Interview by Jonathan Kersting
For entrepreneurs, building a successful company is only part of the equation. The other part is making sure all of that hard work actually creates lasting value for the owner, employees and future of the business.
In this episode of TechVibe, Fragasso Financial Advisors’ Christine Robinette and Bryan Reft join Jonathan Kersting to explore how equity compensation, employee ownership and thoughtful exit planning can help business owners strengthen their companies long before they are ready to step away.
Fragasso approaches financial planning from a distinctly people-first perspective. Rather than beginning with investments and portfolios, the firm starts by understanding a client’s goals, values, family priorities and long-term vision. That philosophy carries directly into its work with entrepreneurs.
Robinette and Reft break down several forms of equity compensation, including restricted stock units, employee stock purchase plans and Employee Stock Ownership Plans, or ESOPs. These strategies can give companies another tool for attracting and retaining talented employees while encouraging them to think more like owners. Fragasso has firsthand experience with that approach as an employee-owned firm itself.
But equity is only part of the conversation. Reft, a Certified Exit Planning Advisor, explains why owners should view exit planning as an ongoing business strategy rather than something tackled shortly before retirement or a sale. Successful planning requires aligning an owner’s personal goals, financial goals and business goals while identifying potential gaps between what the company is worth today and what the owner will ultimately need from it.
The conversation also explores what truly creates business value beyond revenue and profit. Strong leadership, a diversified customer base, documented processes, scalable technology, company culture and reduced dependence on the founder can all make a company more attractive to a future buyer or successor.
The takeaway is simple but powerful: don’t wait until you are ready to leave your business to start planning how you will leave it. Building value, developing leadership and understanding your options takes time, and time is the one asset entrepreneurs can’t buy back.
Understanding Equity Compensation - The Foundation Every Executive Needs
Equity Compensation: Turning Complexity Into Opportunity
Transcript:
Fragasso
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[00:00:00] We do not start with portfolios or investment management when we're meeting with someone. Okay. That is important, and that comes at a time and a place, but we start with people. What are their goals? What are their values? What do they wanna provide for their family? What are their priorities? And we take a deep dive into that.
That's where we start before we even start talking about investment
It's Jonathan Kersting here with the Pittsburgh Technology Council in the Huntington Bank Studios, having just tremendous conversations with folks that can help you build some wealth, for crying out loud. I seriously, I just love having conversations. We bring in our members who are just experts within their fields, and they help the rest of us here at the Tech Council get some ideas around how to build a solid business.
And I can tell you what, in my almost 30 years at the Tech Council, I've seen some pretty cool companies grow in scale, and sometimes I'm like, "Ooh, what are you doing?" "Are you doing this with any help or anything like that?" And so that's [00:01:00] why we're having our guests here today from Fragasso, have Christine Robinette and Bryan Reft.
hanging out with me today to really talk about something that is just, I think, the absolute foundation ... of building a business. It's building the, it's building business value all through equity compensation and how to really set yourself up for a successful exit, whatever that may be. That could be transferring it to- Right, right
your current, to, to current employees- ... selling it to, you know- ... giving it to your family and so forth. So welcome to the show today. Thank you for hanging out with me today. We've got a lot of fun stuff to get through today. Yeah. Yeah, thanks for having us. Thank you for having us. Yeah. Thank you.
We're very excited. Most definitely. So Kristy, let's start with you. First off, your background and what you do, of course, at Fragasso. Thank you again for having us. We really appreciate it. So my background with Fragasso is I began in 1996 as a financial advisor and was an advisor for about 20 years. I focused on women in financial transition, [00:02:00] so was certified in divorce planning.
Wow. Yes. We're- Interesting. Yes. Okay. And there's a reason for this as to how I got into- Okay. This is a good story. We're starting this off strong, Kristy. Yes. I love this. Very cool. Yes, so my, I went to school and got a bachelor's and master's degree in social work and worked at a inpatient psychiatric unit- Wow
with suicidal and homicidal teens. Oh. Family therapy. Goodness. Love, love, loved it. Didn't love insurance- Yeah ... and the fact that kids couldn't get the help that they needed. Oh. So, decided, and for anybody who doesn't know, Bob Fragasso is my dad. I called him one day and said- ... "Hey, what can I do there?"
And he always joked and said he tried not to be too excited- ... and said, "Come on in." So, yes. He's like, "Yeah, it's my daughter- Yes, yes, yes ... she's gonna work with me." Yeah. I love it. So frankly, I really started at the age of 10 filing for my dad- Awesome ... worked all the way through high school and college- Wow
but eventually circled back- Okay ... to become an [00:03:00] advisor. Loved working with women and just more of that hand-holding, That's so cool. Yeah, and fits more into my background from an educational standpoint. Totally. Wow- Yeah ... you're living like the best of both worlds- I was ... here in some ways. And what you hear so much more in our industry now is behavior finance.
Ooh. That was something that was ingrained in what I learned. Okay. And to be able to see how that works and what you need to understand- ... in the financial planning world has been invaluable to me. That's a great story Yes, yes, yes. Yeah. How neat is that? All right, so, t- Brian, you gotta match this, man.
Come on. That's, that's tough. Bring it. I am not gonna be able to top that. I'm not gonna be able to top that. But yeah, I'm Brian Reft, and I started at Fragasso here, I'm actually going on my 10th year. It'll be 10 years in October. Yay. Yeah, it's amazing- Okay ... how quickly that goes. But I am one of our wealth advisors at the firm, and I really provide holistic financial planning to all of my clients.
So that's everything from retirement planning, tax planning, estate planning, equity compensation, which we'll talk- ... a little bit about here- Yes ... in a [00:04:00] second. But on t- on top of that, I'm also a c- a certified exit planning advisor, where I really help lead our exit planning team at the firm, where we work with business owners in order to help them not only find out what they have as far as value goes in their business, but be able to help build on that value, and then ultimately help them transfer on their terms when it's time for them to exit the business.
So- I love the way you say that, transfer on their terms. How important is that? That's the goal. And it comes down to the fact that- We need to be hanging out with folks like you ... if you own a business, just to make sure, because I, like I said, my years having watched people grow businesses, mostly tech businesses, I see folks that, you know, they're so ingrained in the business- and they're not seeing the forest through the trees because they're, they're making payroll, they're getting- Yeah ... a product out the door, and they're not realizing that they're making decisions now that can negatively or positively impact the future at some point when they want to retire or move the business to somebody else.
Before we jump into all that, I think for Gassman's a little bit of a different [00:05:00] kind of a financial advisor. First off, the family side of it has to be so cool. I just love the fact that there's something that's family-run. I just like the idea that I don't know I mean, God bless the big institutions of the world that- Yeah
do what they do. That's, that's fine, but I think I'd want to hang out with people that you know, the family. Yeah. I want that family touch. And, and we really are that way. Yeah. Exactly. You know, Tell me about what makes you different like that. Yeah. I think on two fronts we're very different.
I'll speak maybe to the client service- Okay ... and then the structure of our firm. Totally. But, you know, we do not start with portfolios or investment management when we're meeting with someone. Okay. That is important, and that comes at a time and a place, but we start with people. What are their goals?
What are their values? What do they want to provide for their family? What are their priorities? And we take a deep dive into that. That's where we start, before we even start talking about investments. That's really getting foundational there. 100%. Yeah. And that [00:06:00] also, if you start there, it allows you to guide them to stay the course and to hit their goals in retirement, you know, college funding traveling, whatever it may be.
And part of that deep dive is once an advisor like Brian would gather all of the information and he and his team would put together the plan, we have Friday morning meetings where there is over 350 years of experience. Wow. We used to do it in a big room. Yeah. Now it's Zoom. Okay. Yeah. Post-COVID.
Bring them all around. We're all in different offices- Yeah. Absolutely ... and everything. Yes. And we put the plan up on what I call the board, but- Yeah ... on the screen, and we are picking it apart and putting it back together, all of us together. So it's not one single advisor perspective. That is so cool. Oh.
You're really bringing in folks- Yeah ... that could maybe see something a little differently- 100% ... and maybe question it or- And it's like a you know, a hospital, a teaching hospital. Right. And I know for myself when I became an advisor, that [00:07:00] elevated my knowledge so much quicker- Totally ... because I had all these people in the room, and I could ask the questions or come up with the right solution for the client.
Yeah. Some of the coolest planning techniques I've, I've done for clients have come from other advisors or Christy herself- Yeah. Yeah ... or Bob Fragasso even. He still comes. Yeah. I was gonna- He loves, loves- Bob's still showing ... Friday meetings. Yeah. So, yes. And, and, and so these Friday morning meetings- I love that
are, are, are really cool. It's something that, you know, I spent some time at some bigger banks, and it's completely different here at Fragasso- It's gotta be ... the way we operate and stuff. Yeah. That, that to me is just so cool. Yes. I love that, that's why I'd be like, wait a second, these folks are pretty unique here.
Yes, yes. I love the fact that not only do I have one smart mind here with, with Brian- Yes ... but wow, I got the whole team that might be looking at this and might see something that they might suggest that- Definitely. Yes ... would just up it. Yeah. And then everyone's always upping their own game just 'cause you're learning from each other- Definitely
at the same time too. Yeah, exactly. I love it. So how cool is that? Yeah, absolutely. And- Yes ... you guys were founded in 1972. 1972, yes. So you weren't born, man. Oh. So we're rocking, so I'm like, okay. I was two. And my dad [00:08:00] tells the story, this was the oil embargo you know, he, he went to school to be an English and history teacher.
Did he? Yes. Okay. At Duquesne University. So what's up with the Fragassos here- I know. ... starting one way- Yes. Uh-huh ... and then going the other way? Yes. Uh-huh. Yeah. Okay. There's a trend here. There's a trend. But you will see, he brought that into the business. Yeah. He built the business teaching. We used to get people to seminars at Pitt Community College- the libraries, for three weeks in a row, three hours- yeah, so nine hours total And that's how the business was built. Wow. You, teaching clients all of those things that you need to understand- Yes ... that will then help them stay the course when- Okay ... the market drops. But I think that just being able to tap into every person on the team. We have one book of business. So what that means is if Brian has a client and there's something that we need to discuss, but he needs to tap into someone else's area of expertise, they're coming [00:09:00] in and working as a team.
Yeah, 'cause it's, it's not like- It, there, there's no competition in any way. Exactly. Yes. It's like we are helping with your account. Yes, right. It's like, "No, this is our account." . That is so neat ... on that even more is we are employee-owned.
Which is what we're gonna talk about today. Oh, it leads right into. Yeah. It dovetails right into this, yes. So we have lived it, breathed it, and done- You actually know what it means. Exactly. Yes. Yep, yeah, so, now that I have this really unique understanding of what Fragasso does-
I'm like, "Wow, this is... You guys are definitely a Pittsburgh institution." Yes, we are. Yeah. And so many with- And we are going to stay that way. Which is why I'm so excited to have you guys here talking all about, equity, compensation- Right
for employees. Right. And then making sure you're building this value for when you go to sell your business. We've gotta start with the employee- ... compensation. You've written some really informative articles for us here at The Tech Council, where I'm like, "Wait a second, these are some great things."
We're gonna have links to those- Great ... in this, because- Wonderful ... I think people wanna give that a little bit of a read. Yes. You can, you can hear us talk about it. Yes. But when you read it, it sinks in sometimes- Yes ... in a different way. But there's some great fundamentals in there- ... that if you're just starting a business out, or maybe you're 10 years into it, you gotta be [00:10:00] thinking about it.
Right. Because I think they always say "How, how soon should I have started thinking about this?" It's like, "Two days ago." Yeah. Right. So I'm glad you guys are watching this right now, okay? So let's start off with some of the basics. Where, where should we- lift this lid off- Yeah ... when it comes to all things.
I think in general, equity compensation is, the goal is to really just kind of tie and attract good talent- ... to the business. Yeah. And, and it's- And that's no easy task in this day and age. It, it isn't. Yeah. Yes. And there are so many different ways to do that. Yeah. I would say that right now we used to see incentive stock options, non-qualified stock options a lot more from companies, e- especially the larger ones.
And I'll have Brian chime in. I think RSUs, restricted stock units, as well as employer stock purchase plans- ... are the most typical that we see. And then certainly we're seeing more ESOPs employee-owned. Yes. Yeah. Which is a different type of- [00:11:00] Okay. Yeah ... incentive- Incentive ... compensation to- For them, right.
Correct. Yes. Exactly. Yeah. Yeah. Well, I, I think one of the biggest things about this is when it comes to attracting talent is getting someone to know that they're a part-owner of that company, that they have the actual skin in the game- Yep ... I think is a great way to get someone- It is ... to be like, "Wow."
Yeah. Plus knowing that the harder I work - Yes ... the, the better chance of success. Yes. The higher the stock price- Yeah ... the more money I make. Yeah. It just- Yeah ... it works on many different levels. Yeah. Which is why I think it, obviously it's, it's so common within tech companies- Yeah ... and startups- Right
because in many ways also they will use that because they can't always pay that exact competitive salary for a developer. Right. So they're like- Right ... "We're gonna up it on these RSUs." Uh-huh. I like saying RSUs. Yes. Yeah. It makes me sound like I know what I'm talking about. Yeah. Yeah. It's all about the RSUs or something like that.
Yeah. Great vanity plate for somebody at Fragasso. That is a good- Yeah. That is a good one. That is a good one. I'll have to put that, put in for that. Yeah. Yes. Yeah. Yeah, I think, I think loyalty, it, it's, it's maybe not what it used to, to be for employees- Exactly ... for their employers anymore. And so I think from an employer [00:12:00] standpoint, if you're having a hard time obtaining, you know, good talent, there's a good chance your competitors are also having the same issue.
It's, it's hard to get good people, right? And so these RSUs a- an ESOP strategy, anything where you can get some equity compensation for your employees, I think is, it, it maybe give yourself a leg up- ... against your competitors. 100%. So let's, how do you actually set this up? I mean, is there a point where it's too late to set it up if you've been down the road too far?
Do you have to do this when you first found the company? How does that typically work? Yeah. It depends on each type of equity compensation. Okay. Yeah. If you will- Let's start with RSUs. Yes. Yes, yes. Just 'cause it's got I get to say RSU one more time. Yes.
I don't know if it it, it probably doesn't start right away- Okay ... if you will. Good. You know, I think a company has to build a bit before- Get to a certain, get a certain base ... you chime in and all, yeah. Yeah. Yeah to be able to promise, if you will Right ... what you're gonna give that employee- Okay
down the road. Yeah. Yeah, and again, it is typically, you know, for a [00:13:00] four-year vesting period. I mean, it, it may be different, but usually it's four years. Usually, okay, it's employees, it's typically the time frame. Yes. Gotcha. It may be 25, 25, 25, 25. Yeah. So, you know, for example, $100,000 is given in RSUs to an employee vests over four years, so every year 25% vests.
You are not buying that stock, unlike when you're looking at non-qualified stock options- Exactly ... you really are going to have to purchase them. And you don't pay taxes on that until they vest, so that way- Correct ... you get that big thing. Exactly. And that's the key part. Exactly. Right. Yep. Yeah. So if $100,000 RSUs go to, goes up 20% and it's $120,000, first year $30,000 vests, that will be ordinary income tax.
Okay. That's where people really need to understand that and do the planning, financial planning and tax planning, to try to minimize that as much as possible. Exactly, right. Yes, yes, And that's not something you can do [00:14:00] yourself. I'm sorry. Yeah, yeah. Unless you used to be an accountant or something like that.
Correct, correct, yes. Yeah, yeah. So that's why I'm always like, you need the professionals- Yes. ... because they just know things you don't know. This is their livelihood, so you can really show your client how to structure this- Right, right ... so that way you get the most out of it. And I think part of that also is the guidance when, when they vest, your choice is do you sell now or do you keep it?
And most people who are getting RSUs, they're gonna continue to get them. So a risk- ... there is over-concentration in one company. Right. A lot of employees are very tied to it and very passionate about what they're doing. Yes. But guidance on how to make sure you're not overly concentrated- Okay
because once it's vested, you own it. Right. And so where that stock goes- Okay. Yeah ... that is what you own. Right. So you don't want to own too much of any one stock. Exactly. Yeah. Yeah. So Brian, how do you then work with a client to make sure that they get , the right balances? Yeah, and I, I think to Kristi's point, I [00:15:00] think when you talk about concentration risk, you know, there, there are certain kind of percentages, you know, kind of a standard rule of thumb, if you will, where- Okay
you, you typically don't want to have more than, any more than 10% of your overall net worth in one particular company- That makes sense ... or one particular stock. Then you become, your portfolio becomes very concentrated on the performance of that one stock. But I think also, just to kind of go back a a bit, when you talk about concentration and you're getting these restricted stock units, which are great, you have equity in the company, you have that value from the stock, don't forget, your income is also tied to that company as well.
So not only do you have the risk of all of this stock, but your income, your- Year to year what you're living off of is also tied to that particular company. So that, I think, even magnifies the risk even more.
And I'll add one more piece to that. A lot of times those companies may also have an employee stock purchase plan, where you're purchasing at a discount, and of course they're buying into that as well. Interesting. Right. Well, tell me more [00:16:00] about that. That's interesting. Right. So this, this is something outside of- Yeah
the RSU- Right ... that allows you to buy additional stock- Right, so it's not given ... but at a discounted price. It's given, but you can actually buy into it. And it is typically 15%. Yeah. Gotcha. Yep, out of pocket. Oh, okay. Yes. Yeah, so you really need to look at that whole picture to determine, are you overly concentrated versus everything else that you have there?
Okay. Sometimes people are also buying it in their 401. So, ... that's why the bigger picture, overall picture, is so important. Interesting. And I just look at this tied together, and I'm thinking about me as, as owning a company, knowing I have this set up, I feel like I have one up on the competition when I'm looking to hire somebody and I can say, "Here's some other things I can bring to the table- Right
besides your salary- Yes ... you know, besides our benefits and the other thing, but we have this as well, too. That's a competitive advantage. And I feel like it's also just strengthening my business, because I know I got people that they got their skin in the game. .
And they're just gonna really take that extra mile to really- Yeah ... make the company successful. Yeah. Yeah. And that's- And, and also promote the idea that people like to flip out of jobs- Yeah ... really fast. [00:17:00] Yes. Yeah. Yeah. This helps keep someone there- Yeah ... because once again, you're tied to that company a little bit more.
So not only does it attract, but it also helps retain- Yeah ... your talent. Exactly. And I think, you know, anything you can do to kinda, you know, retain those key employees is gonna just be beneficial for you as the owner in the long run. And we've seen that with our firm, and again, switching to the ESOP for a moment.
Yeah. Again, those shares are given, . You know, you're, you're not buying them as an employee. Right. But the tenure in our company people stick around. I like to think that it's also our culture in general. Right. But I think the ESOP speaks to that culture. Yeah. We all think like owners, not employees- That's what it's all about
because we are owners. It just changes your mindset- .. completely- Right ... when you're coming to work every day. Can we jump more into the whole ESOP angle? 'Cause I think this also kind of plays into the exit angle as well too- Right. Right, right, right ... 'cause I know many times they'll set an ESOP up as a way of kind of getting out of the business- Right
and then setting the structure up differently to allow the business to continue on then under employee ownership. Yeah. If you don't mind, maybe I'll talk a little bit about- ... what we went through at Fragasso. That's, so [00:18:00] y- And then I'm gonna let Brian- Perfect ... the expert take it from there.
How cool is that? Yeah. So I think first and foremost, and you'll hear this from Brian- This wasn't just one day Bob decided- ... he's going to- He tries- ... transfer shares. Feel like maybe transfer- Yes ... some shares to everybody. Uh-huh. Yeah. Yeah. So, no matter what, you need to make sure that you are going to have a person or a team who can continue to lead the company- Right
in the way that you have and motivate employees. So we have what's called an executive team where there are five of us on the team- ... from different areas of expertise within the firm. And so we are leading as a team to help grow and nurture each of our employees as well as to make sure- Okay
100% our focus is on what is best for the prospect and the client. I mean, that's really what drives us. Yeah, 100%. But building that executive team didn't happen [00:19:00] overnight. Definitely. Yeah, that's something- You know, we spent many years working with Bob amongst the executive team to make sure we understood everything that needed to happen and why was this...
Maybe I knew a little bit more than some of the other people on the team, but why was this company built what really matters most- ... and how do we make sure we continue that? That makes total sense. Yeah, yeah. Yeah. So this was over a 10-year period Really? Yes. Wow. Yep. Okay. That, that goes to show you just how- Absolutely
how core that is- Yes, yes ... when you're building something like that- Right ... to really make sure that is part of the roots. . So the process of actually setting then an ESOP up, I mean, obviously there's all the paperwork that has to go with that. What does that mean then as far as, like, when you roll it out, then how do you offer shares- Yeah
so that your employees can then become part owners of the company? Yeah. Did you wanna take that? Yeah. Yeah. So I think really when you look at an ESOP, first off, I, I do think an ESOP is great. I mean, coming into a company that, that is an ESOP, I mean, it, [00:20:00] it really does just enhance that culture- I feel like even more. We're seeing it a lot more. Brian's seeing a lot with companies. Yeah. Yeah. ESOPs are becoming more and more prevalent, but I will caution I don't, I don't know that every bu- ... business can do an ESOP. Well, and that's why- There are, there- ... you need to have someone- Yes, yes
like a Fragasso in order to really talk that through and what it means- ... 'cause it doesn't make sense for everybody. Right. I, I think the biggest thing, if you're going down the ESOP route, and maybe we could talk a little bit about, you know, broader strategies- ... as well here, too. But if you're going down the ESOP route, I think one of the key, one of the key things you absolutely need to have is a strong management team that Kristi talked about.
Okay. That executive team that can help continue to run the company after your owner is then gone. Because if that, if you don't have that key management team and that owner does the ESOP, well, that ESOP could crumble very, very quickly. Yeah, it's only as good as really the person that is leading that company, that has all the knowledge and - Yep, yep
has all the contacts and the business associates- Yeah ... and so forth. Exactly. And then I think the other thing, too, from an owner standpoint- You can sell everything to an ESOP in a [00:21:00] one-stop shop where you sell 100% of the company to the ESOP, but it doesn't have to be done that way. Okay. You can also do it, if you're maybe not quite ready to walk away completely from the business yet, you can do it in waves.
You can sell maybe 30% to the ESOP at first. So you can actually stage it, okay. And that's what we did too. And so that's- Yeah, interesting. Yeah, and so, you know, we did it in a couple of different waves, and now our ESOP, we are a majority-owned ESOP now at this point in time. But it was done in a couple of different tranches and so that Bob could kind of, you know, maybe ease his way out of- out of the business. Okay. Well, and I think financially too, I mean- Yeah ... you you know, typically you're ending up getting a loan, if you will- ... to be able to buy the shares, Right ... from the owner, the company is. And so paying that back while shares are released- Released, yes ... if you will. Yeah.
And then, you know, ours is after two years, employees are eligible for it to, for us to start dispersing them to them. Interesting. So, yeah. Wow, see, this is ... I love learning about this stuff. I feel like I'm becoming like a little advisor myself. And it's only one [00:22:00] of the many routes that are available- Right
to owners out there. Right. So I think, you know, this whole concept of exit planning- Yeah, let's jump into the other- It- ... other aspects here as to how, you know, I've reached this term where I'm like, "Wait a second, I've built this company. I've got 30 employees." Yeah. I don't know, I've got 15 million in sales.
Yeah. I know I can't do this forever. I don't wanna do this forever, but I wanna make sure this business keeps, keeps cooking. Yeah, and I think that's the main thing. And so I think, you know, before we kinda maybe dive into some of the options- Yeah ... I think it's important to understand essentially, you know, what is exit planning?
And, and in my mind- Okay ... I think exit planning really, it centers around aligning three different areas for, for an owner. The first one is their personal goals. The second one is their financial goals, and those are different things. And then their business goals are the third one. Okay. And in the exit planning world, we kinda refer to this as the three legs of the stool.
Yeah. So have you ever gone to a restaurant or cafe, you sat down on the stool, and you get that one wobbly stool? Somehow it- You get, you get the packets of sugar and the stool doesn't work. Somehow it happens to me all the time. Yeah. You're reaching for napkins, and you get- Yeah ... right? So the same [00:23:00] thing applies for a business owner.
I- if one of those legs are not balanced or not aligned, you, that stool becomes pretty wobbly. Unstable. Right? Exactly, right. And so that typically does not lead to, you know, success at the end of the day when the owner tries to exit their business. So I think whether you're exiting in 2 years or 20 years, understanding the, maybe not all the intricacies of exit planning, but the concepts and the framework- The con- yes, yeah
and why this is so important, understanding that now versus later is just, is key. And so- It goes back to what I said earlier. Y- there's not, it, the best time to have started thinking about your business- Right Yes ... is always two days prior. Yes. Yep. Time is the one thing we can never get back. Because of that, is exactly, and that's why, I'm just go back, I just keep saying it like, 'cause I've seen this so many times.
I just wanna shake people to like, "Look, this is not gonna end well for you." You need to have someone to guide you. Yeah. Yeah. So at least once a year you're meeting and just saying, "Where am I? What am I doing?" Yeah. And, 'cause you're- And that's the hardest part, and- Right ... you know, business owners are business owners, and to get them to step away- [00:24:00] Really tough
they're in the day-to-day, and, you know, but that is our job to make them think about it. Exactly, right. And, and so Chris Snyder, who's the CEO of the Exit Planning Institute, he has a really good quote, and Exit Planning Institute is, is one of the, the biggest organizations, ... that's involved in exit planning.
And so his quote is, "Exit planning is simply great business strategy." And if you think about that, that's kind of the mindset shift that owners need to have. It, exit planning is not something that's going to happen or should happen a month before you exit or six months before you exit or even 12 months before you exit.
It's just part of your overall plan as you roll forward. It- Yeah ... ex- it's a present day strategy- ... that not only allows you to build value in your company, but also it personally prepares you for whatever comes next. Exactly. Whether that's an external exit, maybe you're selling to a strategic buyer or a private equity firm- which pretty- hot right now Pretty common, absolutely. Yeah. Yeah. Mm-hmm Um, or m- it's an internal sale to maybe family members, a management team, or like Bob did for us, an, an ESOP- Exactly ... [00:25:00] which, you, you know, was great. So I feel like you needed to have a new mindset, and that mindset has, is another column on your spreadsheet that basically says- Yeah
you know, how am I gonna get out of this? Yes. I like the way you think about that. Yeah. Yeah. Yeah. Yeah. So that way then it's always just part of your plan. Yeah. It's, 'cause I think everyone's always looking quarter to quarter- ... or year to year. Right. And that's what their focus is, because you gotta get people paid, you gotta get customers happy, of course.
But you then are forgetting something very important, that there's gonna be a point in your life, you said it's been 10 years for you now. Yeah. You're like, "10 years goes by quick," you know? Yes. And so the idea is that if you keep that going, you're not coming in last minute to you guys trying to figure out, "How do I take care of this?"
Yeah. Yeah. You're gonna get a much better outcome if someone's been handling this- Yeah ... all the way along. Yeah. Yeah. A- and the problem, the problem, Jonathan, is, is business owners, i- the statistics, you're already behind the eight ball. The statistics are- Yeah ... not good for selling your business.
Exactly. The, the Exit Planning Institute does a lot of research and studies. And one of their studies show that only 20 or 30%, 20 to 30% of businesses that go to market actually sell. [00:26:00] Really? It's that low. It's that low. Wow. And when you look at family transitions, only 40% successfully transition to the second generation.
Oh, I believe that. And if you're talking about third generation- Yeah, it's- ... it's, it's somewhere, it's maybe fif- 13, 15- ... somewhere around there. Yeah. And so I think it's, you know, on top of that, you, we talked about concentration risk. Well, for a business owner- Yeah ... typically the business is their largest asset, and it, it, it's about 80% of the business owner's net worth- Yep
is tied up in their business. So if you have 80% of your net worth tied up in something that only sells 20 to 30% of the time- Mm ... not a great- Yeah. You're already starting behind the eight ball. That's a gap. And many times- Right? That's this gap that you have- Yeah, yeah ... where you gotta really start thinking about what your assets really are, right?
Right. Yeah. And so just- Huh ... you know, a, a colleague who helps run our exit planning team, Dan Tatomer at the firm, he, he has this quote, he s- "Hope is not a strategy." And I, I feel like if you're just, you know, if you're not doing any planning- ... and you just hope that when you're ready to transition, there's value in this company- Yes
and you're in that 20 to 30%- Right ... I mean, that's, that's a bold strategy, right? E- exactly right. So- Correct [00:27:00] me if I'm wrong too, I think that one issue they come across too is, again, when it's your business, you can think the value is higher than what it really is. Well, that's something, of course. It is.
I mean, everyone thinks their kids are the smartest, right? Yeah. I mean, this is no different. Yeah, it's like- Yeah ... and, and it, I mean, to There could be some hard realizations for folks- Yeah ... where they're thinking they have a valuation, but you're like, "Wait a second." Yeah. Like, when you factor in all these things you haven't been thinking about, it's not as great as you think it is.
Yeah. And, and we start- Yeah ... we start by telling our clients, you know, "If you don't know where you're going, then how do you know what road to take to get there?" Exactly. Like I- I'm like, yeah ... just took a trip up to Erie with the family this, this past week, and I didn't just get in the car and start driving north.
Although I guess I would've, I would've maybe ran into it- Eventually ... eventually. But you know, you plot it out, you use different sites you want to see, right? You'll plot that out on your trip. Well, the, your business should be no different. Yeah. There should be certain checkpoints along the way that you're hitting.
It's kind of crazy when you say that, 'cause of course that's what it is, but people just don't do that. It doesn't happen. Right? Yeah. I mean, and people do that, whether they have a business or it's their own [00:28:00] personal finances. Yes. Yeah. 'Cause we're all thinking there's always tomorrow- Yep ... and I'm never gonna get older.
Yep. And time's gonna be where it always is, but it doesn't. It marches on. Yeah, yeah. Wow. Okay, yeah. Yeah. I mean, there's so much to think about when you're running a business, but I think the key thing you gotta be thinking about is you add that column Y- yeah. Sure. To your spreadsheet- Yes ... about "I'm gonna retire one day and not own this business, and what does that mean, and how do I make the most of it, not just for myself, but also for all the people that have been working for me- Right
for a bunch of years?" Right, right. Right. Knowing that like, when I'm gone they just don't lose their jobs- Yeah ... because the, the business- ... can't succeed. So you're, think beyond yourself. Think about all your awesome employees that have been helping you out. Yeah. 100%, yeah. There's a weight there.
There's a weight- Yeah ... on a business owner from that standpoint. Yeah. Yeah. And so I think really starting with, with two, there's two gaps that, that I call them. The wealth gap and the value gap. Gotcha. And I think these, these two gaps are, in my opinion, one of the most crucial things an owner needs to understand, and understand as early as possible.
And, and the wealth gap really is, it's the difference between your wealth pool, so say I'm your financial [00:29:00] advisor and we figured out, okay, Jonathan, you need $10 million to live the lifestyle that you want to live post-exit for however long that is for you. Well, then we look at your current balance sheet, excluding the business, say that's your retirement accounts, your, you know, your cash savings- Yeah
your investments. So let's say we did some calculations, you need $10 million. Your personal balance sheet's four. Million. Well, you have a $6 million- There's my- ... wealth gap. Where do you think most business owners think that that $6 million is gonna come from? They think it's gonna come from their business.
It's gonna come from business. And if you, and once again, you have the smartest kids. So your kids might only be $3 million smart, if you know what I mean, so. That's a perfect, that's exactly right. And so I think, you know, quantifying the wealth gap early allows you to almost kind of, reverse engineer how much you need that business to be worth- Yep
down the road- ... when you're, when you're ready to exit. Yeah. So it's crucial. And then the second gap is the value gap, and this really deals with the actual value of your business today, and it compares that to y- your best in class [00:30:00] peers in the, in the industry. And so s- again, we can offer an opinion of value for your company, so we do some work for you.
W- we determine, you know, "Jonathan, your business, ballpark, is $5 million, but we know that a best in class business in your industry is $8 million. Well, you have a $3 million value gap there." And you can help them figure out how to make that gap up. And that's really- Yeah. ... Where, you know, I think most owners are surprised that even though their revenue is very similar, you know, to, to this best in class company, their cash flow is really good, you have a strong company, why is there a $3 million difference between- Exactly
my company- Right ... and company XYZ? And so there are a really, in my opinion, when you look at business valuation- It's all about risk. What is the risk to that potential buyer of your business? And so when you talk about risk, there are a lot of different ways that you can de-risk the business over time, but I think that's the biggest- I never, yeah, I never thought about that- as a, in terms of risk. [00:31:00] Yeah. E- exactly. That- Because if you had something where it's a big risk could be, like, well, the CEO, the owner that has, like, all the business contacts. Like, all their business comes in- Yeah ... because- Yep ... he does business with his best friends- Yep ... and that's- Yeah ... just how it's always worked.
And we're like, "Wait a second. No one else knows that person to sell them again-" ... when you're- Right Yeah ... when you're gone. Yeah. Okay, that's a big risk, right? Yep. So I'll, I'll touch on actually- Okay ... that a sec. That's a really good segue into- Yeah ... kind of what builds value, but yeah, you're absolutely right.
Okay. Owner dependency is another one. If the business is just- ... it, you know, if you can't, if that owner cannot take that three-month vacation and come back- Yep ... and the business still be standing- Risk ... there's, there's a problem. Risk. Right. Yeah. You, that's... And, and the more risky your business is to that outside buyer, the lower the valuation that- Exactly
you're gonna have for your bu- Yeah. You're, you're not paying a premium- Yep ... something that you're not sure of the return on your investment. Yeah. Yeah. I, I think the, the math behind all this is pretty simple, but I just think it's with business owners, they just don't have enough time in the day- To do it.
Yeah. I know. To let, to really think about this- They're busy running their business. Yes. Yes. Yeah ... until it's too late, so, and I think that's where we can come in and maybe help them out. Absolutely. Well, I, I come to the, my [00:32:00] conclusion here of you guys are almost like, it's like you're the fifth Beatle of these places.
You're like George Martin or something like that. Just making sure that you know- Yes ... you guys are gonna make it to the show. You're gonna sound good. Yeah. You know, we're gonna do this for your next album, so, you know. I like the analogy. Yeah. Yes. Uh-huh. I'm just thinking this is kinda what you guys do.
I, I'll, I'll take that analogy. Yeah. Yeah, yeah. I like it, man. That's a good one. Yeah. Keep these companies rocking, man. Simple as that. Yeah. So. Absolutely. You know? Yeah. That's amazing to me. So, I don't know, where else do we need to keep digging on, on exits here? So I think with value 'cause that's a, that's another one.
Yeah. You know, a- again, I know I've ref- referenced them a, a bit here, but the Exit Planning Institute about 80% of the value of your business comes from something called these four intangible capitals. And so when we talk about value, most owners think it's just the financials, right? But there's actually two, there's a lot of pieces to valuation, but there's two main ones.
Okay. The quantitative piece, and then there's this qualitative piece, and these four intangible capitals lie in this qualitative piece. Yes. So the four capitals, the first one's human [00:33:00] capital, so this is your employees. Yeah. Knowing you got experienced employees- ... and they show up for work, all that good stuff.
Yep. Right. Yeah. How, how strong is your management team? Are your e- employees able to innovate, adapt, create without having to come to the business owner for every little thing? Yep. Right? So how strong is your bench, essentially? The second one is customer capital, so you kinda hit on this a little bit ago.
Yep. Yeah. Do you have a diverse customer base, or are, you know, is most of your revenue coming from one or two customers, and what happens if, you know, they decide not to do business with you anymore? What happens if you forget to send them a Christmas card? Right. So, but I think also too with customer capital, you mentioned it's, it's the relationship of the customers with the owner, or is it with the business as a whole?
Because again, risk, right? The third one is structural capital, so these are your systems, your processes, your technology. This is one where, you know, are they well documented, or do they all lie in the owner's- ... head, right? And the owner just, "Oh, I just, I've been doing it that way for 20 years."
That's how we... You know. Exactly. Are they scalable to, for an outside [00:34:00] buyer to come in and try to build value in the business? I think that's a big one as well. And then the fourth capital is, is called social capital, and I really think social capital is kind of a blend of the, the first three. But- Yeah, I would say so.
It kinda creates this whole je ne sais quoi of your- Yeah. ... business, right? It's your brand. It's your culture. It, it's how you're perceived in the community, and, and that's stuff that might not... It, it won't show up on your financial statements- ... but it's absolutely a big part of- Yeah ... value for your business.
And so these are things that you can help walk a client through then as you are looking at these gaps. You can then help them- Yeah ... address these things? Yeah. Yes, yeah. See, that's what I'm talking about. Yeah, yeah. Yeah. Wow. Good Lord, man. This is so much that we, I have learned today, which means if you're watching this right now, if you haven't taken notes-
well, you got the articles to read. We got them linked in the thing, so there's really no worries. But seriously, I just love this 'cause this is just so actionable. I just feel like it just, as a business owner, this really makes you really rethink that, "I haven't been doing this. Why would I not?" Yes, you know? I, I just- And it takes time. Yeah. I mean, it, it, no matter what strategy you decide is [00:35:00] the right fit for you- I mean, you're bringing the points. A- anything important that we haven't covered that you feel like our viewers should be thinking about or- I, I- ... when they are? ... I just think an owner, y- y- you need a team in place. Okay. And hopefully that team is led by a certified exit planning advisor.
, As I just said, it all takes time to, to put into place.
And as we all know, that's the one thing that we can't get back. So I think that ultimately at the end of the day, I, I think if there's a call to action, I think owners need to discover what you have first and foremost. What is your business really worth? Not what you think it's worth- ... but what it's truly worth maybe to that outside buyer.
Is this when you bring Christi in to give him the, the, ... the psychological edge? If it's good news, I'll, if it's good news, I'll tell him. If it's bad news, we'll talk about it later. Yeah, they walk her away and why is Christi at the table? Yeah, yeah.
And then, and really, you know, build your team.
And so, you know, it's a, it's a, you know, a cliche analogy, but we're the q- we're, you know, the exit planning advisor's the quarterback of the, of the team, and we'll- Love it ... kind of help get everything aligned so that the- Make sure it stays on track. Yeah, [00:36:00] so if the owner- Yeah, 'cause it really- Yeah ... yeah.
Stay on track. And every owner's gonna have different financial needs. Every owner's gonna have different family dynamics, and every owner's gonna have a different long-term goal or strategy for themselves and their business. So it's just really important that you have somebody coordinating that for you so that you can work in and on your business while your team kind of helps with the rest.
Brian, you did a fantastic job summing this up for me. Thank you. Because like I'm keeping notes in my head. I'm like, there's so much here, but I think you really put a bow on this for us perfectly. And once again, I have links to a course where people can find you guys, read some of the articles- Yeah ... and just realize that I think I need someone to help me out, check you guys out.
Yeah. Give us a call. Yeah. We're happy to help. I think it's amazing stuff. Like I said, I've seen so many companies as they're building, I'm like, they can- you better be talking to somebody- Yes. Yes ... because I see good things there. Yeah. So make sure you've got that fifth Beatle on your side.
Yeah. Yes. All of that. I, I love it. Yeah. Thank you guys for hanging out with me. Thank you so much for having us. Thank you for having us. Yes. Christy Robinette, Brian Raft. Come on, [00:37:00] man. Thank you very much. Guys. I appreciate your time. Thank you. The best, man. Thank you. So much fun. Yeah. Like I feel like I had a little mini masterclass today- Good.
Good ... on financial planning for a, for a business- Yeah ... moving forward. And once again, thank you for hanging out with me today. I know you learned a bunch. If you didn't, I don't know what to tell you. But once again, hanging out with the Huntington Bank Studios, they make these conversations possible. And once again, I'm Jonathan Kersting with the Pittsburgh Tech Council, and I cannot wait to see you on the next one