Business Innovators Radio - Josh Sherrard, CEO of SNI – Business Families & Acquisitions

Episode Date: October 5, 2023

There’s an old adage that says you should pay your fair share of taxes but not a penny more. We believe that to be true.We help business owners and high-income earners realize their savings by deploying time-tested tax strategies with decades of case law to back it up.Each strategy must pass through our sift of being legal, moral, and ethical.Get your complementary analysis to see how much you overpay on an annual basis. Click the link below to schedule your complimentary analysis.Learn More: https://www.stratnavinc.com/Schedule Call: https://www.navigatesni.com/NAVIGATEhttps://businessinnovatorsradio.com/navigateSource: https://businessinnovatorsradio.com/josh-sherrard-ceo-of-sni-business-families-acquisitions

And Grandpa happens to be wandering the halls because that's what old entrepreneurs do, right? They're just, they're kind of hang around and they want to see what's going on in the business. And Grandpa pops his head into the office and he asks what's going on and we explain it. And he looks me dead in the eye and he says, we'd be a whole different business if you are around when I was ready to pass this to my son. Welcome to the Navigate Podcast, Strategic Navigators, where we save entrepreneurs 40 to 60% on their income taxes. Today's episode will highlight family businesses and acquisitions. We're your host, Adam Dirkson. And I'm Mitch Salanti.

And back on the podcast today, we have our very own Josh Sherrard. He's the president and CEO of Strategic Navigators. He wears a lot of other hats. But Josh, welcome on. Thanks for having me, guys. Thanks for coming back. Before we get started on our topic today, Josh, we didn't ask you in the first episode who you are.

So give us a little bit of information about, your background, where you're from, what you used to do, what you're up to now and your family and all that. Yeah, no, glad to do it. You know, I started my first business when I was 12 years old and I saw the Girl Scouts were selling cookies and I figured I got to be able to make money like they make money. And so I went to work baking in my mom's kitchen and that first year, I think I made eight grand. And so ever since then, I've done all. kinds of little entrepreneurial projects, everything from owning my own graphic design business to doing card detailing while I was in high school and just found ways to make money. And then as I got

a little bit older, went into the field of ministry for schooling and went to Moody Bible Institute, got my education there, was heavily involved in local ministries. And then from there, made another pivot, which was a little interesting, went to become a financial advisor and worked for a large nationwide firm called LPL and climbed the ladder there quickly. But again, another right turn and went back into ministry full time as a pastor for a decade. And after finishing my third and final stop as a pastor, decided that I wanted to move into business and look to do that by creating strategic navigators and helping business owners with one of their largest paintings. points, which was paying taxes. And so just strategically looking at ways to do it morally,

ethically, and legally. And yeah, so we've been growing ever since. Company's been around officially since about 2014. And I've been working in this world since about 2012. I actually have a lot going on here in Illinois, where I'm based out of. Our main office is here in Batavia, Illinois. I live out here with my family, my wife and three children, and I'm heavily involved, like Mitch said, in a number of different things that we love to give back with. So that's just a snapshot on who I am. Thanks for sharing that, Josh. I'm glad we have a little bit more background on you now. Now for listeners who, you know, weren't quite sure who you were listening to. You got a little bit more of an idea of who Josh is. So let's get a little bit into the topic now,

Josh, we're talking about family business transitions. And we're going to start off with this question. What are some determining factors that would go into business owner thinking about this transition? You know, thinking about, for example, father selling to son or daughter. Yeah, you know, timing is critical in this conversation. And there is really no greater joy for an entrepreneur than to be able to pass on their business to a son or daughter who's interested in. to be able to prolong the family legacy. You know, businesses in America are the best way to make money.

I believe that wholeheartedly. And when you're a business owner, it doesn't matter whether you're the entrepreneur or you own stock and Tesla. That's one of the best ways to make money is by owning something and then receiving the dividend or the profit off of that. And so as an entrepreneur, you want to be able to let your kids have that opportunity if they're wired that way, if they're, if they have the same passion or desire for it, which we see all across the country, you know, young people getting involved in business as

early as, you know, six, seven, eight, and then, you know, the teenage years and really falling in love with the family business. And so they learn what that's like and the freedoms that come along with being a business family. And as a result of that, you know, the timing becomes critical. as far as when is Generation 1 looking to retire or transition out? I end up working with a lot of families that maybe look ahead five or 10 years. So for some of them, it's when mom or dad are 55 or 50,

and they're looking down the road and they're saying, I want to be out or I want to be part-time by the time I'm 60. And so that's the time to start talking to strategic navigators and the time to start planning. I can't tell you how many situations I run into where I meet these families maybe in the last year of their buyout. And they look back and they see all the taxes that they would have paid because they did not use us. And so the timing really, the earlier, the better be able to come up with that plan and understand what the future looks like for the family. So I can tell when you were talking about that, that you had some specific examples in mind.

So let's hear a story or two about, you know, a client that you've worked with and you helped with that transition. No, absolutely. So I'll tell you one that I couldn't help first, and then I'll tell you one that I did help. So I was working with an asphalt company on the West Coast. And this was now Generation 3. So Grandpa had sold it to Son and Son was now getting ready to sell it to his. his sons, our grandson. And so we're working in the conversation with father and son, our son and grandson. And grandpa happens to be wandering the halls because that's what old entrepreneurs

do, right? They're just, they're kind of hang around and they want to see what's going on in the business. And grandpa pops his head into the office and he asks what's going on and we explain it. And he looks me dead in the eye and he says, we'd be a whole different business if you are around when I was ready to pass this to my son because he realizes what the tax implications did to them. And to give you a little bit of an idea of that, we were working with a family in the Midwest here, about a $12 million sale. And this is, again, Generation 2 going to Generation 3, mother to daughter. And what ended up happening is they worked with their local CPA. The local CPA structured the deal, planned everything out for them even filed their taxes in that current year. And we got involved at that point in time.

Fortunately, not a lot of money had transferred hands, so we were able to get involved. So here's what typically happens when you have, say, a $12 million sale to another generation. And the reason you have a $12 million sales is because you want to, as the outgoing generation, you want to make some money on this. You want to have some income for the future. But when you really tear that down and you say, what's the real desire here? I mean, do you really need $12 million to live off of for the rest of your life? I mean, that's more money than most people would need to live off of. And ultimately, it's going to go to the daughter anyway when it comes to inheritance. And so, we're just paying taxes for the sake of paying taxes. And so what we do is we examine the traditional

sale. The traditional sale would involve, let's say it's a 10-year buyout. So it's $1.2 million for 10 years. So daughter has to make the $1.2 million, which means that she really has to make closer to $1.6 million to be able to cut a check for $1.2 million. And then mom's going to get the check for $1.2 million. And then she's going to pay capital gain tax on that $1.2 million. And so you've got two kinds of taxes happening in the same family for the transition of this business, which when you think about it, it's just criminal. that in our country it's going to cost double tax for you to be able to pass your business on to your kid, which is your dream. And so we get involved and through a system of multiple companies, through contracts, and

very specific valuation methods, we're able to tear that down and not only make the $1.2 million payment a write-off, but we can also eliminate the capital gains tax for the mom or for the receiving party. So again, tax planning with strategic navigators in this situation is not 40 to 60%, but we're actually eliminating the taxes that were involved in the purchase or the transition of this business at $12 million to the daughter. Wow. So in that case, Josh, you were able to redact the contract.

Correct. It was already in place. We did. We went back. We retracted the contract that was in place. we rewrote it, we went back, we actually amended the previous year's taxes. So our tax attorneys got involved, went back into the tax documents, we're able to amend it with the IRS, because again, compliance, compliance, compliance, that's a high value for us at

SNI. We want to make sure that everything we're doing is going to pass muster with the IRS. And so we did that, show the justification for that, and then proceed with our plan. But yes, we had to go backwards. We were able to catch it enough on the tail end. that we could make the difference. I'm imagining how that conversation first started. So you probably met with the second generation and you're helping them save on their taxes.

And then what did they just ask you? Hey, is there anything we can do about, you know, this $10 million sale? How'd that conversation go? Oh, absolutely. Yeah, they were because because when you think about it for that younger generation, that's their biggest bill, right? I mean, to come up with $1.2 million a year like that, I mean, that's a big nut to crack. So they may be able to call themselves the owner, but they're not living off of an owner income at that point.

And so by eliminating the need to go 1.6 on that and really making the 1.2 a write-off now. I mean, talk about a huge benefit. You're going to almost eliminate their income tax for the next 10 years because of this write-off. And a huge benefit to the family. And that 1.6 that they would have to make to pay the 1.2. I mean, those are just bare minimum numbers. The difference in the 1.6, 1.2 is taxes plus the income that they need to live. Correct.

And grow. And all that. So upwards of 2 million. Right. And so the exciting part, though, with entrepreneurs, and I think I've shared this with you guys at other conversations, but you give an entrepreneur more money. And what do they do? They make more money.

I mean, so this family's opening two new locations. I mean, it's beautiful to watch this happen. So this thing is just going to keep growing on top of itself because of the planning that they're able to do. Josh, you were sharing some specific numbers there with the $12 million, then the $1.2 payments. Does this look different with a bigger sale? So if there's a, say, like a $50 million transaction versus a $12 million transaction, how does this start to look different when you get into bigger numbers. Yeah, when you start working with bigger numbers, you're going to start doing some more estate planning in conjunction with the business sale. And so oftentimes what you're doing there is

you're looking at corporate structures that may be housed in a different state. You're looking at different opportunities to utilize trust mechanisms. Again, I've said this before many times. I'm not a big fan of trusts because I think they're heavily overused. There's a place for trust, but I like to be a minimalist when it comes to trust. And this could be one of those examples using a family trust or a family treasury is another term that I like to use. So again, $50 million is more money than somebody's going to be able to spend in their lifetime. So if dad gets a check for $50 million and pays tax on it, he's still not going to be able to blow through that money. So he's going to leave the rest to his kids. So again, we're kind of circular in this whole

thing. So let's just make sure that we get rid of that third partner who's Uncle Sam in the midst of this situation. And you for a second go a little bit more into trusts and just talk about what you would say to someone who obviously trust are very popular with, you know, wealthy people in this country. What would you say to someone who would maybe oppose you on that opinion? Yeah. So one of the first things I would point out is that trusts pay more income taxes, income taxes than individuals do. And that basic difference is one of the reasons I don't like them. All right. The second thing, you can break trust down into two major categories. There's the revocable type of trust, and then there's the irrevocable type of trust. The revocable type of trust,

I want you to think of it like wet cement. All right. So it's going to one day harden if you've set it up correctly and it's going to one day be irrevocable, but it's revocable during your lifetime. That's the kind that I like. The one I don't like so much is the irrevocable trust because once you set that up and once you get it going, you cannot make changes. And it becomes very difficult then, however, that was structured. And I've actually had conversations with some older clients of mine who have trusts that were irrevocable and they were frustrated because they were guided down a path that led them to do something they weren't really wanting to do. So again, control means a lot for the entrepreneur for the business family. Right.

I bet those people that you're referencing right now, too, did any of them go to court and try to alter these trusts at all? No, because again, these are things they were doing under their own volition. Though they were guided, nobody can say something forced me to do it. Nobody held a gun to my head and said, hey, sign the document and make it an irrevocable trust. But what we then do is we come alongside a situation like that. And we have ways of creating new structures that have greater flexibility, get back to the wet cement, that can then maybe detract from some of the things that were locked up. So there are things we can do to try to fix things and come alongside of it.

But back to the large numbers, you know, I'm actually working in the middle of a case right now, $185 million sale of a business to private equity. And when you're looking at those kinds of numbers, you're looking at some very sophisticated planning that goes a little bit beyond what might have been used with a $12 million sale or even a $600,000 sale, you know, where we're starting to use various states and the different benefits that come from entities within those states. So, you know, in situations like that, you're looking at the long-term plan, right? What's all this money going to be used for? What's the purpose of it? You know, I think I spoke last time on this podcast about the 501c3 and then treasonable benefits that come from that. And I

I love introducing that conversation when we're talking about a sale. I call those waterfall moments, right? Because if you can introduce a 501c3 into the midst of the conversation, depending on the character of the family, man, can that money go even farther than even if it was just invested? If I could just pivot for a second, Josh, I want to go back to acquisitions. Yeah. I know recently we had an event where you spoke, and I believe you said that, a great way for a business to grow is to acquire more businesses. Correct. So what does that conversation look like for the business owner who wants to essentially

waltz right in and say, hey, I want to buy your business with having Stratnav on your side, what benefit do we bring to the table? And how have you seen that play out? Yeah, you know, being a business owner again, it's something that is unique to some extent, right? I mean, there's, there's not a, you don't turn a corner and find 50 business owners. It's just, that's not the way it works. We're a little bit on the rare side. And because of that, sometimes when somebody's been running a business for 20 or 30 years and maybe their kid doesn't want to buy the business from them, they're looking for a way out. They're looking for an exit

strategy. And I like to say your business is only worth as much as somebody's willing to pay for it, right? And so you're looking at a situation when somebody might have poured their heart and soul into a business and they're looking for an opportunity. And typically when somebody, I would say they're over 50, that's kind of my marker, right? I like to say that between 50 and 60, we're making the most money that we ever make ever in our lifetime. And so if you have a business owner that's over 50 and maybe they're doing well and then they have a good business, they may be open to the conversation about a buyout.

And the way that we structure our buyouts, they're always multi-year buyouts. We always create a secondary consulting company for the existing owner, and we get them money so they can retain a lot of the characteristics of being a business owner. And they are a consultant then for quite a while. We then use a number of our tax strategies to get money into that consulting company and then out to the business owner tax free, all of this then being a deductible expense for the person coming in and buying. And so that's a huge deal for a lot of the smaller businesses, for

certain. I'm helping an HVAC company right now. His determination is to buy at least eight small mom and pop HVAC companies, you know, worth anywhere from half a million to $1.5 million a piece. And he's basically getting them paid for by the profit that they're generating over the years, right? So again, say that business is making $200,000 of profit in a given year. He's going to keep 100,000, use 100,000 to pay mom and pop, and that money is going to them tax free. It's a deduction to him. And at the end of that period of time, he now owns that business. So, you know, that's going to grow his enterprise as long as he's able to bring some of the infrastructure and maybe it's a regional thing or an area type of thing. I work with a lot of businesses that may have ancillary businesses.

You know, so again, to use the HVAC example, there might be an HVAC company that can then acquire a plumbing company or can acquire an electrical company. Now, you've got to watch out some of those licenses that you need to make sure are in place that you have the key individual with that license. But sometimes this works with locations. I can tell you that here at Strategic Navigators, it's one of the ways that we've grown over the years is we've acquired other businesses through these strategies. and it's a way to increase your manpower, increase your reach, and increase your bottom line. Are you able to talk a little bit more about that

and how you've done that personally with Stratnav? Yeah. So, you know, one of the things that we've done, and again, it's a strategic move where we, early on, I was teaching continuing education for CPAs. We would go,

I would book colleges and I would speak and people would get the continuing education credit for this. and then I would basically work with these CPA clients. I would always be looking for CPAs to partner with, and it dawned on me that, you know, I was giving away a lot of that CPA accounting work. And so I ended up running across a company that was open to a merger. And through a strategic partnership,

we did very much what I'm talking about and formulated our accounting arm. And so, again, I'm not an accountant. accountant, so I can't technically own the accounting firm, but through a system of contracts and the different things that we have in our arrangement, essentially I own part of this accounting firm. And so we were able to do that. And then as a company, we went out and purchased other companies that have smaller accounting firms, you know, and so same concept, right? Lots of accountants are trying to get out. And we come in and use the strategy of acquiring them and paying for it out of

profits of the business, and that grows our staff, grows our ability, and gives us a brand new book of business to go and mill for new business. So you did that fairly early on. Is there any, I believe, is that correct? Is that earlier? A several years ago. Yeah. It's not, it's not been too many years, but yeah, several. Is there anything in the future that you're thinking about as well, you know, with growing Stratnav? Oh, yeah. We are definitely looking to do More of that, we constantly get the request for bookkeeping help. And so this year, 2023, we have launched Strategic Navigators Bookkeeping. And we are not only hiring new bookkeepers, but we are also looking to buy and purchase

bookkeeping firms because, again, getting them compliant with what we do, you know, I talk to so many business owners, they're like, hey, I would pay, you know, two, 300 bucks a month to have somebody handle my cookbooks for me. And, you know, that could be a possible reality inside. of what we're offering with SNB. So to answer your question, yes, we are looking at doing more of that in the future and hope to build out the branches that we have now already created. Gosh, I hopped on the all-knowing Google here recently.

Good old Dr. Google. Good old Dr. Google. And I just typed in a simple question here. What questions do people have when there is a business acquisition or business transition? and there is a plethora of people posting 55 questions to ask when buying a business. 11 questions you need to know. Things, all this, there's a lot of noise. For a listener that is looking to acquire another business or a generation looking to pass down right now to the next generation,

what is some wisdom? I mean, this whole podcast has been wisdom about that, but just snippets of wisdom. that they can carry away to know what they should be asking their CPA or get involved with us or just things that they should know before going into that. Yeah. So I would put those two in the very distinct categories. Purchasing a business or acquiring a business that you don't know the owner or that maybe just be in the same industry as you and you're looking to expand, kind of like what we were just talking about.

That's a very unique situation. and unfortunately in this world, there are a lot of skeletons in closets. There's a lot of surprises. And so having a good audit of the books and the history of the company is important. Again, if you're buying a stock, if it's a stock purchase, you're going to be inheriting all of their past debts and liabilities and everything else unless you do the right type of paperwork to be able to go along with that. So you need to understand what you're buying.

I think one of the things that we miss often is, is understand the reputation that that particular business has in that part of the country or that part of the state or whatever it is that you're going to. Don't take the seller's word for it, right? I mean, do your due diligence. Talk to other businesses. Talk to other people in the community. Understand what it is.

One of my basic pieces of advice for this is do not rush into this. This is a process that needs to take you some time. I would say at least six months, if not a year of due diligence, asking the right questions, talking to the right people. As far as S&I is concerned, the earlier you get us involved, the better it's going to be. I have yet to come across other groups that know how to structure acquisitions the way that we do in the efficiency that we give it. Again, we're using tax law. We're using strategy and structure to maximize and save money for both sides. I like to say it's a win-win.

And then to come to the generational transfer, I would say, as far as wisdom is concerned, be open and honest. Have the open conversations. One of the things that young folks, young entrepreneurs who think they're going to just inherit the business from mom and dad, one of the mistakes they make is not doing what they need to do to take care of the exiting generation. and the moment that is smelled in the water, I think what's going to end up happening is that Generation 1 isn't going to want to sell so quickly. But if Generation 1 feels like they're going to be

taken care of and that the business is going to be able to carry on, I think they're going to feel okay, maybe going to a part-time. You know, mom and dad are traveling in the Bahamas while juniors running the business. And by the way, he now owns 50% of it, right? So he is a vested interest. Let me interrupt you right there, Josh, because I've heard you talk about this several times. And something that is key is that the generation that's selling doesn't want to gouge the next generation, but they still want to get paid because it's their legacy. It's what they built. And the generation buying it doesn't want to be paying forever.

So they have to find that middle ground. And you just touched on that. And you help facilitate all of that. Yeah, and that's why I call myself a business coach because a lot of this takes coaching. A lot of it takes private conversations, understanding maybe what mom and dad's dreams are, what their aspirations are, and, you know, being able to help them. Sometimes, I mean, we're dealing with a situation right now where the family came to us and it was a horrible situation and structure of a C-Corp structure. They were paying double tax. We had to fix that before we could even talk about transition.

So you've got to clean a lot of that up, do the due diligence, but the good news is there is a way to do this effectively and efficiently. And that's where it takes the need to have the right coaches involved, the right people and professionals along your side. So Josh, I want to ask you about what this looks like for your family. You have kids of your own. You know, I don't imagine you want to be the president and CEO of S&I until your last. breath, correct me if I'm wrong, but what do you think this will look like as, you know, you want to transition your business? Yeah, no, one of my greatest joys, Mitch, is watching people flourish in their giftedness. And, you know, even when I was a pastor, I loved identifying

what somebody was good at and then plugging them into it, you know, as best as I could. I remember taking a guy from IT and plugging him into facilities management, and he did a hundred times better in facilities management than he did an IT and who would have guessed it, right, just by talking to them. So same thing. If my kids are going to be wired to be able to take over the business one day, then great, but it may not be them. It may be somebody else. It may be a board or a group of people that would take it over and varied membership. I do believe in the very simple philosophy, if you have a cash cow, don't let him out of the barn. And in this sense, you know, I love what I've built. I love S&I. It's doing well. I don't intend on letting it out of the barn. However,

it does ride alongside my nonprofit, my 501c3. And so with my dreams and aspirations, the business will eventually fund more and more of the nonprofit initiatives. And hopefully my kids will manage both of those sides of things. There are some very trusted people along my side as well. I love hearing that. I love your vision. And for those who are listening, we did a podcast earlier with Josh talking about philanthropy and talking about his nonprofit. So give that a listen sometime. Josh, thanks so much for sharing all of that.

It was, I learned a lot that was super helpful and super interesting, especially thinking about, you know, how this looks different for different families, different business owners at different levels and just the unique ability. ability of S&I to come in and do things that probably people aren't going to think of if they're not approached by a group like ours. Yeah, we'll love to be able to help people and take them to the next level. It's all about that journey from success to significance. Before we wrap up, there's a quote that Adam and I love when you share has to do with harnessing the wind. So talk about, we'd love to hear that quote and, you know, talk about what it looks like to

to harness the win in this particular situation. Absolutely. Well, the pessimist says there is no wind and they just kind of stares in an empty sail. The optimist says, hey, the wind will show up one of these days. And the strategist actually adjusts the sails and harnesses the wind. And so many people, when it comes to taxes and when it comes to business planning, they're either deflated. They don't know what to do. They're either really optimistic and saying, oh, I'll get to that one day and it'll be fine. And they don't have a plan. You have to be the individual that grabs the rope and says, I'm going to make a difference here. I'm going to harness the wind. And that's what we help people do here at strategic navigators. Love it. Thank you, Josh. All right.

Thanks, guys. Thanks for listening to Navigate. If you're interested in learning more about strategic navigators, feel free to click on the link in the description.