Episode 074: What Next? (Life After Exiting a Business)

(00:00:00) Commentators: You’re listening to The Wrap, a Warren Averett podcast for business leaders designed to help you access vital business information and trends when you need it. So, you can listen, learn, and then get on with your day. Now, let’s get down to business.

(00:00:17) Paul Perry: Good afternoon and welcome to another episode of The Wrap podcast. We are happy to have you with us today. My name is Paul Perry, one of your co-hosts, and I’m joined by another Member here in the Birmingham office. Reed King is a cohost for this one. Reed, happy to have you here with us.

(00:00:33) Reed King: Thanks. Glad to be here. Yeah, my name is Reed King. I am a Member in the Birmingham office and our tax division. I focus a lot on real estate, aviation and high-net-worth clients, which I think will be very pertinent today.

(00:00:52) Paul Perry: Glad to have you. It’s going to be a good discussion. Just to recap, we’ve been going over that business life cycle that we’ve been talking about now for four or five episodes. We walked through the whole piece, right? The whole business life cycle. Then we entered the startup stage and then we got to the growth stage, the maturity stage, the exit stage.

And today we’re going to be talking about that freedom retirement stage. We don’t want to use the retirement term too much, right? We just want to use the word freedom. And so, I think it’s going to be a good discussion. I am glad to have you here with us, and I think we have a guest with us. Correct?

(00:01:25) Reed King: Yeah. Excited to welcome Greg Sellers. He is a fellow Member in our Montgomery office, and he is going to be sharing about that freedom stage—oftentimes the goal of the business life cycle. So, Greg, welcome.

(00:01:40) Greg Sellers: Thank you guys. I really appreciate the opportunity to spend time with you today.

(00:01:44) Paul Perry: So, Greg, just so the listeners know, give your background and why you’re here talking about the freedom stage.

(00:01:50) Greg Sellers: My background, I’m a Member with Warren Averett. I started out about 38 years ago and had no idea what the Estate and Trust world was like at that time, but that they had a need for staffing in that area. So, I started—unbeknownst to me—what has led to an entire career in estate planning, estate tax compliance, trust planning and compliance.

It’s been a great time, a great career for me, and I look forward to sharing some of the things that I’ve observed and learned during this time.

(00:02:31) Paul Perry: We’re glad to have you with us.

(00:02:33) Reed King: Yeah. I guess we can go ahead and dive in. Greg, if you would describe the freedom phase of the business life cycle, maybe some considerations, opportunities, challenges of this phase.

(00:02:47) Greg Sellers: Yeah. The freedom phase. I like to talk about the freedom phase and that it’s the phase where you reap your rewards. You get to start enjoying life and depending on the age of the business owner, you may be changing a direction or changing your lifestyle, or maybe even venturing into a different career that may follow that business owner’s passions a little better than the previous business.

It doesn’t, as Paul said, it doesn’t really mean retirement. It can mean retirement, obviously. If the business owner is of retirement age, they may be ready to stop that timeframe of working every day, and go on to enjoying life, but it also can be a shift in—maybe if it’s a young business owner. They just moved from working for a particular business and now they have the flexibility to move on to a different business with an investment in a different business, or just move on to participating in other activities that they enjoy and want to do. The emphasis isn’t on the business, but it is a shift to a lifestyle.

You asked what one of the considerations or some of the considerations might be as to: how does one business owner go about shifting into that freedom stage? Some of the questions that I like to think about during this time are things like: What do you do now? Have you reached your full potential?

So, these are questions that are often asked of the business owner. For them to start thinking about what’s important to them. Is it travel and spending time with the family more important at this time? Is it freedom from a schedule? Sometimes, it’s people following a dream.

They’ve worked all their career. They’ve made money, maybe they’ve just reached the pinnacle, and then they have a desire—some passion—that they want to follow. And so, some of the opportunities that exist, obviously is for them, if they’ve had a liquidating event like a sale of a company, they have opportunities to invest that capital in new ventures—whether they are involved in the actual day to day operations of those ventures or whether it’s just the angel investor that lets those people or lets other people pursue their dreams. It also means having time to enjoy with the family.

When you think of folks that are reaching close to retirement age, they would love to go spend time with the grandchildren, and so they may travel across the country—or overseas even—to spend time with family. The major impact of the freedom stage is having that flexibility to be able to change course and decide what you want to do whenever that changing course comes along.

So then what are the challenges, right? The challenges are financial, almost always. Because the individuals who have been accustomed to building their businesses are keen to what that financial impact has been to the business, and they are always concerned about the fact that what will happen if they outlive their financial resources.

Another one that many professionals run into is a challenge of: what is your identity? Many of us who are in professional practices—whether it be CPAs or attorneys or medical doctors—those individuals have a long career, a long profession in their business. Once they retire, once they meet their freedom stage, it causes a little bit of a loss of identity.

That sometimes is the hindrance for some people to be willing to go about the shift that may be necessary to enter into the freedom stage. Sometimes, that’s an ego matter. Sometimes, it’s just a feeling of self-worth. But that identity crisis is oftentimes a challenge that many people run into during the freedom stage.

(00:07:30) Paul Perry: So, Greg, you talked a lot about the businesses, financial health, right? And that’s what the owner has been thinking about from startup to this freedom stage. And as they get into the freedom stage, I’m sure there’s a mind shift, right? You’ve got to stop thinking about the business’s financial health.

How does a business owner approach their own financial estate and legacy planning? You’ve talked a little bit about that, but dive into that a little bit more.

(00:07:56) Greg Sellers: Yeah. So, it requires a balance. It’s a balancing act. So, the balance of maintaining the lifestyle that they may have developed over their career and over the time of the business. It’s a balance of their possible desire to help other people—whether it’s the successors of the business or whether it’s charitable entities or whether it’s advancing a cause.

Sometimes, it’s even shifting to where they’re teaching—whether it’s teaching the next generation their skills or teaching how to manage and run the business that they built—or whether it’s sometimes even moving out of practice and into teaching the young students at a college or university. So, a balance of teaching, a balance of the financial, and a balance of the lifestyle preservation.

Another balance is the preservation of the capital that they have achieved—whether that capital again is dollar bills or assets that they have built during the during the various phases of the business or whether it’s just self-worth capital, but preservation of that capital for the benefit of family and friends.

Then, finally, a balance of planning for mitigating taxes. That’s the world I come from. It’s mitigating those wealth transfer taxes and preserving what’s left to pass on to that next generation.

(00:09:32) Reed King: You mentioned identity. You mentioned flexibility. This next question has a little bit of a flavor of all of those, but how should someone balance the pursuit of a passion project?

Something that they’ve always wanted to do versus a financially driven venture in this freedom phase.

(00:09:52) Greg Sellers: One of the things I thought I might bring to the table here is to come up with an example of what many of the folks that we meet with—but this one in particular has been of recent time.

So, we had a highly successful professional that came in. He’s been a client of the firm for many years. The partner brought me in on the case as they had moved—not only have they moved through the business cycle all the way from the startup phase to the freedom stage—but he’s done this three times.

So, he took the first transition time where they ran into a liquidity event and rolled the dice a little bit and started it over. Then, ran it up the tree again and rolled the dice again and started over. Now, after doing that three times, he’s gotten to the point where he’s still advising, but he is no longer in the day-to- day management of that company, but he still has some skin in the game.

So, he is interested in what’s going on, but now the transition has begun. He’s leaving the day-to-day management to somebody else, but he then has to now figure out: what am I doing with my life? So, his initial meeting with me was to come for me to help tell them what’s going on and what to expect from an estate tax standpoint.

What liquidity did they need to have available? What is the tax going to be? And they came in again with a plan already in place that did involve some charitable bequests. So, I listened to what they did.

I did a little research into their tax returns and found out a little bit of what their goals were. Then, when I ran the calculations, the current values were not off by much from what they thought and expected. But when these mid-60 to early-70 year olds—when I showed them that their life expectancy is for another 20 years and the growth of the wealth that they have over this 20-year time frame, it multiplied the estate tax, and the liquidity needs by multiples not by just a few dollars.

Then, with their charitable bequest that they had put in there, when we grew that as a percentage—what they were thinking as a percentage—it became a whole different story as far as the amount that would go to charity. And so, it didn’t change their thoughts or ideas about the charities, but it did cause them to pause and think: Is that the right way to calculate what they are going to leave to charity?

So, these sessions that we have with this particular client, it’s been going on in at least monthly fashion, if not more frequently, for two years now. So again, it’s a process and not a product. We have involved them with some life insurance professionals who have put into place some products that provide the liquidity for the short term that they needed.

And then we’ve involved them with trust companies that will provide for the long-term management of the wealth for the future generations—not just their children—but for future generations down the road. And we’ve tried to implement some processes and strategies that will mitigate those estate taxes in the long run.

All of that to say, that the process that we go through introduces a team of advisors that best serve the client.

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(00:14:32) Paul Perry: Greg, one of the themes that I’ve heard you say throughout this discussion is related to cash needs, right? Cashflow needs. I’m sure that you have some recommendations on trying to project what those cashflow needs are through retirement.

You talked about lifestyle balancing. How do you balance the maintaining that lifestyle desire, but then being financially responsible and sustainable through retirement. So, I’m sure that’s a lot of the conversation you have with that one client on a monthly basis.

Is that right?

(00:15:04) Greg Sellers: You’re exactly right. And yes, it is. The quick answer to that question is cash flow projections need to be made very conservatively. Rarely do people come into the office and say “I want to spend the last dollar that I have the minute that I pass away.”

Sometimes, they joke about that, but in reality, they don’t really mean that. They are much more focused on having plenty of funds to take care of them—for whatever situation they will be in—until they pass away. And most people are most interested in passing along a legacy to their family.

They want to make sure that people can be taken care of in a lifestyle in the way they’ve become accustomed. So, the challenge is making sure that they don’t have to live off of their monthly income like they’ve been accustomed to when they’ve been going through these phases of the business cycle. They’re accustomed to getting a paycheck. They’re accustomed to getting a draw and they’re accustomed to getting something to live off of. They’ve been living off the business and so they never really tap into the equity or the principle of their estate. So, that’s a challenge that we have to overcome is to help them understand that their entire pot is available to them.

They don’t have to just live off the earnings. They can dip into the principle if it’s managed properly and projected very conservatively. Conservative financial planning is also constantly reassessing the plan. Again, you don’t do this once every five years and stay stagnant, because how many times have we all seen—whether it’s the stock market or whether it’s just the business environment in any place—that it fluctuates and sometimes greatly?

There needs to be a constant reassessment. I’ll tell you one other story. As you can tell—us old timers, I’ve been around a long time. We have lots of stories to tell.

(00:17:24) Paul Perry: That’s what the listeners want to hear. That’s what the listeners want to hear, Greg.

(00:17:28) Greg Sellers: So, I had this client that was an elderly widow of a highly successful business owner.

Now, the business owner died about 20 years ago, and the widow has lived another 20 years past his death. She recently died at age 100. But the interesting thing was, she assured me for the last umpteen years that she was going to live to a hundred and five because long lives were in her genes.

She lived to age 100 very well. She was not sickly—she was loving life. She and her husband had put those planning vehicles in place. They had trusts that were provided for children and grandchildren. They had life insurance to provide liquidity so that there were liquid assets available.

They knew they had given away wealth during their lives. We had done some really good planning to help go ahead and help those next generations along. She educated every single one of her children and every single one of her grandchildren, very good educations. So, lawyers, medical doctors, financial planners—a lot of good professional people. Her desires were to continue helping the education for her great grandchildren by providing 529 accounts for them. So, a lot of planning and a lot of tools that had gone into that. She was carrying all of that out—even for the last 20 years after her husband had passed away.

It then became a little concerning to her and her family as in the last four years, she had a medical event that caused her to need some 24-hour care. Not because she was incapacitated or in the bed, but she just needed camaraderie or companionship. That’s really the term I would use. That companionship—those sitters—for 24 hours a day for about four years, were getting expensive. And then along with the cash flow needs that were already in place to fund life insurance premiums—and to fund all of these annual exclusion gifts—the cash flows were heavy.

So, they came to me being a few years ago and asked: “Is she going to have enough to continue the plan?” When you sit down, and you say to a family of somebody who’s 98 or 99 years old and that has multiples of millions of dollars… you almost sound cliche a little bit, but I tell them, “You can’t get that sick.”

So, hopefully though, I was able to prove to them with the cashflow projections and very conservatively—that there were ample funds to maintain the lifestyle that she was accustomed to keep her living at home with the sitters and providing for the gifting that she had planned to do. Then, continue with the expected wealth transfer that would occur at her death. The key there was that the plan’s in place. We monitored it annually—if not more frequently in the latter years—and we planned with conservatism so that we knew that it was going to pass along.

(00:21:32) Reed King: Sounds like planning is a theme in all of this. You talked about leaving a legacy. What steps should somebody take if they want to leave a legacy, and they want to protect their assets, but they also want to go into a new venture? Perhaps invest in something new and not just sit around—maybe not an active role in a business—whatever it is. What steps should somebody take to protect existing assets and wealth when going into a new venture?

(00:21:59) Greg Sellers: Yeah, that’s a tough one. That’s a tough question. But to be able to continue the perpetuity of the business or to invest in a new business and protect the family wealth…many times, you just have to have a strategy. One of the ways that I like to… it’s actually a recent court case that I feel and many other commentators. There’s a commentator, a very well-known state litigation attorney that loves to fight battles with the IRS.

This guy was at a conference I was at recently, and he was speaking. He had an opportunity to work on a very high, well-known case with family name recognition.

Since it’s a court case, there’s nothing confidential about it. It surrounds the Biltmore family estate. The Biltmore house—that’s part of the Vanderbilt family lineage. If you’ve ever been, it’s this enormous mansion up in Asheville, North Carolina.

I finally had the opportunity to go tour it. Everybody in my family had been before I had. But we finally went last year and it’s magnificent. It’s not just the structure of the house, it’s the grounds and it’s the business that surrounds all of that. There are multiple sectors to each one of those, to that whole family business.

There’s agriculture, there’s tourism. It’s just an amazing place. Then when you realize that the entire little community—the entire little town that surrounds the estate there—is a benefactor or a beneficiary of the function of that estate. Not only were they the beneficiary of it when it was built in 1903 or whenever it was, but it continues on today.

When you think about the hotels that are in that little community, the restaurants that are in that little community, the little shops that are all around there. They are dependent on the core business there around the Biltmore. Getting back—I go down rabbit holes and tangents—getting back to the question a little bit.

So, the steps I think that we need to start going through is for everybody didn’t have to have a Biltmore. Everybody didn’t have to be Vanderbilt rich, but every family should be considering how to protect the family legacy. This court case recently illustrated that the family has developed a family commitment and an education plan to train the whole family, all of the family members that are left, starting at their children.

They start with the eight-year-olds with color crayons and diagrams and help explain the family business and the impact of the family business that it has on the surrounding community, the employees that are employed in that business, as well as all around the nation with people that are influenced by it.

So, this family plan education plan commitment, it’s intended to keep those children who have been the benefactors of generations of wealth. It keeps them from being complacent in their wealth and in feeling entitled. They also continue the mission; they educate the family on the mission of the great grandfather who started the whole place and try to teach them about the value of the business.

Then again, part of the protection is mitigating taxes. So, sometimes you have to take an offensive position—as this court case proved—against the IRS. Instead of just sitting back and defending whatever they throw at you. You take the offense, and you suggest plans.

There’s the ‘plan’ term again, but we also have to recognize that and the recognition of the success of the business is not just in the hands of the family, but it’s in the hands of those employees, the key management and all of those in the community that support it.

(00:26:58) Paul Perry: Well, Reed, I don’t know about you, but my children are going to hate me this weekend because now we’re going to start pulling out some crayons and some diagrams and we’re going to talk about legacy. This is going to be a fun weekend. I’m sure you’re going to do it at your house too.

(00:27:08) Reed King: It’s never too early. That’s what I’m taking away.

(00:27:11) Paul Perry: Greg, here on The Wrap, we’d like to wrap it up in 60 seconds. That’s what we always say. We’d like to wrap it up in 60 seconds, but it’s hard to wrap up a freedom stage, so many years of built-up wealth.

And what do you do with that? But what’s the ultimate advice for the listeners that you want to give for success in this freedom stage that we’ve been talking about?

(00:27:36) Greg Sellers: Planning is the key word. Don’t put off the planning. Do the planning, and also pull a full team of advisors into that plan.

Each advisor offers their professional specialty and a team of advisors who are committed to working with one another to the benefit of the client is going to benefit the client.

Then, finally, I guess I would say quickly to reassess your plan at least annually or at any time that there’s a major change in the circumstances.

(00:28:18) Paul Perry: Greg, thank you very much for taking the time to have this discussion with Reed and I. I know the listeners appreciate you wrapping up that final stage of the business life cycle in the manner that you did. So, definitely thank you for being our guest today. And we look forward to future discussions.

(00:28:35) Greg Sellers: Thank you, Paul and Reed, I appreciate the opportunity to share my many years of experiences.

(00:28:42) Reed King: Thanks guys. Greg, appreciate it.

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