In this episode I talk with Sean Wieland, Founding Principal at Tannhäuser Financial.
We talk about:
- Deferred Sales Trusts for business exit
- Pre and Post sale of your business
- Premium financing life insurance
- Captive Insurance
- 401-H and more!
Here is the online illustration tool to compare any highly appreciated asset sale (exiting a business, commercial real estate / 1031 rescue, cryptocurrency, fine art, etc.)
I hope you enjoyed this conversation with Sean as much as I did!
Listening options:
- Listen on Stitcher
- Listen on iTunes
- Listen on Spotify
- Listen on TuneIn
- Android users can grab our RSS feed here.
Have comments about the show, or ideas for things you’d like Taylor and Jason to discuss in future episodes? We’d love to hear from you at info@mutinyfund.com.
Transcript Episode 42:
Taylor Pearson:
Hello and welcome. This is the Mutiny Investing Podcast. This podcast features long form conversations on topics relating to investing, markets, risk, volatility, and complex systems.
Disclaimer:
This podcast is provided for informational purposes only, and should not be relied upon as legal, business, investment or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of Mutiny Fund, their affiliates or companies featured. Due to industry regulations, participants on this podcast are instructed to not make specific trade recommendations nor reference bias or potential profits. Listeners are reminded that managed features, commodity trading, Forex trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they’re not suitable for all investors and you should not rely on any of the information as a substitute for the exercise of your own skill and judgment in making a decision on the appropriateness of such investments. Visit mutinyfund.com/disclaimer for more information.
Jason Buck:
So I wanted to do a bit of an experimental podcast this time so this should be interesting. I’ve got Sean Wieland from Tannhäuser Financial, and he is a specialist in exit planning. So I know we have a lot of entrepreneurs that listen to our podcast and we have a lot of entrepreneurs ex-clients. So I want to explore what exit planning is. So even though it seems pretty self-definitional, what does exit planning actually mean, Sean?
Sean Wieland:
Okay. So it’s the whole life cycle between basically treating your business as an asset, that you know it’s going to have some dollar worth at the end. A lot of people when they run a business, especially when they do it for a while, they tend to run their whole life through it, and they use it for income and lifestyle, but they neglect the fact that it’s actually worth something that they should sell or, if anything, pass on to their kids at some point.
Sean Wieland:
So it’s doing the work to actually think all that through, especially if they do decide to sell to somebody else that it’s an asset that’s transferable. So it’s not dependent on the owner for all of the clients or friends of the owner or that nothing is documented, those sorts of things.
Sean Wieland:
It’s divided into generally three phases. There’s the prep work. Once you’ve identified a triggering event of, “Hey, I’m thinking about doing this in a few years,” or maybe they’ve had a health incident or something like that, it’s generally at least two or three years ahead of time that they’re going to clean up the books, get their house in order, document the procedures. Often, I’ll bring a value advisor in to get all of those ducks in a row and really maximize what the multiple that this business could get. I can help a little bit there too with some of the financial structures, make them more tax efficient or boost up their EBITDA a bit.
Sean Wieland:
Then there’s going through the actual liquidity event, so working with an M&A firm to … It’s somewhat of an illiquid private market, so we’re looking for who’s going to be a good buyer, whether it’s going to be private equity or a strategic buyer, and to try to come in realistically for what that value is.
Sean Wieland:
Then there’s preparing, which is often the most neglected part, preparing for what happens post sale. Often, everybody gets so caught up on the idea of, “What’s it going to be worth and are we going to get it?” like they’re winning a lottery ticket, and then once they have it, they haven’t thought about, “Hey, this has been my life and my identity for the past 20 or 30 years. What am I going to do afterwards? How am I going to invest this money that I’m not going to blow it all?” or that, “Oh, it’s going to get invested in the market and then there’s a market crash and then I’m back to square one.” So preparing owners through that whole life cycle is what exit planning is all about.
Jason Buck:
No, that’s perfect. I’m glad you actually talked about those three phases because I was actually going to start at the liquidity event, and I’m glad we’re not going to start there because it’s our pre because I’m curious, the whole built-to-self philosophy, Taylor and I believe in that. Even if you’re never going to sell the business, it’s a good idea to think about what eventual buyer would want and to build the infrastructure in your business. That looks great to eventual buyer because that’s just running a more efficient and effective business. Is that a fair assessment?
Sean Wieland:
Yeah, exactly. I mean, yeah, a lot of times, it’s something more to think about. It’s more stress. Business owners are already running around stress out about their business, but yeah, if they think about it, what’s the worst that happens even if they don’t sell it? They have a more efficient, more profitable business. It’s win-win.
Jason Buck:
Then so part of that, what do you think are some of the biggest mistakes? Like you said, it was having relatives or friends as the number one sales client or things like that. What are the things that people, they usually need to tweak to get it ready for sale?
Sean Wieland:
So yeah, I have to look up.
Jason Buck:
It’s probably a long list.
Sean Wieland:
It’s a list.
Jason Buck:
It’s probably unique every time.
Sean Wieland:
Yeah. The shorthand is the four types of capital where you’re addressing the people who are working there, that the procedures are documented, the customer relationships. Actually, do I have it handy? Let’s see if I can remember what the other one was.
Jason Buck:
While you’re pulling it up, one of the things I always think about is how pivotal or integral or the cornerstone is the founder of that business and is sometimes they’re the face of that business. So you have to think about maybe structuring it so they don’t need the continuity of a single person like you have that Keyman risk.
Sean Wieland:
Right. So that’s the other part too. So the culture was the other one I had to think of. So yeah, it does help to have to groom and air a parent and build that up. Again, that’s one of those things with the business owner of how’d you like to take a vacation at some point, how’d you like to not have to be so hands-on all day every day. They’re resistant at first and then once they get going in that process, they wonder why they didn’t do it sooner.
Jason Buck:
Then part of it, like you said, you can help increase their EBITDA with that, but sometimes it’s maybe not even increasing the EBITDA. It’s like you might be able to get a better multiple if it’s a much more effectively or efficiently hands off or on business. Is that a fair way of thinking about it too?
Sean Wieland:
Right. Yeah. That’s the other part. Yup. Yeah. A mediocre firm is going to get maybe a 2x, but a really polished self-running dynamo might get 5x, depending on the industry too, but yeah, it’s a rough estimate.
Jason Buck:
So how often, though? Sometimes that’s going to take you maybe two years to do the prep work before the liquidity event. I mean, are people usually coming to you at that point or they’re coming to you like, “I want to sell right now,” and you’re like, “Well, this is going to take us two years to clean this up.”
Sean Wieland:
It’s a little of column A and a little of column B. The ones that want to do it sooner, I mean, sometimes there’s a real pressing need for that, and there are things that could be done to accelerate that process, triage it, and address the most urgent issues. Then through the liquidity event, there are things that my firm does to help close that value gap or income gap. So even if they’re not getting the top dollar that they possibly could, okay, well, if we structure the deal so that they’re not going to pay capital gains tax on the sale, maybe that gets them closer to where they need to be.
Jason Buck:
Right, and I can’t wait to get the post sale side because that’s, I think, the piece that is rarely talked about. So when they’re coming into this, they’re cleaning out the books, they’re getting the EBITDA up, they’re working on different aspects of the business, but they’re coming into the liquidity event and they’re looking for an actual purchaser. Like you said, a lot of times you can use that strategic buyer. It seems like everybody these days are like the strategic buyer in their industry because they think they can get a higher multiple, but is it always best to go with strategic buyer?
Sean Wieland:
I mean, it so depends on the circumstances. Realistically right now, there’s just way more money out there with private equity. They’re clawing at the gates to deploy all this money that they have. Sometimes there’s a bit of a cultural element that maybe the strategic buyer is a bit arrival and they still carry a grudge. So it really depends on the circumstances of that company, and whichever one makes sense. The other option as well is to work with investment bank and set up an ESOP and maybe the management team themselves want to take over ownership of it, and that’s the process that the owner or the founder’s able to step away from it. So it does depend on the business.
Jason Buck:
Well, let’s define ESOP for people.
Sean Wieland:
Oh, so Employee Stock Ownership Program. So basically, an investment bank sponsors the value of what it would be purchased for, and then the employees are able to finance it over time with their own stock ownership. There’s some tax advantages with that. It’s also complicated and a little fee heavy. It’s also great when there is no natural buyer. Again, you brought up that point of what happens when there’s somebody who they need to exit within a year. They had a heart attack and they’re afraid of the second one coming or something. There is no apparent buyer to buy them out. ESOP’s that buyer of last resort that, “Hey, you already have a great team working for you. Why not comp them through ownership of the company and transfer it that way?”
Jason Buck:
Personally, I always loved ESOP programs because I loved the continuity to actually go to the employees and for them to get an ownership interest, but then when I started tracking ESOP’s five, 10, 20 years post the conversion to ESOP, a lot of times to be able to pay out the original owner, they’re putting on a huge amount of debt service. That can be an enormous burden to the ESOP. Is that the catch 22 to going with the ESOP?
Sean Wieland:
That’s certainly one of them. Again, going back to the corporate culture part, a camel is a horse designed by committee that without that leadership or that initial entrepreneur, the company tends to flounder or lacks direction as well. So I’m not saying don’t do an ESOP. It can be a right fit for a lot of people, but that leadership matters a lot and making sure that that’s going to be in place is important.
Jason Buck:
Are you telling me that centralized leadership matters and you can’t really run a decentralize the organization with no person driving the agenda? I’m not going to get into politics now. I just wanted to highlight that piece.
Sean Wieland:
Yeah. We could circle back to the fact that hierarchies are natural and necessary. Sure.
Jason Buck:
Yeah. So they’re coming into this liquidity event. So let’s just say I’m selling. Let’s just use round numbers, whether it’s 10 million or 100 million. Let’s just choose 10 million. I’m selling my business for 10 million dollars. There’s a lot of literature out there, like you said, how do you clean up your business, built to sell, how do you get EBITDA up. A lot of people can help with that, and there’s a lot of literature out there. There’s a lot of literature about people telling their stories of their liquidity event when they sold their business.
Jason Buck:
The hardest part, like I was saying, is it’s how hard to find information, what do you do with that money post the liquidity event. So let’s say you find that strategic buyer or it’s ESOP or it’s a PE firm, but I think then the hard part is without a very even more specific example, we can’t say who that buyer would be because then you could start structuring the terms based on that buyer like your price, my terms kind of thing. So let’s try yo talk about it as generically as we can, but then go into as much detail as possible is if I’m selling my business for 10 million, what are my options because I’m used to a certain amount of income from that business? What am I going to do post sale?
Sean Wieland:
Right. Yeah. So setting aside earn outs or that second bite of the apple and some of those complexities or seller financing. If it says it’s great to have sale, first and first and foremost, what we typically do [inaudible 00:12:12] client is able to practically, perpetually prefer the capital gains tax that otherwise would pay back closes a lot of the gap upfront, and then the other part that even within the industry is a topic I’ve been trying to address, and you’ve been helping me with this as well is a lot of advisors come into exit planning more from the retail space. So their notions of investment is almost identical to an IRA retirement plan and, “How do I make this money last 20 years before it’s depleted?”
Sean Wieland:
When you’re talking about tens of millions of dollars, they’re now an accredited investor. That opens up a lot more options as far as what they’re able to invest in. They need to have those conversations about that level of sophisticated investing, and it helps them. So that would then be the other part is to close that income gap, where especially protecting against volatility tax or sequence of returns risk because they are taking an income from it, to protect against that downside is especially important.
Jason Buck:
Forgive me, my headphones cut out for a second there. I had some technical difficulties, but if you address this, I would assume that’s just the hardest piece of the handholding you do is people are used to the expectations of the income they’ve had before the business versus post sale of what income they expect from their investments.
Sean Wieland:
Usually, the way that, and the client won’t even come out and say this openly, but this is really what’s happening in their head as far as I can tell is now that they have this big pile of money, part of being an entrepreneur is not trusting other people, “Why should I invest it in the market and get 6% when I can do the work myself and make 20%?” so that transition and that loss of control, and then with that fear of, and similar to retirement plan as well, “Okay. What happens? I exited. I’ve got this money and then six months later the market crashes and now I’m in a hole. How do I protect against that or how do I make sure that now I’ve got my big payday that I don’t lose it?” Usually at that level, they’re much more concerned with not losing the principle than they are in getting monster income from it, but they also expect to live within the lifestyle they’ve become accustomed to.
Jason Buck:
I think you just touched on a really interesting piece that I always come across is this idea of zone a genius in a way, for lack of a better term, is when somebody has a lot of success as an entrepreneur, they tend to start thinking they’re a cross-disciplinary genius, and like you just said, they don’t trust anybody, and now they’re going to come out and they’re going to become the next George Soros, they’re going to become the next world’s greatest investor, and they don’t realize that they probably need a decade or two to even get up to speed, and they’re just delusional about their abilities.
Jason Buck:
I mean, good on them, you do an unbelievable job to be able to sell a business for a liquidity event, but that idea that then you’re going to come compete with the best hedge fund managers in the world is a bit of a delusion, but a lot of people fall under that.
Sean Wieland:
Yeah, absolutely. Now, if you have a team and if you’re coaching them along the way and you’re leading them into the right direction to realize that, that certainly is preventable, but again, going back to that a lot of other advisors coming into this space are coming from more of a retail kitchen counter planning is because that market is so competitive and so rife with a lot of advisors. There’s also a systemic cultural issue in this industry of advisors who let their clients lead essentially or that they’re implementing their bad advice, and then when it goes wrong, they’re the ones that take the fall for it. There is a bit of a cultural component of to have confidence in your own abilities and that this is your domain expertise just like whatever business a client had that was their domain expertise, and to have the confidence to say okay, to confront them on, “Hey, this is maybe something you actually don’t know much about. Here’s how involved it is. I’m going to simplify the risk as best I can,” but it’s much more like if you went to see an oncologist for your lung cancer, you wouldn’t be arguing with them about the style of treatment.
Sean Wieland:
There’s a level of, “Okay. This person’s devoted their whole life to this craft, this one particular specialty,” not that you blindly trust them, but maybe you should defer to their experience and expertise, which is the whole reason why you’re going to them and the whole reason why you’re paying them too, right? If you could do it all yourself, you wouldn’t need to pay all these other people. The fact that you can’t do it all yourself is why you’re bringing in this team to handle this unwieldy project.
Jason Buck:
My favorite was the great Spanish chef Ferran Adrià of El Bulli, used to say, “If eating wasn’t so quotidian three times a day, then we could really elevate the art status of great chefs to painters and sculptors,” but because we all eat every day and we all cook food, we’re not that impressed by what he could do at El Bulli, and I think almost the same thing sometimes as a financial advisor or whatever or a hedge fund manager. It’s like everybody can buy and sell stocks by just hitting a button on their computer so they think that they can compete with the Soroses of the world, so to speak.
Jason Buck:
The other one that I think this really hard mental shift that we talk with our clients about often that had a liquidity event, it’s like you have to take an enormous amount of concentrated risk to gain wealth as an entrepreneur or a business owner, but then to keep it, you have to add. There’s a total of 180 degree shift is now you need proper diversification. Do you think that’s one of the hardest things for them to wrap their heads around? It’s almost like you have to shift your mentality in 180 degrees.
Sean Wieland:
Yeah. That is very true. Yeah. I mean, it’s just a completely different mindset, and at the same time, one of the benefits of working with entrepreneurs over maybe somebody who’s an EVP that walked away from a company with a 401(k) with tens of millions of dollars is their mentality is different. They’re generally more open-minded. They’re willing to work through problems themselves as opposed to someone who’s coming from more of a management position. They’re usually very well-conditioned of, “Well, this is the one right way to do it. This is how everybody tells me it should be done,” and then if you present anything different, they just don’t believe it and rebuff you on it. That’s almost impossible to deal with. Frankly, I’d rather pass a client like that onto somebody else. The great thing about working with entrepreneurs is that most of them are willing to think it through with you, and if you can explain much like you have in the five-minute Cockroach piece, that’s enough where they’re like, “Okay. That makes sense. I see where you’re going with this. I hadn’t thought of it. Let’s see what the details are from here.”
Jason Buck:
Yeah. We have the same experience. If we can talk to that first generation decision maker and you lay out a very rational plan, it tends to make sense, and then you can have a further conversation from that. So let’s get into the ways to mitigate taxes on this liquidity event. I mean, maybe starting with one that’s obvious but may not be the best is maybe earn outs. Maybe you could explain what an earn out is, and maybe the pros and cons of why you’d want to do an earn out.
Sean Wieland:
I mean, so usually, earn out is also that a buyer is weary that there’s going to be skeletons in the closet, that they might be buying a lemon, and it’s a way to keep their expertise on, make sure that it’s a successful handoff. So it keeps them on. Now usually, the sellers, they want to be done with it. Once they’ve gone through all this, especially when they’re not in charge anymore, they feel like a fifth wheel, but that does help a little bit.
Sean Wieland:
Again, if it’s not complicated with an earn out or financing, the most straightforward way to do that again is that deferred sales trust, where, “Okay. We’re going to structure this trust as an intermediary. We’re going to perpetually defer the capital gains. All of that is going to get invested in this post liquidity event model.” Then like a 401(k) or a pension or an annuity, they’re only going to be paying taxes on the money that comes out as they need it. Especially for their lifestyle they only need one, two or three percent, they’re very well ahead of the game between the growth inside the trust versus the money that they’re pulling out to live their lifestyle.
Jason Buck:
So let’s talk about more setting up the sales trust. Obviously, they have to come to somebody like you to set up the sales trust. Are you working with a team of attorneys? What are the pros and cons? A lot of times when you hear about these strategies, you’re like, “Oh, it sounds too good to be true,” and usually you’re kicking can down the road before the government comes back for you for taxes, but with the sales trust, it’s very different than some of the other out of the box things people come up with on the internet.
Sean Wieland:
So yeah, first and foremost, the great thing about this is it’s not a hodgepodge of different strategies. It’s one piece of tax code. So most people are familiar with the 401(k) or 403(b) for tax deferral. So this is 453 for installment sale. This was, I guess, first invented, I should say, I want to say about 30 years ago. They’ve been through audits. There’s always been no finding. They have a private letter ruling, the law firm that handles this. So yeah, all these different people have specialties that I work with.
Sean Wieland:
This is all they do. Yes, there’s going to be legal fee for setting it up. It’s contingent on it ever actually being funded. So a lot of this is no harm, no foul to, “Hey, let’s put this in, and if you decide not to go through with it, that’s fine, but you need to make sure that language is in there.” That comes back to a point you were saying before of if they’ve already done the sale, there’s no way to go back and fix it.
Sean Wieland:
So these are conversations that have to be had at the M&A firm sales agreement level before it’s completed. So again, it’s that handoff process, so from one phase to the next, but otherwise, it’s pretty straightforward. There’s a trustee. They’re getting paid out of it, and there’s illustrations to model this, but obviously, the savings from taxes early upfront far outperforms the fees that are incurred to maintain the structure.
Jason Buck:
So ideally, even when you’re at the letter of intent level, you want that to be on the documentation. It’s going to your trust, not to you individually. That’s how pre-planning you need to be about.
Sean Wieland:
Yeah. That’s generally the time to bring it up is that the LOI part of what the IRS wants to see is that you were going to do it because it’s structured this way. They don’t like seeing that you did all this work and then at the last minute said, “Oh, we were going to sell it straight up, but then we saw this and decided to go some other way.” They want to see that this was the plan all along. So again, having that conversation early, and because there’s so many moving parts in this whole process, the clients need to have their handheld throughout this whole thing. I mean, there might be a point where you’re telling the client this three times before it really sinks in that they wrap their head around the process.
Jason Buck:
Well, it might be helpful just to compare just a rudimentary situation. If I’m selling a 10 million dollar business, I don’t do anything to mitigate my taxes, what hit am I going to take versus converting this to the sales trust? How different is that delta between the two?
Sean Wieland:
So yeah, if you’re maxing out the taxes, that could be 30 or 40 percent whack that you’d be getting net. So the 10 million dollar business, you were looking at maybe a net of six million after that as opposed to if you can keep the full 10 and reap the investments from that. Yeah, it’s significant. Again, we have software that’ll illustrate that specifically for any particular case taking me into account. What am I thinking of? Cost basis, but with a business, often a cost basis is pretty minimal.
Jason Buck:
Got it. Then forgive me, I can’t think of the actual name of it because I’ve seen in the past where people have shown if you were selling your business, you could roll it into basically a 60/40 index portfolio, but that has a different name attached to it. It’s not technically a trust, right? That’s just a different way to mitigate taxes.
Sean Wieland:
That I’m not sure of. I’d have to look at what you’re thinking of for that.
Jason Buck:
Well, because that’s what I was always concerned with is if you went from the sale and then you wanted diversify and you wanted mitigate your taxes, but it sounded like when I was talking to other people about it, the only options I had were investing in 60/40 index or 100% S&P, and I was just like, “That obviously was untenable to me.”
Sean Wieland:
Right, right. Yeah. I mean, yeah. I’m not sure. I mean, not unless they’re doing muni bonds or something, I don’t know how that by itself would necessarily be tax advantageous, but yeah, again, the fact that most of these people are coming from a retail investment space, they know what they’ve been trained on and that’s as far as it goes. Unfortunately for a lot of these other advisors, that’s the attitude that they bring to the table as well is, “Oh, that’s nice. I’m glad you’re working on it. When it finally sells and you have that money, let me know and I’ll tell you what to do.” Again, by then, a lot of the opportunities have been lost. With a 60/40, all assets correlate in down markets, right? So that’s really the biggest threat, and especially when you have that sequence of returns, risk or volatility tax because you’re drawing an income from it, you really need to be diversified beyond what most advisors, especially if they’re attached to a broker dealer, are even able to offer.
Sean Wieland:
That’s part of the problem too is that principal agent problem of either they don’t know it, the advisors don’t know it or if they do know it but can’t offer it, they’re not going to suggest it because then all you’re doing is teasing the client and they’re like, “Why did you tell me about it if you can’t do it?” So to really do the foundational work of being able to offer these solutions to clients, it really counts.
Jason Buck:
Okay. So I’m selling my business for 10 million dollars. I’m essentially rolling close to that 10 million dollars right into the 453 trust. What are the covenants and restrictions for what I can invest in, what I can invest in? Do I have to take distributions? What are all the restrictions of using this vehicle?
Sean Wieland:
Gotcha. So the way that’s exchanged is then the client is going to have a promissory note. By default, it’s 10 years because the law says it has to be some number. You can’t just say perpetual. Now, the strategy there is when you’re in year nine, you can then work with a trustee to renegotiate and say, “You know what? I’m willing to update these terms and extend it out another 10 years.” Part of that is also that withdrawal rate or the percentage that you are taking out. That can also be negotiated. The IRS does not like to see that you’re treating it like an ATM machine or a piggy bank. It can’t be willy-nilly. It has to be some structured payment, but it’s also reasonably accommodating and flexible that if you think, “Hey, I’m only going to need 2%,” and then six months into the year you’re like, “Oh, this is actually tight,” you can revise it up to three. If you realize that you don’t need that money upfront, there’s ways that, okay, maybe for the first couple years you’re deferring completely, and then maybe you’re taking more down the road. So it’s very flexible and accommodating.
Jason Buck:
Is there some minimum distribution by law that you have to take?
Sean Wieland:
That’s a good question for the lawyers. There might be. Some of these things, it’s like, “What’s the legal definition of a loan?” and below 0.001%, maybe that’s not considered a loan anymore. There may be some minimum in that sense. I haven’t encountered that because most people are usually interested in getting something. Often it’s like one to three percent that they’re pretty comfortable living off of.
Jason Buck:
Yeah, because that was making me think about I think when Derek Sivers sold CD Baby, he put it in a charitable trust for music education, where he got to draw on it until he died, and then it went to the musical education. I believe when you set up charitable trust, the distributions have to be a minimum like four to five percent, but I’m maybe misunderstanding that.
Sean Wieland:
Yeah. Charitable trusts are much more structured. That’s also something that I’m not as familiar with that I would defer. I have somebody who really knows foundations and nonprofits and creating those kinds of structures. I will say that the benefit of doing something, a deferred sales trust is that it buys you the time to do those other things. I’ve seen far too often in speaking with other exit planning professionals where because they’re trying to capture that tax benefit, they’re going after maybe their fourth or fifth choice of preferred charity because they were the ones who would file the paperwork by the necessary deadline to get it done. Whereas if you defer first, then you can figure out what you want to do from there, and it takes that pressure off that you get to take the time that you need to do it right as opposed to having to work within the framework of the IRS and tax rules.
Jason Buck:
So it’s technically possible to roll a deferred sales trust into a charitable trust in the future if that’s too much heavy.
Sean Wieland:
Yes. I mean, at its most simplest, that’s just a distribution that then you’re contributing to a charitable manager trust. Yeah. So it maximizes the flexibility of options that you have available to then do it down the road. Whereas doing something like those charity trusts, once you’ve done that, that’s locked in.
Jason Buck:
It’s locked in.
Sean Wieland:
So you really hope, “Okay. I did this the right way,” and if it’s a year into it and you have a buyer’s remorse, you’re stuck with it.
Jason Buck:
It’s not a taxable event to move from the deferred sales trust to the charitable trust.
Sean Wieland:
I will honestly have to check with it with a tax advisor. Offhand, I suspect it would be that you would have a distribution and then a contribution so that they would balance each other out, but if it would have to be a direct rollover, I’d have to check. There may be some way to do that.
Jason Buck:
Then I wasn’t tracking the promissory note and the 10-year duration. Is that an accounting convention where, basically, you’re forced to take in a loan against the charitable trust just the way that’s set up or why is the promissory note necessary?
Sean Wieland:
So because the 453 is structured as an installment sale, the promissory note is the financing of how the installment is being paid with the idea of generically, you’re going to get 1% a year for 10 years and then a balloon payment on the back end. The idea is we’re trying to kick that balloon payment down the road for the rest of their natural life. Then when they pass away, it is still outside of their estate. There’s some taxable events that occur at death, but it does also create multi-generational wealth outside of their estate from that as well. Usually, there’s a life insurance component as well to knock out those taxes that you’re getting. You’re taking advantage of that.
Jason Buck:
I want to get to the life insurance in a second, but essentially, yeah, you’re saying within nuance, you could keep moving that balloon payment or that promissory note rolling 10-year periods or something like that.
Sean Wieland:
Right, and that’s the nature of all estate planning is there are these structures that are arms length enough that you don’t have enough control, that you’re considered taxable, but you have enough influence on how it’s going to benefit you, that you can steer it in the general direction of what’s appropriate for you.
Jason Buck:
So this is an interesting piece because that arms length control. So that brings me to the next question. What can you actually invest in with this 453, and then how do you create that arms length even though you want to choose what your investments are going to be?
Sean Wieland:
Yup. So the investments is, obviously, the beneficiaries of the trust are going to be included in that conversation. Really, it’s the trustee who’s making that ultimate decision as far as how it’s invested, but trustees are amenable professionals who understand how this works and this is what they do full-time. So they’re on the same page.
Sean Wieland:
So as far as what to invest in, part of it has to be professionally managed in order to fulfill the ability to pay out that promissory note. So there has to be some level of professional management that we know, that you’re not investing in something that could all go bust, and then that’s going to wreck this whole tax for all scheme as well, but it is possible to take a portion. Let’s say even up to half, where then it creates an LLC, where the … Let me see if I remember this correctly. It’s like an 80/20 split between the trust and then whoever the other company is, and then that becomes self-directed, and if they then want to invest in real estate or their next business or whatever that is, that LLC is now an asset within this tax deferred trust to carry on and grow just like any of the other investments.
Jason Buck:
Then is there anything? I remember when I was looking at PPLIs, private placement life insurances, sometimes there’s restrictions of you can only have a minimum in certain investments so you add proper diversification. Is there any restrictions around that?
Sean Wieland:
So again, it’s a restriction on making sure that enough percentage is professionally managed, such as by myself, to satisfy the withdrawal rate or the interest rate of that promissory note. So as long as we feel confident that we can meet that number, the remaining balance is open. Again, it’s not uncommon for have to be professional and have to be self-directed.
Jason Buck:
Got it. Then even if it’s all professional and you’re managing it, is there any restrictions where you can go public, private, go anywhere, VC, illiquid real estate? Is there any restrictions that you’re able to invest in?
Sean Wieland:
Right. So because they are at that point an accredited investor because they have at least the million to qualify or the two or 300,000 of income, then yeah, then it’s open-ended, right? They’re considered a sophisticated investor, and that’s part of having that conversation is this might be that threshold moment where they are now entering into that world where more than just the retail space is available.
Jason Buck:
Got it. Then like you’re saying, if you’re moving the trust down the line, you’re obviously you’re going to want to put your kids as a beneficiary of the trust, and is that eventually how you’re going to avoid estate taxes or how does that get mitigated upon death?
Sean Wieland:
So part of that is that the … What’s the word I’m looking for? The living trust of the family is generally then made to be the primary beneficiary of the trust income generation from that promissory note. Yeah. So it’s usually also a life insurance component. Life insurance pays out tax-free. You’re paying for that life insurance from the income that’s being generated from inside this trust. So you’re already very tax advantage with that, and then when that moment occurs, you’re at least getting if not exceeding through that tax-free death benefit to offset whatever taxes would be incurred.
Jason Buck:
So just if I think about it philosophically, you have the trust and then you can wrap it in the life insurance, and you wrapping it in a PPLI or what’s the typical life insurance that you’re using to wrap the trust in?
Sean Wieland:
So it’s not that the trust is wrapped in it. The trust is going to pay for life insurance than then benefits who’s paying the taxes, essentially. Those PPLI options are available. Sometimes that makes sense. Usually by default, what we’re going with is premium financing of life insurance, where then we’re getting a bank to foot about two thirds of the premium commitment, and it’s an accelerated contribution schedule. So the client or the trust in this case is really only paying half of the first five years of premium. The bank is paying the other half for those first five years. The next five years, the bank is paying all of it. It cooks for another five years. Then the bank is getting its loan back plus interest, but because you’re getting that arbitrage between what a life insurance would pay and what the bank interest rate is, you’re capturing all of that and it greatly accelerates the cash value of that policy.
Jason Buck:
The financing on the bank side, is it pretty low because it’s tied to a life insurance policy like the rates are minuscule or de minimis?
Sean Wieland:
So that’s the benefit too. For a long time, trying to do premium financing was onerous, a lot like getting a mortgage. You had to get individually underwritten and the bank had to know how these things work. I work with a team where they’ve made all of that turnkey and the asset itself is what secures the loan. So they don’t even go through a credit check in order to get this. The bank has an automated process where they’re the first collateralized of it that if you miss a payment or it doesn’t work out, the bank’s going to get their money back first, but that’s all that’s required in order to secure the loan.
Jason Buck:
So part of that, sorry, the trust is paying for the life insurance and you’re using premium financing with the bank, but is there any restrictions sometimes let’s say if I’m 50 years old, I sold the business for 10 million, and I want to get that 10 or 10 million plus in life insurance, isn’t there only a certain amount I can stuff into that life insurance policy via the premiums that every year there’s restrictions to that, is there not?
Sean Wieland:
Okay. So yeah, if you’re thinking of the seven pay test, unless you’re not a non-resident alien, yeah, so there’s a limit to that. That’s what’s calculated. You just have to maintain what they call a corridor, that the death benefit is a certain amount above whatever the cash value is, but you’re structuring the policy to meet that, and doing jumbo policies is not uncommon in that case. So if we’re starting from a design standpoint of, “Okay. Where do we need the cash value to be?” and then build the policy around that.
Jason Buck:
Yeah. I like this separation much better of having your investible trust and then just buying life insurance outside it via the trust versus whenever I looked at whole life or PPLI, and forgive me for anybody that does this for a living, I was always very concerned with a lot of the Excel sheets that they present, and more importantly, to make sure that the actual person designing the contract has dotted their Is and crossed their Ts so to make sure the insurance company can’t screw you on the back end is there’s a lot of liabilities there that I felt uncomfortable with, where it seems like you’re mitigating a lot of those by just buying the life insurance via the trust. Is that fair?
Sean Wieland:
Yeah. I think that’s fair. I certainly have nothing against PPLI. It’s a fit for right people, but yeah, you’re right that, and like with the trust itself, you need to make sure that the investments are going to be able to support the structure the same way that it has to support that promissory note. When you get into more exotic investments, the actuarial process for that is perhaps murkier than other assets that I want to say are well-understood, but I think we do come back to that problem too of expected return. Past performance is no indicator of expected return. So yeah, as far as the flexibility of the pool of investments that you have in the structure and that you’re not tied to a limited investment selection is the important part there.
Jason Buck:
All right. So I sell my business, I set up the 453 trust, I’m buying life insurance from the trust, you’re investing the proceeds from the trust. I’m assuming you can also combine liquid and illiquid, like you and I have talked about this privately, if you have a well-diversified fund but then you’re using the capital efficient that you stated there to buy illiquid, let’s say, real estate, but the best part about real estate is if you can have a 10 to 50-year time horizon, and you’re just buying, rehabbing, refinancing, and just keep rolling that forward, that’s doable within the 453.
Sean Wieland:
Yeah. Yeah. That’s all absolutely doable. So that structure, even though that cornerstone or bread and butter of what we do is exit planning, this applies just as well to commercial real estate. That’s very common in what’s marketed as a 1031 rescue. So if we work with the QI ahead of time, and they’re not able to identify within 45 days or whatever it is or can’t close within 180 days or whatever that is, you know, okay, it’s going to roll over in this trust in that you are going to get that tax deferral.
Sean Wieland:
Sometimes in real estate they know that’s a bargaining tactic that we’re going to take you up to the very end of the date, and when you don’t have that, and you’re confident that, okay, you can walk away from that situation and still feel whole, that can help you with that as well.
Jason Buck:
Then what else am I missing from the 453? I’m using it for my investments. I’m using it to buy life insurance. What are other tangential benefits that I’m missing that you have the ability to allocate via the 453?
Sean Wieland:
So because it’s opening that whole world of accredit investing that we’re talking about more than stocks and bonds, the stuff that we deal with in terms of long volatility positions for commodity trend following or physical precious metals that diversify your diversifiers, right? So the ability to actually have access to all of those diversified diversifiers works within the structure also because this isn’t an ERISA instrument, right? There are restrictions on what you can invest in in a 401(k) or an IRA. This, because it’s still technically non-qualified money, does not have any of those restrictions. It’d be the same as if you were just investing from a taxable account.
Jason Buck:
Got it. Then I’m trying to think of, is there a minimum sales price for a business where this makes sense or if you get down to one to two million to five million, does it just cost too much to set this up and you don’t get as much benefits or what do you recommend the minimum sales prices for you want to set up the different sales price?
Sean Wieland:
It’s pretty efficient. So yeah, that’s a great point that fees are somewhat fixed, but benefit is variable, right? So there’s going to be a point where it stops making sense, but that point’s pretty reasonable that as long as there is at least $250,000 of capital gains, it’s probably going to make sense.
Jason Buck:
Very interesting. So is there a way to … Obviously, I’m going to pretend like I’m not asking this from a personal basis, but if I haven’t sold my business or not plan to sold my business, is it possible to set up a 453 trust without … Obviously, it’s sales deferred, so it’s probably not, but what would be the equivalent as I’m building a business and I want to put stuff away into a trust that would be similar that I can invest in go anywhere policies? Is there anything similar to pre-sale that would be similar to a deferred sales trust?
Sean Wieland:
Yeah. So the two that come to top of mind, one is an 831(b) captive insurance. I know, especially lately, people worry that it’s on the IRS’s dirty dozen. Realistically, most of that is because of how people who are structuring it to really push the boundaries of what they thought they could get away with. That’s why it’s come under scrutiny, but again, the team that I’m working with or teams I work with on this, they are much more conservative and they have a long track record of doing this because they don’t want to go through all that.
Sean Wieland:
If this all blows up because of the IRS, it’s not actually worth anything to anyone, right? So why risk it? That’s a great way that, one, especially if you’re in a business where you have risks that are difficult to ensure, I mean, just from the legitimacy of having this privately held insurance company, going through a global pandemic where suddenly the supply chain stops existing or your customers evaporate overnight, that’s a risk where you could get, and my clients did, they got this payout that provided the liquidity, that got them through that period of uncertainty, and they can figure out where to position to next.
Sean Wieland:
People who are YouTube stars, and they’re worried about being deplatformed from YouTube because there’s not many viable competitors to that, and no one really knows how those terms and agreements are going to change over time. So there are all these sorts of certainties that are not normally covered by typical business liability that then can cover and pay out, and those are tax favorable payouts, but then assuming you do a good job in estimating the risk of the policy that you’re covering, the excess premium is then building up in this company that you own.
Sean Wieland:
So you’re able to deduct the premium as a business expense, but then it’s going to grow in this other entity that you have, and should you decide to take dividends from it, it’s long-term capital gains. So it’s also has a tax advantage as well that if you don’t end up having a lot of emergencies and are able to build up that cash, it’s not being thrown away to some insurance company never to be seen again, you’re still retaining that, and if you have a lot of luck and retain it for long enough, they’re going to be able to withdraw from that as well on a tax favorable basis.
Sean Wieland:
The other one is going back to life insurance a bit. The gap between the benefits of a S corp and a C corp have closed because of the 2018 tax law. If you have that separation of entity, again, you’re able to use that premium finance life insurance combined with a split dollar loan regime. So as opposed to say a typical 401(k), which if you have a small closely held business, maybe it’s a law firm or a dental practice or medical spa or something like that, one, I think even Michael Kitsis did the analysis on this, that the return on investment doesn’t breakeven on a typical 401(k) until 20 to 25 years down the line, but people do it because they say, “Oh, that’s what I’m supposed to get,” or when they sign up with a payroll company, the payroll company’s like, “Why don’t we just add it onto?” and that’s as far as anybody’s ever thinking of it.
Sean Wieland:
If you’re working with a few employees who are highly compensated like Keyman, it makes much more sense to do this. You’re free of all those restrictions, which is a lot of overhead, and generally, the risk-adjusted return is much more favorable as well, and because it’s split dollar loan regime, loans aren’t income. So the money is going to you as a loan, and that loan gets paid back from death benefit, which again is tax-free. So that’s always the, I hate to say loophole, but the way life insurance is often engineered is you’re using that tax-free death benefit to pay taxes that you would otherwise owe.
Jason Buck:
Within that regime, my problem always with whole life and all this other was I was very restricted on what you can invest in, but with the split dollar loan, you still have the opportunity to go anywhere and invest in hedge funds, assuming you’re credited.
Sean Wieland:
So with premium financing, yeah, it is using indexing, which is basically ginned up, fixed because they want that hedge, right? They want to know there’s a zero bound, that it’s not going to have, again, that sequence of returns risk, that you have a big loss in one year. So of course, they do cap it on the other end. Everything comes down to a derivative strategy. That’s generally what they’re looking at, and because you’re getting the leverage, the tax-free return that you’re getting from that tends to justify it, especially then if that’s also your bond proxy or the part that is liquid, conservative, you know you can rely on.
Sean Wieland:
Even just straight up for a business owner they say, “Okay. I’m going to do this,” rough estimates, let’s say, maybe it’s two million this phase, that for someone maybe in their 40s, again, this is not advised, but very, very rough estimates, that could make sense where they know, “Okay. No matter what else happens, I’ve made those five payments. Everything else is set it and forget it. The business goes bust. I lose everything else. I’m still going to be pretty well off and comfortable in retirement.” So because they have that confidence that they’re not worried about losing everything, now they feel free to take more appropriate risks with everything else that they’re doing.
Jason Buck:
Then you touched on the one I hinted on earlier with captive insurance. So that always makes me nervous. So the people I’ve talked to, and I’m sure you’ve dealt with them many, many times and you said, “Well, there’s a way to do it and be conservative,” but how do you allay my fears about that just by saying we’re conservative when you’re working with people? What’s the other way to talk about captive insurance?
Sean Wieland:
Yeah, that the legal structure is done right. I mean, also, this tax code exists, right? If the IRS really thought it was tax evasion, you wouldn’t have that part in the tax code. It’s there because it’s meant to do something. Also, I have to remember the statistic on this, but basically every major company has a captive. I remember as a kid visiting Walt Disney World, and maybe I’m just that nerd, but somehow got to talk about, “I wonder what the insurance is for liability with all the animatronics and things that could go wrong,” and Disney employees are very well-trained. They won’t just BS some answer. They will go and find out the answer for you and they come back. Basically, yeah, Disney’s had this captive since I think the 1970s in order to self-insure all of that. So it is a strategy used by every major global company or most, I don’t want to say every, but many of the global companies that you’ve heard of.
Jason Buck:
So this is one of my random outside the box questions. So forgive me if you don’t have an answer for this one, but I always wondered, I’m sure you feel the same way, it always drives me nuts how much health insurance is for entrepreneurs. I think about the way we’ve structured Mutiny Funds and Cockroach, and we have all hundreds of LPs and most of which are entrepreneurs. I’ve always wondered, can you set up a captive insurance, and then in bulk, we can start negotiating on health insurance for entrepreneurs and lowering that cost?
Sean Wieland:
Yeah. So that exists. I have people who do exactly that as well. A lot of companies are finding that that makes sense also because they can control costs. They’re not just paying out every claim that comes in. They can then work with the employees or tailor it to suit them best for what they actually need.
Jason Buck:
When they’re doing that, are they pairing it a high deductible with an HSA plan and then they’re going to invest that as well or am I too detailed?
Sean Wieland:
Yeah. The details depend on the company and the implementation. Yeah. Sometimes it’s the HSA or HRA is a piece of that. Then yeah, the bulk or major events, yeah, that is a little slightly outside of my wheelhouse. I have the X. I know enough to bring it up and talk about it, but I definitely have people who know all of the intimate details of when it’s most appropriate to use what combination as far as health and health captives are concerned.
Jason Buck:
Yeah. I have a stupid dream of building up the largest HSA policy in the world the way Teal and everybody has ever done with other plans, but I don’t think anybody’s quite done it with a HSA yet, but it has that triple tax benefit. If you had a high return, high vol strategy that didn’t blow up, it would be an interesting way to build up a nest egg.
Sean Wieland:
So the version of that would be much more doable because the restrictions for straight up HSA are very onerous. The politics behind that have never really been able to iron out, but a lot of people don’t know there’s also … So everybody’s familiar with the 401(k). There’s also an option for defined contribution for a 401(h), and that is also where you get that triple benefit of you’re deducting it pre-tax, but then when you’re retired and you’re spending it because it’s medical expenses, you’re getting the tax deduction so you’re not paying taxes then either. So in cases where, again, part of building up the company early on, we’re doing a 401(h) combined with a pension plan to really maximize tax deferral. Yeah. That’s a scenario where we could probably hit the numbers necessary to do a sophisticated investment strategy like that.
Jason Buck:
We’re going to have to talk about that offline as well. So we talked about working with the clients maybe two years out pre-liquidity event, getting their structure and books in line, that way they can get to maximize the multiple they’re going to sell to. You talked about the different strategic buyers versus P firms when we’re going into that liquidity event. Setting then up the 453 deferred sales trust prior to doing all that, so that way you can defer that sales into the trust and you get the bulk of that money on the liquidity event. Then you have your trust set up. Somebody like you is managing that trust and really diversifying and trying to figure out a proper income stream that the person’s looking for.
Jason Buck:
You’re also using, like you’re saying, premium financing to build in the life insurance as part of that as well. What after that is ongoing? Is it quarterly, annual basis where you’re reviewing with the client or with hands off, can you even talk to them about what you’re investing in?
Sean Wieland:
Well, so I’m working with the trustee. The trustee is going to be on that call and then the beneficiaries of the trust are generally cc’d on everything. So they’re going to get copies of the statements and they’re going to be in the loop and, yeah, we want to make sure they’re on the same page as well because the trustee also has to know how to act in the way that is best beneficial for the beneficiaries of the trust, right? As far as how frequently those reviews are held, again, a lot of that depends on the client. There are some that say, “You know what? Give me an update once a year or unless something happens. If there’s a big market crash, give me a call, let me know everything’s okay.”
Sean Wieland:
Others want that quarterly review. Maybe they have more complicated things going on. There’s other estate planning issues of they’ve remarried and have a blended family or they’re bringing their kids into it or they’re … So yeah, it very much is tailored to the client as far as as much or as little hands on as they need, but generally, the benefit too of using something where you have more of those diversified diversifiers that you’re really protecting against those drawdowns is you don’t have those panic conversations of, “Yeah. I know the S&P 500 is down 20% right now. Don’t panic. Stay the course,” but you’re talking them down off the ledge. I’d rather they’re not getting on the ledge to begin with when you actually have a portfolio that’s diversified.
Sean Wieland:
I mean, I just had a conversation with another advisor earlier today and he gave me that standard line of, “Oh, well, we were diversified in a typical 642 way. So we’re only down 12% instead of 20. “We are still down 12%. That’s not a win. Yes, it could be worse, but it always could be worse, right? So yeah, having that worked out ahead of time is part of that process, that you’re looking out for the client, both materially as well as psychologically.
Jason Buck:
Then is there anything from a regulatory perspective on the trust for distributions whether they’re annually, quarterly or monthly or is that up to the client?
Sean Wieland:
It’s up to the client coordinating with the trustee, but yeah, whatever is going to be beneficial to the client. Those are all the standard options. The biggest concern is it can’t look like a piggy bank, right? So it can’t be they start taking a monthly income, and then they want to buy a boat or they have an opportunity to buy a vacation home and they, “I need a sudden distribution.” That could mess it up. So there has to be some reasonable adjustment of, “Okay. Well, apparently, what you’re really saying is that you needed more income on a recurring basis. We’re going to go back and rewrite the note. There’s a little bit of a fee to go back and do that like adjusting a mortgage, but then you’re going to have access to more of the money from the trust that you need.” So that is one way of doing it.
Sean Wieland:
The other is sometimes those kinds of events, if it is investing in real estate that you’re not going to live in yourself, again, that’s something, okay, well, maybe that’s something that could be done inside the trust as opposed to money that actually has to come out for you to use.
Jason Buck:
Part of that, though, due to the arms length rule with the trustee, can the client tell the trustee they’re interested in this piece of real estate or they’re just interested in investing in real estate?
Sean Wieland:
So an LLC is going to be created where they are-
Jason Buck:
Oh, that’s the 80/20, yeah.
Sean Wieland:
I believe they’re the 80% owner and the trust is then the 20% owner. So because they’re the majority stakeholder, they’re able to direct where that goes, but the trust has, and the trustee, has decided to invest in that LLC as part of their overall portfolio.
Jason Buck:
So outside of carving out that LLC, when you’re setting it up with the trustee, you’re going to want to have a lot of long conversations as the client about a broadly diversified portfolio and what the trustee’s going to implement because after they put it into practice, you can’t really have too much input from a regulatory perspective, right?
Sean Wieland:
Yeah. There should be an understanding of what the investment goals and strategy is going to be, which, again, so in practice, psychologically, the sequence of events tends to be we’re interested in all this minutia of investing, it’s not interesting to most people. Their eyes glaze over, it goes over their head, they don’t really understand it nor they necessarily want to understand it, other than they want to know, “Is my money safe? Am I going to be able to live off of this? Am I protected if there’s a market crash?”
Sean Wieland:
The hook to get them there to a place where they are going to give you some undivided attention and talk for 50 minutes about the parts of that they do need to know that, “Here’s mechanically how it works. This is how we’re managing risk. This is how we’re going to protect you,” it’s once they know they’re saving that 30, 40 percent off their taxes that, “Okay, I’m listening,” and then you can have that conversation of, “By the way, how this is invested to also,” in the back of their mind they’re worried about, “Well, what if I lose half of it because of market crash?” We’ve addressed that. If we’re doing our jobs correctly, we have the diversified diversifiers that you’re not going to have those big drawdowns, which compound over the long term is much more effective than trying to hit home runs.
Jason Buck:
Then I’m obviously setting you up with this one because you brought it up with other financial advisors are usually just doing the 60/40. Do you think it’s just CYA, just cover your ass, and it’s just mimesis and everybody’s afraid of looking different is why they don’t provide that to their clients while the majority are still just recommending 60/40 portfolios after they have a business sale?
Sean Wieland:
That’s certainly part of it. I mean, that whole confluence of all of that plays a role, that they’re working with a broker dealer, and that broker dealer is very rigid as far as what they’re allowed to do and what not allowed to do. Maybe you’re not allowed to use outside software except for the one designated portfolio construction software that that firm has implemented. So you’re not able to talk about anything that’s not offered on that menu.
Sean Wieland:
There is a bit of professional risk that, again, it’s better with entrepreneurs than people who might have executive vice president of a company and maybe they have a big concentrate stock position, but they’ve been in management their whole life. So they’ll come into it and, “Oh, well, I read Kiplinger or Money Magazine and I know it’s supposed to be low fee index funds in a 60/40 because you can’t beat the market,” and you try to talk them out anything different and you’re fighting an uphill battle and it’s just not worth it.
Sean Wieland:
So they do have to be somewhat amenable to thinking through it themselves if they have someone who can explain it in a non-overly technical, non-jargony way on why that’s the better alternative, but to get to sort psychologically the right kind of client and to hold their attention long enough to have that conversation, that all has to be teed up as well.
Jason Buck:
Right. Like you said, it’s a long-term relationship. Like you’re saying, especially if you’re wanting to do two years presale, obviously, this is a very long term and the handholding and finding the right clients is always the key for you. Why-
Sean Wieland:
Yeah. It’s a process of earning their trust through that process as well. So often, I mean, again, the ones who are ready to sell, I can have that conversation, and if they’re that urgent, then they are willing to make that decision on their own, but the ones where we’re just talking about, “Hey, this is probably the biggest asset that you own and it’s worth something and you’re going to need to sell it off to somebody someday,” you’re going to earn their trust because you brought it to them like inception. You brought up the idea. So you’re going to earn their trust doing the smaller pieces with their business like the captive insurance or the 401(h) plan, and once they see that in practice, then they’re going to trust it more for when you get to the big liquidity event.
Jason Buck:
Yeah. I mean, I would think how many business owners when you talk to them might have even heard of a 453 deferred sales trust. I mean, you’re earning their trust right away because, and I’m using trust twice there, but you’re earning that right away because you’re introducing them to new ideas that they’re going to love for mitigating their tax consequences of selling their baby.
Sean Wieland:
Yeah. So a key part to that too, it’s a big tent doing an exit plan. I always want to emphasize that if they already have their favorite CPA, maybe it’s a CPA that their dad introduced them to 30, 40 years ago and trust them implicitly, but they also haven’t done CE or kept up. This is too exotic or outside their wheelhouse for something that they would know about or other advisors maybe already have a financial advisor for their IRAs and retirement plan or something like that. Nobody’s getting pushed out of the nest. Everybody can be included in this conversation. We’re not trying to exclude anyone, but this is a unique, specific, complicated process.
Sean Wieland:
There are things in it that you wouldn’t hear about otherwise, and that is also the biggest concern a lot of clients have is they know it’s their one shot and because they’ve been successful, they’re very cautious about not screwing up, and because they can’t really be in control, they’re relying on other people to do a good job. There’s a lot of tension there that they really want to trust but verify and figure out that’s the case.
Sean Wieland:
Having the CPA onboard for the accountant or the tax advisor and especially having the M&A team who is brokering the sale, to have them on board is very important with this as well. In my experience, if they’re already working with some firm, and I meet them at some event or they’re talking about it and I mentioned, “Well, did they bring this up?” and you say, “Yeah, you could have deferred all these taxes.” If their team that they’ve already selected and trust hasn’t brought it up, psychologically in their head, even though they could go Google it and find out that this is correct and save millions, possibly tens of millions of dollars, they’re going to think, “Well, I picked the right team. They didn’t mention this.” So if this other person mentioned it and they didn’t, it must not be worth doing, worth looking into, and people can really shoot themselves in the foot because of that. So getting everyone on the same page in that team of what’s available, what they can do, and that the client isn’t getting mixed messages is very important as well.
Jason Buck:
No, that’s extremely important point. You hit on that, the team aspect of it, because, yeah, nobody wants to fire their family’s CPA to work with some guy they just met. So that’s a perfect way of looking at it. That’s great. Why did you name your firm Tannhäuser? Am I pronouncing that correctly?
Sean Wieland:
Yes. So yeah, it’s like the opera or like the fairytale. I do wish I had more of a story to this. Part of it was I was, and when you have to go and do branding and especially because now everybody’s a brand, finding the domain that isn’t taken, finding the firm that isn’t already using that name is in and of itself a challenge. Really, it was a matter of just ideas that popped into my head and, “Oh, let me see if this is taken,” and when it wasn’t and I could grab everything across the board, “Okay. I’ll go with that.”
Jason Buck:
You just described the bane of my existence, coming up with great company names and then Googling it and knowing if it’s taken. Everything’s always taken. It’s impossible. So I want to thank you-
Sean Wieland:
Oh, just did snag it as a domain name, exit.finance. I’m proud that I locked that in.
Jason Buck:
Oh, there you go. Yeah. Yeah. Use the different endings on these domains these days. So I want to thank you for coming on to talk about 453 and deferred sales trust. I think it’s hopefully highly valuable for a lot of the entrepreneurs in our audience. Probably have to get you back on again because what most people don’t know that I’ve learned is you’re quite the economic historian, especially specializing in Austrian economics. So we could do an entire podcast or series of podcast just on that alone. You’re always teasing me. I think you should write several books. You always said, “Should I write a book on that?” I mean, I think you should write several books.
Sean Wieland:
Yeah. I would like to come back on. If only because I think we can revise the way that your definition of malinvestment or the way that you think about it. Your malinvestment is somebody else’s opportunity, right? So we thought it was fit for purpose. A, it doesn’t work out, it gets liquidated, but somebody else then says, “Okay. I can do it for plan B,” and then it works out. Right?
Jason Buck:
Yeah. My thing is, actually, it’s just a time horizon thing. Over a short time horizon, I might look at malinvestment over 100, 200 years. It looked like a beneficial investment or creative investment. We just don’t know. That’s my point is, how do you know when the time horizon you’re looking at?
Sean Wieland:
That’s the bane of every entrepreneur. You’ve touched on this point before as well is what happens if you run out of runway, I mean, an idea, “Hey, if I get this done in 10 years, it’s going to be the next Elon Musk with a rocket to Mars,” but if there’s a credit crunch and your funding dries up and you’re in year six, it’s not sustainable anymore.
Jason Buck:
Exactly. Thanks, Sean. I appreciate you coming on and I look forward to our future conversations.
Sean Wieland:
Yup. Likewise. Thanks for having me.
Taylor Pearson:
Thanks for listening. If you enjoyed today’s show, we’d appreciate if you would share this show with friends and leave us a review on iTunes as it helps more listeners find the show and join our amazing community. To those of you who already shared or left a review, thank you very sincerely. It does mean a lot to us. If you’d like more information about mutiny fund, you can go to mutinyfund.com. For any thoughts on how we can improve this show or questions about anything we’ve talked about here on the podcast today, drop us a message via email. I’m taylor@mutinyfund.com, and Jason is jason@mutinyfund.com or you can reach us on Twitter. I’m @TaylorPearsonMe, and Jason is @JasonMutiny. To hear about new episodes or get our monthly newsletter with reading recommendations, sign up at mutinfyfund.com/newsletter.