is going to get you right, what is the place this is going to put you in and is it going to achieve the long term goals that you have? I mean, you know, if you find it doesn’t, you may need to work another three, four years, grow the company another 30, 40% and then maybe then you’d have the money you’re looking for. But selling the company in a vacuum because you think you’ll be able to be financially dependent on it, you know, unless, unless the numbers are astronomical, you know, 100 million, most people can survive on 100 million after tax for a long time.

Dana Robinson:
Right.

Tim Smith:
Everybody I know, yeah.

Dana Robinson:
But Most transactions are 10 million and under. I mean they, the. Which is, which is a respectable, I mean the, the anyone that’s their largest asset that has a business that might sell for 5 to 10 million dollars. But as you say, I’ve seen this repeatedly in, in my career. They haven’t thought about it until someone says, I think I’d like to buy your business. And they say, I think it’s good time to sell. Thanks. And then they start by sort of maybe being misaligned on value because the seller hasn’t thought through value and the buyer has.

Dana Robinson:
Buyers are in a market, right. So they can assess value and are pretty sharp about value. So the seller’s got the first problem of never being prepared for a fair value and then the second one is not planning for taxes and the third one is not being prepared financially to live on what’s left after, after all of that. Do you, do you find a lot of C Corp owners that, that haven’t planned for double taxation, you know, kind of having that become a, you know, a major problem in their ability to have a monetization?

Tim Smith:
I actually don’t find that much of that. And I think it’s primarily because I think accountants have generally done a good job of communicating with the client about their long term needs, not just about their current tax posture and positioning them in a way that will maximize a sale if and when the time comes. So honestly, I don’t see that many C Corps anymore at all.

Dana Robinson:
We’ve run across three, three this year. And, and it’s a problem. And I asked their CPAs, have you thought about how to solve this problem? No one’s going to buy your, your, your client stock. And they say no, I, I haven’t thought about that problem and how to solve it. Well, it’s good to know it’s dim then what, you know, the, the, the biggest, the typical deal between 5 and $10 million that I see, you say, you know, we’d like to pay you a fair price. You know, the market is five to six times your ebitda. We’re happy to be generous with whatever your owner discretionary earnings and add backs are. And they just say, well, that isn’t enough.

Dana Robinson:
And you say well why? And they say because I, I need more because otherwise I won’t have enough to live on to, to have the, the life that I, that I’d like.

Tim Smith:
Yep.

Dana Robinson:
So they’re, you know, they have that number in their head, but they’re misaligned on the Timing of selling it and somehow think if they could just get it by naming it, you know, I just need $8 million to make this happen. Why? Because that’s my number in a market, which there is for businesses of almost all types, that there is a price all buyers are probably willing to pay. And, and that, you know, diminishes as the price increases. You know, have you seen sellers kind of reconcile with that, this disruption of expectation? And, and as you say, do they mostly go back to drawing board and hunker down for a couple of years and try and get to that point?

Tim Smith:
I think most successful business owners who. And I’m going to distinguish between someone who is more of the creative type, who founded something and had a good business management team to run it, and what that might. What they think that’s worth versus real business management types. I’ll just call them most, for the most part. While there may be an initial shock about value, I think most business types will step back and say, okay, this is a market just like the markets to which I sell my services. You know, I, I can’t get away with going to a customer and saying, hey, we’d like to take over your business. You know, we, we sell carpeting too, wholesale carpeting, just like we’re manufacture carpeting. And we make this exact same kind of thing as they do.

Tim Smith:
They sell it for $4 a square foot, we sell it for $6 a square foot. And you know, the customer says, why are you 50% more? And he says, well, I have a boat, I have a second home. You know, I have needs. And the buyer goes, well, thanks, but no thanks. You know, your needs are your problem, not mine. And once the, once the op. The opposite situation or a situation of experience to the business person is brought to their attention and the emotion of their own situation is removed from the equation. Normally they see it as opposed to the creative type.

Tim Smith:
Right. Who may, may really not get supply and demand or, you know, what you can get away with selling something for in the marketplace and perceptions of value and things like that. I think that person will have a harder time grappling with value in particular if they’ve lived a very affluent life on their salary and profits from the business. So they’ve become accustomed to just being themselves. And the money pours in.

Dana Robinson:
Yes.

Tim Smith:
And so therefore, you know, they’re going to want a number where the money continues to pour in. And you know, that may or may not be possible depending upon, you know, the market and what the business is and other things. So I, I think it really comes down to getting the buyer, the seller, rather away from the emotion of their own thing. Getting them to grasp supply and demand, you know, equations that they’re accustomed to and that they deal with on a regular basis and understand. Yeah, this is exact same thing that I deal with with my customers all the time, or my employees, for that matter. You know, you’re trying to employ, You’ve got a position open, you interview three people, they’re all great for it. Two guys want a hundred thousand dollars, the other guy wants 130. And you ask the guy, why do you want 130? And he says, well, like I said, I got a boat, I got a house, I got a, you know, I got a kid in college, I need to get 130.

Tim Smith:
And you’re like, well, I got two other guys at 100. I like you. You can take it at 105, let’s say. But I’m not going to pay you 130. Well, that’s not enough for me to put my kid through college. Well, you need to add more value to your situation to be able to warrant the additional money in the market.

Dana Robinson:
Yeah, I love, I love that you’re talking about it because I just had a conversation with somebody who’s an accountant who helps people position their company to sell, and he said that the, the deals that always fall apart are when a seller has never thought about their value until they get a first foray. Somebody says, I like your business and I’d like to buy it. And maybe they, they get excited. That value is not even thought about in terms of market or dollars. It’s. You just told me what the thing I built is worth. Right. The emotional consequence of, of waiting until you’re ready to sell or someone makes an offer is damaging to both parties because it means your buyer is wasting their time because they’re the one kind of punching you in the face with the, with the reality of a number.

Dana Robinson:
And the seller isn’t going to take the deal because now they’re emotionally wounded for, for having someone call their business only worth 5 million when in their mind it was worth 10. This. So, so the idea that a financial advisor, you know, who has clients that are entrepreneurs, can teach them that the principles so that they can not only, you know, hopefully increase value over time before they do monetize, but also so that they’re not offended by the, by learning their business is worth some number.

Tim Smith:
You know, I think they’re going to be offended at first no matter what happens in Part because the negotiating style and tactics of a lot of savvy buyers is always going to be low to start with to, you know, to try to see how desperate you are or see if, you know, maybe you’re so unhappy in what you’re doing that you’ll take anything to just get out of it or, or whatever, you know. So, you know, two things that definitely will improve your negotiating stance is a never seeming desperate, never seeming like you’re in an enormous rush to get it done. And number two, if you’re extremely unhappy in what you’re doing, make sure you tell them you’re damn happy at what you’re doing. Although you’ve been thinking about leashing.

Dana Robinson:
Put on the happy face.

Tim Smith:
Don’t, don’t give, don’t give ammunition to the other side.

Dana Robinson:
Yeah, absolutely. I love that. Well, I interrupted you as you’re talking through the flow of how you consult and think about entrepreneurs, their plan.

Tim Smith:
So the last, the last part of it is that I’m typically, you know, then heavily involved in helping them use their assets to provide for their long term financial independence. Interestingly, I find that entrepreneurs who sell seem to fall into two categories with, in terms of their risk tolerance after they’ve sold. There are some, and age has something to do with it, but there are some who absolutely don’t want risk. They’ve spent their life dealing with risk. Right. Their, their professional life and frankly their home life. Because if you’re an entrepreneur, it doesn’t matter whether you’re home or at work. It’s 10 o’ clock at night or 6 o’ clock in the morning or midday.

Tim Smith:
This is on your mind all the time. Yeah, it, you know, there’s, you never leave it at work. I think that’s something most entrepreneurs can really, you know, agree with. And so that type of a person really needs a way to invest that is going to avoid, you know, triggering them or, or putting them back in a risk posture. As an example, you know, yeah, you’re 67, you sell out, you put a quarter, let’s call it 40, 50% of your money in the stock market and the market goes down by 50% over 18 months. And of course, you know, the advisor is you got to hold out. You gotta, you know, hold on, it’ll come back, that client will look at that and say, I lost a quarter of what I worked to build.

Dana Robinson:
Yeah.

Tim Smith:
Because of that freaking stock market. You know, so there have to be different strategies of investing for growth for that person versus the other kind who is a risk Taker, still wants to be a risk taker, you know, wants to, you know, always wants double whatever the s and P500 does and wants the, you know, the hot stock type stuff. Personally, I don’t work that well with that person. I, I tend to work extremely well with the conservative investor, not as well with the hot money, quote unquote type investor.

Dana Robinson:
Sure.

Tim Smith:
And, and I’ll just tell you quickly why, because this is one of my differentiators as an investment person. I work extensively with instruments like puts, calls and structured notes so that I can create positions for people where market downturns in general are being in effect guaranteed by large money center banks and puts and things like that. And I use the calls to give them the upside that they would otherwise be losing by the protection that the bank gives them. So you know, we’re giving them market like returns. The goal is to give them market like returns but with you know, say 25% downside protection on their money. And we can make it more than that by using puts as well. So it’s a non scalable strategy. And one of the challenges of working with financial advisors today is that the mantra is scalability.

Tim Smith:
If you’re a financial advisor and you talk to a coach or you’re looking for ways to double your assets under management and that kind of thing, a very common theme you’re going to hear is turn over the money to a third party to manage, they’ll put it into model accounts and you will just help review it periodically. That’s it, you’re done and you can move on to the next sale. And that’s great in terms of scalability. It is, it’s not great in terms of customization to what that individual investor is really deeply wanting from the financial advisor, from the investment advisor. And so I, I just don’t do any of that kind of thing. Everything I do is individually done. You know, if you go into the money, into the market today with me, you’re going to have a different portfolio with different instruments, with different maturities and everything else than somebody who came in three or four months ago. Even if your goals are about the same, you’re still going to end up with different instruments because it’s a different time.

Tim Smith:
So it’s a, a lower market risk approach, still giving market like returns. But it, once it’s explained and people are educated about it and you know, business owners are typically somewhere between extremely street smart and extremely astute and business savvy and everything else. So you know, you can explain concepts to Them in a way that they’ll understand. And they, you know, they gravitate to this because if they are this type of person, they gravitate to it because they’re like this, this is great. Now I can sleep at night. I’m not going to worry that, you know, everything I’ve built up is going to get lost, but I’m still going to get reasonable growth on my money if the market goes up.

Dana Robinson:
Yeah, I like that. That’s so the, the entrepreneur, let’s say that the entrepreneur that I know is right in the middle of that. They’re going to sell a business and they need someone to give them, you know, the replacement for cash flow. But they are risk takers. Do you see a lot of them looking to take some of their winnings and go place another bet, you know, with somebody or get into alternatives? Because they’re used to, you know, the entrepreneurial returns, whether that’s real estate or, you know, investing in business or angel investing. I mean, the, the entrepreneurs used to having outsized returns and more control and involvement in their investing than you give them when you, when you give them a product.

Tim Smith:
Yes, there’s no doubt about that. And, you know, many entrepreneurs struggle with control. You know, it’s an issue in their relationships. It’s a really, you know, it’s everywhere for them. This is where financial planning comes in again. Because if I say to the guy who sells for 8 million, let’s say, yeah, you need about $20,000 a month to live on, and that’s going to go up with inflation, we know how much you’re going to have from Social Security. And when, you know, there’s probably no pension, there are probably some 401k assets, things like that, plus the proceeds. So if I turn to the person and I say, look, we know that we’re going to put 60% of this into fixed income to replace the income that you had.

Tim Smith:
So we’re going to have 40% to try to grow for the future and eventually turn it into income as inflation increases, the amount of income that you need on a monthly basis over the years as they go by, especially if you live a nice long life. Right?

Dana Robinson:
Yeah.

Tim Smith:
So if, when we do that kind of an analysis, if that other 40% turns out to be just about enough money, you know, to get them to age 90 or age 95, well, I would have a heart to heart with the client about how much risk makes sense for them to take with that money, because for the sake of argument, if they took half of it and lost it. You know, in a hedge fund, venture capital, hedge fund, that just makes bad choices. You know, one out of ten is supposed to be a home run. Well, sometimes ten out of ten are no good. You know, just, you just don’t know if that’s. If they’re on the cusp of having enough in assets to be financially independent, and if that is a strong goal for the person, they don’t want to work again. They don’t want to invest in a company again. They’re not, you know, starting up a new thing.

Tim Smith:
You know, then I would probably say them, you’re, you’ll be taking a big risk if you take some of this money and put it into something that is strongly risk capital. Take the other guy who sells for $12 million with the same situation. That person may have two to three million dollars of assets that it doesn’t look like they’re ever going to get to because the projection says that 3 million is going to grow to, you know, 22 million between now and age 95. Okay, so, and again, financial planners, this is what we do. We calculate this stuff, you know. Yeah, it sounds like a lot of fun. I know. So it’s kind of stuff we do over beers, you know.

Tim Smith:
So if that guy’s going to have two or three million dollars of excess assets, that person, I could say to them, yeah, you want a million dollars to try a new business startup thing of your own. You can afford that and it’s not going to impact your financial security. You want to put 2 million into a hotshot hedge fund stock fund and shoot for the moon. Yeah, go ahead. You can afford that and you can still accomplish what you want to do. So in particular, if the other parts of the portfolio perform consistently and properly, you know, as was planned for them. So a lot of it, it just, it’s situational. You know what, you might counsel someone.

Tim Smith:
And I’m, I’m not the kind of person who says, I don’t think you should do this or I think you should do that. I’m the kind of person who tries to give people the information they need to understand the consequences of their own decisions and let them make their own decisions. You know, that’s just my philosophy.

Dana Robinson:
So I love it. As we sort of get toward the end here, I always do a gut check on a podcast and ask if we missed anything that you think is something you know really well that the entrepreneurs and business owner operators that are listening don’t, you know, that we haven’t talked about yet.

Tim Smith:
There’s one other thing that I, I didn’t mention and it, you have to be at least a few years away from selling for this kind of stuff to work out. And typically there has to be a pretty good sized number involved in the value of the company. But that’s charitable planning. There’s a series of different types of charitable trusts that can be used that can reduce some of the income taxes or capital gains taxes that hit that you might take in particular if you’re charitably inclined. Like for example, if you were thinking about, you know, leaving money at death, a million dollars for a charity at death, you could put it in something called a charitable lead trust and you would actually get income from it for a period of time, whatever you’ve designated and I’m sorry, charitable remainder trust. And at the end of that period of time, the money would go to a charity. You can take a tax deduction today for what’s called the present value based on some financial calculations of that future gift that’s going to go to charity. And you can partially shelter some of the income taxes.

Tim Smith:
So, you know, if somebody was thinking, you know what, I’m going to give away a million or $5 million of this as soon as I get the deal done. Well, don’t wait, don’t wait until the deal is done. Start talking to tax attorneys, tax accountants, years ahead of time because it’s not the kind of thing you want to set up at the 11th hour. And, but again, if you were thinking of giving away a chunk of money, do it in the tax smartest way. And on the money that you don’t give away to charity, you could be getting a nice big tax deduction against the gain on that money. So, you know, these are the kinds of things that you, you should be thinking about and have, have awareness of and be mindful of.

Dana Robinson:
Yeah, no, I appreciate that’s great advice and certainly, you know, I think the, the advice whenever I bring an advisor or a coach or consultant on the podcast for entrepreneurs is start, start thinking about these things now that, that, you know, may not be impactful today, but that you need to be doing today to, to be ready two, three, four years down the road. So many things the, the accounting that, do you think of all the things that people scramble to do when they suddenly are in a transaction that if they had thought ahead and, and I love the tax planning and getting with a financial advisor. Speaking of which, I know people already know from listening in the beginning how to find your singing and TV commercial career, but if they want to find you as a, as a CFP or get into, you know, kind of into your funnel as a potential customer, what’s the best means for people to connect with Tim Smith?

Tim Smith:
Sure. My, our website is www.aurorapw.com. p as in peter w.com and I am tim@aurorapw.com so, you know, they can ping me there. That’d be great. I’ll just. Two other things quickly. I the financial dad is on YouTube. The handle is just @ the financial dad. One word.

Tim Smith:
And so if anybody’s interested in, you know, especially the younger folks who are looking for more education about getting their businesses moving forward and things like that, you know, you could find that there. The final thing is I, I do have a book that I’m working on. Unfortunately, I have had to deal with a number of investment frauds by investment advisors over the years because I’ve dealt with an awful lot of them, you know, and the book is about how to protect yourself against that. So it’s an explanation of sort of all the checks and balances that are available in the system, so to speak. You know, money held by a Merrill lynch or a Schwab or a Fidelity, and how that protects you versus, you know, Tim Smith comes to you and he says, I’ve got a new investment fund I’m starting and I’m going to invest in micro micro small companies. And you know, we’re going to make 35% a year with this and I can guarantee you you’re not going to lose your money. Because I know all these people, that type of situation is just ripe for fraud. And there’s.

Tim Smith:
For the vast majority of people, there’s just no reason to do it. So the working title of the book is 50 Ways to Protect Yourself Against Investment Fraud. And you know, they can contact me at my email if they’d like to get an advanced copy. It’s just in manuscript format at this point, so maybe six months or so, I’ll have it up on Amazon.

Dana Robinson:
Good, good one. When you do, you send me the link. I’ll put it on the podcast notes so people can thank you. Exitplan us, everybody. Remember, feel free to reach out by email. Hello@danarobinson.com Tim Smith, thanks for your advice today.

Tim Smith:
Thank you, Dana. I’ve been a pleasure.

Dana Robinson:
Thanks for joining me on this episode of the Exit Plan podcast. I’d love to hear from you. Feel free to hit me up with questions or comments by emailing me at hello@danarobinson.com or leave comments and questions by calling 858-252-7785. Call 858-252-7785 and leave a message.