Business Innovators Radio - Interview with Rexford Cattanach President of Keats Group Discussing Business Succession Planning

Episode Date: September 7, 2024

Rexford is president of Keats Group LLC, a comprehensive financial advisory firm. He works with successful families and family businesses to implement effective income planning, tax planning, and asset protection solutions that are administratively practical. He manages our service relationships with specialists for complex tax and estate planning, business transitions, and company retirement benefit planning.He writes and speaks on various succession and compensation planning topics for professionals and business owners. He is the lead author of InBusiness™, which features topics of planning interest to Private Clients.Mr. Cattanach has served on community boards and other leadership roles in the Twin Cities, including the Board of Directors of Lakeview Health, a sole corporate member of HealthPartners health system, where he was chair of the physician and executive compensation committee, a member of the finance committee and the ad hoc committee overseeing the Lakeview Health integration with HealthPartners.Rexford is a fiduciary, independent financial advisor who has completed over one hundred business valuations and transitions. He has volunteered as an academic tutor and mentor to at-risk K-12 children at Good Neighbor Center in Saint Paul, Minnesota for 19 years. To recharge, he enjoys the quiet scenery of trail hiking, road biking, and Nordic skiing.Learn More: https://www.keatsgroup.com/Keats Group LLC is a comprehensive financial services company that provides investment, tax and estate planning, asset protection, and pre- and post-sale guidance to private clients and business families. Keats Group and its agents and employees do not provide legal or tax advice. Investment services are offered as a fiduciary Independent Advisor Representative of Advisor Share Wealth Management, a Registered Investment Advisor (RIA), upon completing a signed Service Agreement.Influential Entrepreneurs with Mike Saundershttps://businessinnovatorsradio.com/influential-entrepreneurs-with-mike-saunders/Source: https://businessinnovatorsradio.com/interview-with-rexford-cattanach-president-of-keats-group-discussing-business-succession-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 with us, Rexford Katnaw, who's the president of Keats Group, and we'll be talking about business secession planning. Rexford, welcome to the program. Mike, I appreciate the invitation to be on the show. Hey, you're welcome, and I always love hearing about secession planning because I feel like it is so vital, but so few business owners spend enough time doing it well ahead of their exit. And so this is so timely just to kind of get some of these techniques out there that you advise your clients on.

But before we dive into that, give us a little bit of your story and your entrepreneurial journey and what got you into the financial. financial services industry. Well, it's been a journey. That's an apt term. I spent my early career at Deloitte Consulting, which was then one of the big six audit techs and consulting firms, now known as Deloitte. And while there, I developed specialties in acquisitions and became a national practice leader in compensation planning, which I did largely for physician group practices and

executives in those health systems. At times, I think there's some well-placed criticism of consultants, the most common being that they've not run things. But we did. We implemented plans that we helped create, and they all became enforced successful plans, and so we were proud of them. Management consulting is a good foundation for financial services. I think they both require us to be partners for change without having formal or. positional authority. And so you really do learn the business of change management. And our client's success always, in wealth management or in consulting, came partly from

analytical rigor for sure. But it was also found in relationships and trust. We were always more successful after engagement time had passed and we developed relationships or trust with those people where a family business is involved, often with the owner who started the company, you really have a charged third rail. I have a lasting memory of this visiting a physician client some years back on the way to visit his business. It was the evening before the scheduled closing of the sale of his company that he started. And he wanted to see it and have me and two. This was in a northern location on a bitterly cold winter evening, which we have in Minnesota. And he had an equity partner who was dragging his feet at a late stage when terms had been to agree to.

And that's pretty common. Yeah. And it was creating a lot of stress. And my client, who had become a friend, had his car parked outside despite the oversized garage and his home directly in front. And I asked him, why is your car parked outside? on a bitterly cold night. And he grinned that fly smile that only he could show and told me years earlier he had an urgent patient matter that required him to rush to surgery.

And he drove through his garage door. Ever since that time, he parked his car outdoors. But he related that story to illustrate his motivation for building his business. could provide medical care his way. And I would say if there's a common thread that connects entrepreneurs that I work with, it's that they have a reason that's usually partly independence, that they don't want a boss, but they also have a business goal or path or course that they want to chart and they start their company.

company to do that. When I started our, when I started our firm about, oh, more than 20 years ago now, we advised only business clients. That's how we got our start. And I spent a lot of time with CPAs and attorneys. And most of our clients also had a financial advisor. Excuse me. And what I observed was these professionals were living on separate islands. The CPA was preparing their tax return and was attentive and knowledgeable about bonus depreciation or tax deductions or passed through business entities, but was unaware of what investments were owned or the size of the location of the investments or the tax consequences of these or and certainly the business risks, probably risk management being one of the one of the major shortcomings that we would,

we would run across. Most of these clients did not have a business valuation until we completed one, which was surprising to me. A $8 million business, two business partners, and no business valuation is common, much more common than we might imagine. Most did not even have a will. I have a current client who owns a multimillion dollar business with a spouse. They have three children and had no will or trust until we started working with them, and they now have these. I was having deep personal conversations with these owners, successful people, yet the conversations were often too late in the business life cycle for us to make a difference. So we expanded into our private client practice beyond business ownerships to provide a little more retirement and asset protection planning and a longer runway, more time to have an impact. And that's how I got into the business.

Yeah, I mean, that's just awesome, that journey. And the example about the doctor in the garage door reminded me of something. He recognized that there was, you know, like a hiccup in his process because he had a mistake once. So what did he do? He didn't keep making that same mistake. He made a workaround. And he set himself up for success so that he doesn't have to worry about that. And I think that that just ties so nicely into when we think about secession planning because you never know what those hiccups are going to be.

And if you've not exited 10 companies recently, then you're not even going to know. So having someone like yourself to look from the outside in and give guidance is just so huge. And I know that exit planning or secession planning ties into retirement planning because the owner then needs to be able to say, oh, with the successful exit of the company, I now will have X number of dollars. They seem to be very different, but I'm sure that there's similarities. Talk a little bit about where exit planning and retirement planning are similar, and then also where some of those differences lie. Sure, sure.

Well, I'll preface the answer to saying no one person has expertise in all areas of wealth management. It really does take a talented team. And full disclosure, I did not get that team right on my first try. We do now. We have a terrific team. And that team allows us to think across disciplines, whether it's investment portfolios or valuation, which was an expertise of mine, or tax or asset protection planning. and especially state planning, which we've developed a national partnership for.

There are similarities and difference, to be sure, business exit planning has some extra boxes to check in our process. It has a valuation step, a very necessary and high-impact step. It requires an exit strategy. earlier you start that process, the more valuable or more flexible that strategy is. It has a legal transfer, complete with documentation and due diligence and the legal paperwork. And one part or box to check that people don't often think about, which is really an operating transition. I'm transitioning out of the business. The owners typically had a key role or multiple key roles in their needs.

to be a transition to make that work smoothly. A good succession or a good transaction for a business requires or demands that the business be successful after the close, and that's often not the case in business exits that are not planned especially. But of all of our services to private clients, they're essential for business succession or they're successful, excuse me, they're essential for business owners or they should be. If you were in my office and I was drawn a picture of our planning process, we would draw or have published a large rectangle.

And we divide that into four boxes with a horizontal and a vertical line. Now you're looking at a rectangle with four boxes. And in the upper left, I would label that box growth. And the upper right box I'd label income, lower left asset protection, and the lower right legacy. You know, that's the estate planning piece. If you think of the two boxes on the left side as the value of your assets and on the right side as the destination or the flow of money, you can really find ways to. solve a financial puzzle that are very, very effective and administratively not complicated. There are many ways to do that, but there's typically only one best answer for our client.

And so it is about goal setting, but not goal setting, asking just, you know, where would you like to travel when you retire? It's much, much deeper than that with questions. So the process breaks financial decision making and det doable logical pieces. I think there's a misconception, or at least I don't agree with the mindset that you need a financial plan that is all tied together in one document at one point in time. A business succession can be too complicated for that, too much to take on. And so each box in our process, you know, it uses data for the client to make decisions and stay connected to the plan. But it does relate to one of the boxes. The box for income and for estate planning, those asset flows or cash flows

on the right side of the box are really driven from tax reports that we generate every year for every client. These are tax reports that by way. way of example that actually feed the each box of a form 1040 tax return into a tax opportunities list. And we share that with not only the client every year, but the client's CPA with their approval. So in my opinion, the principle that ties all of that together makes it most valuable is flexibility. It's one of the most important and underutilized filters in financial, planning and the one perhaps we're most proud to optimize.

Flexibility is the ability to change priorities or your decisions without an undue burden or an undue cost. So a well-designed plan has a lot of flexibility. For example, you know, most businesses are low asset or, or, excuse me, low basis assets or zero basis assets that triggers taxes. when they sell. So our 401k and IRA, traditional IRA savings accounts, trigger taxes when they're distributed, which they must be, under required minimum distributions.

And so when a business sale, going back to the first example, it triggers an ordinary income tax, typically, even if most of it is a capital gain, it will trigger ordinary income taxes in almost any deal structure. And it triggers capital gains taxes, which stacked on top of ordinary income. So if the business is valuable, it could trigger significant estate taxes

at the federal level in many states. So there are many exit planning advisors that are familiar with this space, and they include using trusts, advanced insurance strategies, hybrid insurance strategies, certainly charitable giving strategies, are powerful, and so is gifting, among others.

And there are similar questions that affect business succession. There are many ways to sell a business, and all of them have tax consequences, and all of them flow or the flow of money or income for retirement on the right side of the boxes. So several times you've mentioned process and check the box and makes me think that there is a process that, boy, if Rexford has not put that together so that he can guide his clients through there, certainly the business owner hasn't thought of or come up with that process. So it makes me think, what size of a company is there where the process isn't as long? Or does size of a company determine how long it takes for the exit planning or the success of

that explaining is a smaller company easier to perform the process or is the same for small and large it just takes it a little bit longer yeah no that's a great question size and organization matter for sure i think for smaller companies which i will define as maybe five million dollars in revenue or below all of the private client planning matters yeah those are companies where the the the owner's income could be $300,000 or $400,000 per year, sometimes less, sometimes more. And the private client planning matters a lot. But for companies that are, you know, larger or $10 million or more, we see a list of filters such as legal entity and industry,

such as business-to-business services or software, revenue size and type of buyer being the ones that you read about, where the online content is ripe with advice that matter, but they really matter less than the factors that derive company value in the eyes of buyers. So the companies only as valuable as the buyer community thinks it is and is attracted to it. And these are recurring revenue streams. If a financial advisor has assets under management, then those are billed annually, that's an annual revenue stream. Software service businesses, which are near and dear to my heart, not because I own one, but because I pay for about a dozen of those monthly subscriptions for software services.

And those are the companies that are attracting great demand. And they will have higher valuations and more interested in committed buyers and more competitive buyers. I've witnessed that go ahead. You have a question. I was just going to say that software as a service model is so, so huge these days. Yeah, yeah. And I've witnessed that, you know, the risks of value drivers, once an owner who, was one of my most respected guys and probably best personal connections.

He came to me exploring ways to sell his business, and he had an $8 million business that unfortunately had about 80% of its revenue from one customer. Wow. He had just canceled their service agreement nearly overnight. Classy guy, I liked him dearly, and within six months he lost his business. He lost his retirement plan and sold his beautiful home. And so that's sort of the extreme end of not doing planning well and dealing with, you know, asset protection strategies for a business that, you know, was a pretty substantial one. 100%. It just gets back to that aspect of planning.

Planning ahead, well ahead of the time you need it, and having a plan and having someone to guide you through it. So why do you think that a lot of business owners don't have a secession plan? Do they just assume that about the time I want to retire, I'll just put a for sale sign on the business and I'm sure someone will pay me a bunch of money? Why don't they have a plan? And then also kind of related to that, do they assume that they've got a comprehensive plan just because they have a basic buy-sell agreement? Well, Mike, I think that'll be the easiest question you asked me.

I've lived this question for decades, and in fact, some years back, I wrote an article on that question. We don't do succession planning for some of the same reasons that we don't have wills or trusts. The reasons we give to people outwardly are, you know, lack of time, lack of money, the tactical demands of the business. you and I are business owners and there's always more on the plate to do than we get done. There is a lack of successors, which I think is a shortcoming on all of us as owners of a business to not be developing people. That is part of our process, by the way, where we've spent a lot of thinking time on the issue of developing successors. and I think as much overlooked as the apparent absence of a process that proves a return on investment. Business owners are ROI-driven people, return on investment.

They're very good at that, bottom-line people and thinkers. And what we don't acknowledge is that we have to be able to demonstrate that that process yields a set of results or outcomes that are worth the time. and money we put into them. There's a personal human side to this that succession planning requires really difficult conversations and self-assessment about the state of the business, about our current employees, our financial readiness, aging, mortality, one spouse dying before another or a partner separation, which had become in our early years, really a specialty of ours, partner buyouts. I have felt all of these in my own firm, you know, in terms of readiness of current employees to

step up or where are their ceilings. And many of us, me including included at times, we have not run our business with the end in mind, even if we care about who runs it when we're gone. 100%. You know, I think that too many times people just think, yeah, yeah, yeah, I did that. I did that Google search and I found a secession plan 101 guide and I did it. But did you do it right? Was it comprehensive? And I think that a lot of people may be listening to this might think I might not have a comprehensive exit plan. So what advice would you give them? And then how can people learn more and reach out and connect with you? Well, first an observation, and it's unconventional, I think. When it comes to a succession or sale of a business, transparency really has advantages. You think about how most businesses sell. They're owner-driven. When the time comes that they sell, they do it quietly. they obtain a business broker to list their business. It has done privately, and the employees are not aware or engaged in that process

until one or more of those key people has to be. The example being, you know, the controller who has to help pull together documentation or financial information for due diligence. The owners who are very open with their employees and their loyalty to their employees have an advantage. If the mentality is the business is always for sale and conversations are open that someone has approached us, and we'll see where that goes, there's a lot of power in that with the employee group potentially. It has risks. It's not a black and white observation, but it's an observation.

The second or more concrete, maybe the first, if you count concrete steps to take is make a plan. Whether it's on a pad of paper or you start consulting mentors, you know, make a plan. It should be written. There are lots of sources for that. There are people to consult. There are CEO, enter groups like Vistage. There are advisory boards that can be very effective if they're good boards. The starting point for us is that we advocate using a succession readiness assessment. It is a checklist that we created.

and it is a it consists of two steps and the first is a no cost no loss first step. It's simply an assessment of succession and asks some questions, some of which would be expected ones and some of the questions on there would not be expected by most people that would take that assessment. That's advice from us for families that are closer to an exit and by that I would define it as five years or less, don't go solo. You get one shot at this. And again, get a mentor might be another business owner, an executive coach, a CEO mentor,

an advisory board, or a financial advisor that works in this space. You need to connect the boxes between the tax work that CPAs are doing and the financial records of the business and tax planning and estate planning and retirement planning, which is really all about income and legacy, you pass all those assets that you don't use for retirement on. And lastly, this popped into my mind when I looked at the calendar, recognized it was, the time for our call is read the annual report. reports or Amazon. You've never read an Amazon annual report.

I don't like all of the large big tech and Internet companies, but Jeff Bezos, regardless of what you feel about him or Amazon, if you read the first, second, third annual report and you continue reading those, you'll learn more about visionaries. and getting into new markets and combining things to add value, even where customers weren't looking for a solution. Excellent. Excellent advice. Well, Rex, if someone is interested in reaching out and connecting with you,

what's the best way that they can do that? Well, they can email me at any time. My email is my first initial last name, so it's R-B-A-T-T-A-N-A-C-H at at E-E-A-T-S group.com or go to our website and look up our contact information and we have some publications you might choose to read as well. Excellent. Well, Rexford, thank you so much for coming on today. It was a real pleasure talking with you. Thanks. Thanks, Mike. Appreciate it. You've been listening to Influential Entrepreneurs with Mike Saunders. To learn more about the resources mentioned on today's show or listen to past episodes, visit www.com.