Business Innovators Radio - Interview with Linda Jensen, Principal and Owner of Heart Financial Group Discussing Exit Planning

Episode Date: March 24, 2024

Linda has been self-employed for her entire life. A successful financial advisor since 1994, she has enjoyed all aspects of entrepreneurship, especially problem-solving, sizing up dilemmas, and working through complexities with creative solutions. She is a lifelong learner. In addition, she has a passion for establishing a good rapport with business owners and clients helping them access a wide range of resources. “Business owners are in a lonely place,” says Linda. “I want to develop a relationship with the business owner, offer counseling and serve as a referral service.” Linda began her career in 1994 with Prudential Preferred Financial Services; for three years Linda was an agency leader in Tacoma, Washington.Since starting her firm in 1997, Linda has enjoyed working with individuals and business owners helping them achieve their financial dreams and goals. She is an expert in all aspects of retirement planning.Linda has lectured widely on financial topics to both the general public and business professionals. She is passionate about helping business owners leverage corporate cash to create benefits for the owner(s), and key employee(s) and to identify estate-planning solutions.Linda calls the Pacific Northwest home. She married her college sweetheart. She and her husband Brad have two children and five grandchildren. Linda loves learning, reading, hiking, sewing, and cooking.Learn More:https://www.heartfinancialgroup.com/https://www.LowerYourTaxesToday.comInvestment advisory services are offered through WealthWatch Advisors, an SEC registered investment advisor. Wealth Watch Advisors and Heart Financial Group are independent of one another. Please note that the registration with the SEC does not guarantee the success of investment advice.Influential Entrepreneurs with Mike Saundershttps://businessinnovatorsradio.com/influential-entrepreneurs-with-mike-saunders/Source: https://businessinnovatorsradio.com/interview-with-linda-jensen-principal-and-owner-of-heart-financial-group-discussing-exit-planning

Welcome to influential entrepreneurs, bringing you interviews with elite business leaders and experts, sharing tips and strategies for elevating your business to the next level. Here's your host, Mike Saunders. Hello and welcome to this episode of influential entrepreneurs. This is Mike Saunders, the authority positioning coach. Today we have back with this Linda Jensen, who's the principal and owner of Hart Financial Group, and we'll be talking about exit planning. Linda, welcome back to the program. Hey, good morning, Mike. Hey, good morning, and I'm excited to talk about this because I have a feeling that you've got some really nice statistics on what exit planning is and why it's not being optimized for business owners.

So let's just start off first with what's the definition of exit planning? What is that for a business owner to understand? Well, exit planning is actually having a plan in the event that you wanted to either sell your business or transition out of your business. And most business owners, to be honest, Mike, are so busy taking care of their business that they really don't give this attention. And I will tell you why they should. I believe every business owner should really consider getting involved in creating a plan for exit. And the reason is that they will increase the profitability and the valuation of that business. And really the first step is to protect the business.

revenue and derisks that business is really the very first step in the process. I think that's a huge point that you bring up is you got to start somewhere. And risk is a big R word that people don't like to think about. But what would risk actually look like as it relates to exit planning? Because exit planning would be, hi, I'm a business owner. I've had my business for 25 years. I'm ready to do something different and retire. So I'm going to put a for sale sign on it and sell it for X.

Well, how does risk factor into the decision of wanting to sell the business? Well, usually business owners, I think, are pretty myopic and they may not understand their risk. And so that's why we work as a team. I really think exit planning is a team sport. And so that begins with really getting to know that business and studying the dynamics of it. And I'll give you a couple of examples of risk. One would be a supply chain where you're getting pretty much. all of your supplies from one vendor. That can be a large risk. Another risk can be customer

concentration where maybe you're really big customers, Walmart or Amazon. And what if that was to go sideways, you see? So that's some of the things that we would evaluate is really looking at the business, you know, pretty high level and then determining what risks we might be able to uncover. And once you uncover those risks, there's probably going to be several, right? I mean, it's never going to be like, oh, you've got, you know, the one that you just mentioned, there's going to be several. So where do you start?

Once you identify that risk, where do you start in working on addressing the first one? Or are you going to start working on several together a little bit? Or do you want to have, you know, pull focus on the first one, check that off and then move to the next? Well, Mike, that's actually a process that we take the business through. And so, you know, that's the first step. And I will tell you, most businesses have absolutely no idea what the value of the business is. I mean, we're making assumptions onto what it's worth. And generally, there's a fairly good disconnect between what the business is really worth and the perception of that owner.

You know, it reminds me when you want to sell your car and you go look at the Kelly Blue Book and you go, oh, I want $5,000, but the Kelly Blue Book is, showing 2,200, you're like, you know, look, this car is worth $5,000 to me, but it's only worth what people will pay, but you've got to have some sort of a benchmark. So what do you do when you're saying to someone, hey, the first risk is properly or the risk is improperly valuing, putting a price tag on your business, that's a risk because you could have the right buyer come along and it's too high and they move on. What do you do to mitigate that risk? How do you make sure that it's valued the right way. Well, we value it. You know, we have a process to value the business. And then what we're doing is we're educating that owner on increasing the value. And we will

compare the value of their business to the best in class of that same type of business in their industry. And then we coach them on how to increase the value of that business, Mike, is another part of the process. And so that they were going to understand where they're at right now and give them targets and processes to increase the value of that business by implementing different aspects, you see, to increase the value. Because probably if it is not valued the right way, you could get a frustrated owner that tries to sell it

and it just doesn't go anywhere. And they're thinking, what's wrong with me? And the business never sells. And they just got to put a fire sale sign on things and just move on. And it could have been avoided. It definitely could have been avoided because there's lots of things that can be done to increase that value of the business. And so what we do is we concentrate on increasing the value, increasing the profitability.

And what that translates to with the ultimate sale of the business is a higher multiple, you see. so that they're going to get a much higher price for that business. And some businesses are really ready pretty much, but a lot of businesses aren't. And it can take, you know, really maybe three to five years to try to maximize the value of the business and really get it ready for sale.

I'll give you another example. Sometimes business owners will write off, you know, family vacations or they'll have their daughter who's in college on the payroll. and they don't have pristine finances, right? And so sometimes, I know that sounds maybe silly, but it can take a while to clean up just the books and get that business ready for sale. You know, it reminds me when you're describing that of,

like if you wanted to sell your house, the real estate agent will come out and talk about curb appeal. You know, when you first pull up to the house, let's make sure that the house is painted well and there's good landscaping and the yard is. And then when you walk in, you want that next step to look good. And there's going to be curb appeal for a business.

If someone wants to buy it, they want to look at the first thing and the second thing. And then when you start digging in, you want to make sure the books look good. And then you want to make sure that the employees are happy. All of these things are what you're talking about here for, you know, valuation to make sure that you put the right price tag on it so that whatever decision you make to exit can be done. Because I think you had mentioned that statistically there's a certain number of businesses that just never sell, even though the owner was trying to sell it, right? Yeah. Well, I would tell you about 83% of businesses are owned by baby boomers, and there's going to be

an enormous transition over the next 10 years. Unfortunately, only about 20 to 30% of businesses actually sell. And so, you know, there's lots of issues that could come up. There's lots of issues that we would like to plan for, obviously, and make sure that that sale is extremely successful. 100%. So let's just say that when you're thinking about exit or selling, and let's say that the business has been now you come in and do some sprucing up,

the valuation looks good. Is it as simple as just kind of putting a price tag up and saying for sale? What are some of those options for a business owner to consider like, well, I might not want to just sell and right off into the sunset. I might want to have it like a hybrid. What are some of those options? Well, yeah, well, there's two basic categories. One is inside, which would be, let's say, multi-generational,

where you want to be able to sell to your children, or there could be management buyout, sell to existing partners, or even sell it to your employees. The other type would be outside where you're going to sell to a third party, maybe private equity, or God forbid, that doesn't work. you end up actually having to liquidate the business. And so for intergenerational, you know, lots of times people, about 50% of business owners really want to do that.

But in reality, only about 30% are actually able to have that transition go on to their children or their grandkids. Well, it makes me wonder a couple questions, and let's just kind of dive into a couple of these, inside selling to children slash family that might be either working in the business currently or would be interested in it. What happens if there's no family that is even interested at all in taking over and buying the business? So they might already work there and they're just like, oh, no, this is just a paycheck for me.

Or what if there's kids or family that aren't working in the business, but when they were given the opportunity, hey, I'm going to retire. What happens if there's just no family? then you would default to, okay, now let's look at, would some of the employees want to take it over, right? Exactly. Employees are an outside sale. And, you know, there's pros and cons for each one of these, you know,

a pro for selling it to the kids. You know, you want to make sure that those child or those children have really worked in the business for a long time, right? So you've been able to mentor them, that you know that you can pass that on to them. them and it's going to be successful. Usually there's a lower cost. Usually you can plan. Usually you're going to have more control and less disruption. And lots of times the kids are highly motivated. But Mike, you're absolutely right. Because of family dynamics, you know,

you could have a child who just feels like, you know, I'm not that right person. They're smart enough to realize that maybe they don't want to be the owner. And that happens. You know, I actually, my hair salon is a good example. Mom has owned the business. It's a family business. There's one daughter who's really the kingpin and she would run the business. She doesn't want to own it. Yeah. And so you're exactly right.

And then sometimes what happens is there's a lack of funds to be able to, you know, lots of times the parents need to cash out as part of their wealth, right? To continue their lifestyle. But maybe the kids don't have the cash to do that. And then you get into the aspect of, you know, whatever you do, do for a business transition, you want to do very quietly. And so the team approach that we use is very sensitive to that, that you don't want the employees understanding that this transition. You certainly don't want the customers or the competition to understand that either.

So, you know, it really can get quite tricky, okay? That's a really interesting point because if you start letting the wrong word get out and then the employees are running for the hills and then the customers hear about it, you might be liquidating it when you didn't want to liquidate it. And you just didn't keep a lid on things. And you absolutely have to have a very quiet process, you see, where, you know, this can be really, you don't want to risk losing key employees, for example. Yeah.

No. And so it could get quite tricky, actually. Well, as you're describing these, inside to children and family employees or outside to third party, you know, VC kind of a thing, or just, I'm done liquidating. a day to fire sale it. It makes me wonder, is there some type of a hybrid? Meaning, if I'm the business owner and I go, you know what, I'm ready to throttle back, but I'm not ready to go play golf the rest of my life and sell and take this paycheck. And that's it. I would like to work two days a week. So can you give me a chunk of money?

And then I'm going to come in and work two days a week and maybe just pay me a residual few thousand dollars a month for being the, you know, emeritus, you know, owner emeritus. What kind of options are that way for hybrid for someone that wants to pull back but not fully retire. You know, Mike, what you described is extremely common because to have a smooth business transition, lots of times the owner or owners stay on board for even a year, give or take, right, to make sure that that transition is really very smooth. And sometimes, you know, sometimes it's a it's they the the sale will give them some cash up front and then there's an earn out and another thing to think about is something called an esop it's a sale to the employees and that

could be overtime also and that's one where the company uses borrowed funds to acquire the shares from the owners and and the business kind of stays in the family then and those shares by the way are purchased with pre-taxed dollars there's a taxable gain on those e-shop shares that can be deferred. And that ESOP is a really great employee benefit. And that will cause basically the employees to act more like owners, you see, where they're taking ownership of that company. But on the other side, it can be more complicated, it'd be more expensive.

You have to have securities registration exempt them. And then if an employee leaves, the company is compelled to buy back those shares from that company, that employee that left. And that's really, that's kind of a good option sometimes for what you're describing as a gradual exit. Yeah. And I would suspect, too, there's a lot of nuances, obviously, that go into that. But one thing that comes to mind is if all of that is plan for taking care of, like the business goes, okay, if that employee leaves and I'm compelled to have to buy out the shares, I want to make sure that I've got liquidity or some financial tools to be ready to do that. Great. That's wonderful. But one of the, um, but one of the,

upsides I would suspect is that the pride of ownership. So for instance, when some, you know, my, my oldest daughter just bought a house with her husband. Well, the pride of ownership is we own our home. Well, what if now these employees are given this opportunity and now they're part owner of this business, the work, the quality of work is going to go up. Maybe the vendor relationships are going to improve. So that business could actually take a tick up for the positive because you've done something like this. And I think that's something that might need to be factored into the exit planning decision, right, in a positive way. And I think personally, I think the smartest managers or owners want to engage their employees anyway because the employees are actually doing the job.

And lots of times, they can have some really good ideas on how to improve, you know, the profitability or actually the processes that are being used within the business. right? Now, you had mentioned that one of the ideas I had about hybrid, like I want to work two days a week and give me a cash out, but I still want a residual amount of income. Let's throw this idea out there. What if that owner says, okay, I've been doing two days a week for a couple, three years now, and I'm just looking back and the new ownership and my kids or my family or whatever, they are just not doing things well and the numbers are going down. The numbers are going down. I've kind of caught my breath, and I'm ready to. to kind of step back in and I'll I'll kind of buy back the majority of it. Is there a contingency where you would be working with that owner to go, okay, you got this chunk of change. Let's not lock it all up and let's not spend it all. Let's be prepared for what if.

What if you want to step back in? You need to have some opportunity to reaccess those funds or whatever and then, you know, step back in, hire CEO and all of those things. But does that scenario ever come up? Yeah, that can come up also, Mike. And then, you know, I will tell you, too, I think one of the trickiest things is if you have partners, to be honest. And so, you know, with partners, most businesses have what's called a buy-sell agreement. And for the most part, they are not funded.

And so, you know, real life happens. Let's say one of the partners dies. Next thing you know, you have the wife. And she's going to be like, look, I got three kids to raise. I need money. where's it going to come from? And, you know, so if those agreements are not really in good shape, that can create problems. And then usually what you want to do is a good sale to the partners, right?

So you want to make sure you have a good buy-sell agreement. You want to make sure that that's funded. That can be a really good plan because, again, you're going to keep that business, you know, kind of in the family. The partners are very familiar with the business. They've been running the business. That's a lower cost. Sometimes, though, for the people, you know, for the business.

people, the partners are selling it, they're going to get a lower sales price. Sometimes there can be kind of discord among the partners. Sometimes a buy-sell agreement will maybe restrict the options of selling it. And lots of times with the partner sale, getting the cash out is even slower, you see. Yeah. And, you know, typically most of the wealth for a business owner is tied up in that business. And for them to retire successfully and maintain their lifestyle, they need cash. Where's that cash going to come from, right? Yeah. What you're saying is really lots of times it's an earn out, what I would call an earn out, right? Where you're going to get some money up front and then you're going to get paid over time through the profits of the business. And you're right, Mike,

lots of times those owners are still having to be working in that business for a period of time. Huge. Well, just like anything that we would talk about regarding business or financial matters or planning, there's never one cookie cutter perfect solution for every single person. It's all depending on your goals and your outcomes and where you are right now. So I think all of these things are just such huge opportunities that you brought up to consider. And I would just ask if there's a business owner listening to this that's interested in learning a little bit more and then reaching out and connecting with you, what's the best way that they can do that? Yeah, Mike, before I say that, I want to also mention private equity because for some business transitions, it's really helpful to get somebody come in from the outside, provide extra cash to be able to grow that business and also sometimes management skills.

So sometimes considering private equity is also a great option. So, yeah, our office phone number is 360-8788065. A good website to check out is lower your taxes today.com. Excellent. Well, Linda, thank you so much for coming on. It's been a real pleasure talking with you today. Okay. Thank you, Mike.

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