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Welcome to Talk Tech with Rob Scott.
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Welcome to Talk Tech.
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I'm your host, Rob Scott, and today we're visiting with my friend Nick Bartolo.
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Nick, welcome to the show.
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Hey Rob, good to see you.
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Good to see you.
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I really am excited to have you on today.
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You and I have been talking about a lot of interesting stuff.
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And just like I do with other guests that I invite to the show, if I meet somebody that I think is cool and interesting and funny, then I want to invite them to be on my show and you definitely check all three boxes.
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Oh, so you're setting the precedence that I need some funny jokes now.
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So pressures on, challenge accepted.
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All right.
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I'm sure, I'm sure that that won't be a problem for you because I think it comes naturally.
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But for those who don't know you, Nick, why don't you introduce the audience to uh who you are and what you do?
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Well, you know, again, thanks, Rob, for having me on.
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Um, Nick Bartolo.
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So what I do is I founded and run a wealth management firm called Essential Partners.
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Okay.
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So in Essential Partners, what I do is I specialize in working with business owners who are likely to have an exit or sell their business at some point in the future.
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All right.
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So that's that's what I'm up to now.
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I mean, I could I could take you back to birth, Rob, but I don't think we all want to go back that far.
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But I kind of started this journey in working with business owners first as a CPA.
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I kind of came from a very technical background, did accounting, got fascinated in investments during the dot-com bubble.
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All right.
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I call it, I call it the OG Tech bubble.
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I mean, we may have another bubble going on right now.
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Time will tell.
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But I got fascinated with investing during that time.
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And then I realized you could make a career out of that.
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So for 17 years after getting my MBA, I worked on Wall Street.
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And it wasn't in wealth management, it wasn't doing asset allocation.
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It was actually understanding and analyzing businesses, traveling around the world, meeting with CEOs and CFOs of big Fortune 500 companies, and actually making decisions on whether or not we should invest in those stocks, sometimes bonds, for large institutions like pensions, endowments.
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So we were managing money for those types of constituents.
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Okay.
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After doing that for you know 17, 18 years, I wanted to take that and you know kind of be a greedy capitalist, add value to my family, but more so like add value to potential families, where I took this institutional knowledge and then started to manage money for families and business owners.
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So that's what I've been up to over the last lump number of years.
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And and and and that's the context in which I came to know you.
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One of my mentors is a founder of a very successful B2B SaaS company, and and uh you're his wealth manager, and he told me amazing things about you.
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And is so often, you know, this this world works is you know, you you know, it's what circles you run in are the people that you meet.
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And and what I understand about you, Nick, that makes your services different than maybe other wealth management services is you really uh have the expertise to help founders prepare for an exit.
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Uh can you go into that a little bit more?
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I think a lot of people think that they're gonna just build their business, run their business, and one day they're gonna sell it and it's all gonna happen magically, but in reality it's not quite that simple.
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Uh, talk me through how you help founders uh prepare for a potential exit.
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Yeah.
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It's a good point, Rob, because oftentimes what you see is that money is so emotional.
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And when you're a business owner and your whole identity and your cash flow and everything that surrounds your life, your social life is all wrapped in your business.
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Sometimes that decision to sell actually becomes overly emotional.
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So you're having a bad couple quarters, you're dealing with some folks on your team that where you're having to micromanage them.
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You know, I had a business owner recently tell me that they just sick of uh babysitting adults, okay?
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And they're ready to just like take this emotional purge and sell their business, right?
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Which is absolutely the wrong approach.
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So what we try to do, and I think it's like very different than let's say a financial advisor.
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I think people have a lot of can misconceptions or they have accurate uh perceptions of financial advisors in that they take your money, they charge a fee, and they just like put it in a cookie-cutter portfolio.
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All right.
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We really pride ourselves in getting involved in planning well before the sale happens.
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And that's on multiple dimensions.
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So the first thing is that a lot of businesses, they're just they don't know what to do in order to actually prepare the actual business to be sold, right?
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So that's a critical first step.
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Their books aren't in order, right?
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They don't have systems and procedures that are documented.
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They may be the driving force, manager, doer in the business, which doesn't necessarily set it up well, to be sold, all right?
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Those are just like some of the operational aspects.
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But then what we do and where we get involved is actually thinking about quantitatively and processing that decision on if you should be selling your business in the first place.
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What happens if you could potentially sell that business two, three, four, five years down the road?
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And is that money that you're going to have on an after-tax basis enough to actually fund your lifestyle once you sell?
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So you can live your live your life, step away from the business, do the things you've always wanted to do where you didn't have time, where you're in the business, you know, take that trip, pay for your kids' college, whatever the case may be, right?
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So a lot of people don't necessarily connect the dots from that pre-sale decision to sell, how much money they're gonna have after tax and what that's going to mean for their life after the sale.
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Okay, so because the way I look at it is like, how can you possibly know when to sell your business if you don't know how that money is going to be invested and whether or not it can actually support your lifestyle?
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Okay.
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And so I think there is a big planning disconnect there.
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Not to mention, and we can get into it whenever, but not to mention all of the tax strategies that you can.
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Well, let's pause right there.
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Let's pause right there because I've heard a lot of that messaging before, what you just talked about.
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We help people get ready, we help them prepare their business, uh, we help them plan.
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That's not a unique differentiator from what I've seen in the marketplace.
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But one of the things that I think makes what you do very unique is your tax expertise and the tax strategies that you've implemented for your customers.
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And I'd like to jump into your whole reasoning behind focusing so much on tax strategy and the importance of the qualified business stock and strategies that you've developed around that, to where founders today, if they plan correctly and have the right structures, can really significantly reduce their tax exposure, which gives them much more money to finance their lifestyle such that when they do the calculation that you're talking about, the tax savings really put a lot more money in the net take-home, so to speak.
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So, talk about your background with developing these tax strategies.
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What are you seeing that's working the best?
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And what is the state of the art when it comes to tax strategy for founders who are exiting?
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Okay, yeah.
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So that's that's a good point.
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And so there's a few, there's multiple dimensions of this, as you know, as you and I have talked about.
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And it can happen five years before a sale, and if nothing has happened, let's say before a sale, there's still you know strategies that can be implemented that could save 20 to 30 percent of a tax bill after the sale, depending on a multitude of factors, including the timing of the sale.
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So let's just kind of unpack some of those one by one, right?
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So if you have your business set up, you have a longer-term time horizon on when you want to sell.
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Say it's three years, say it's five years, okay?
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And let's say you're sitting there, and a lot of small businesses, right?
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They're they're an S-corp, right?
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They may be, you know, operating as an S-corp because of the tax advantages there.
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And so they can't necessarily, they don't have the entity set up as a C Corp in order to take advantage of Section 1202, which is the qualified small business stock, as you alluded to, all right.
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So if those businesses are an S Corp and they want to take advantage of QSBS, they can actually convert to a C Corp, right?
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There's a special process.
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You can't just go to your local attorney and convert to a C Corp.
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There's a special process in order to do that, and there's attorneys that specialize in that type of transaction or that type of transition to that entity to make sure that it's done properly, all right?
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But let's say you do that.
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Let's say your business is valued at$10 million at the time that you go to convert from an S-corp to a C Corp.
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It is true that during that five-year transition period, there are going to be some tax disadvantages of being a C Corp because the C Corp is an actual taxpayer, 21% for federal purposes, and then any state taxes, depending on the jurisdiction.
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So you are paying more tax.
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So if you take so then if you take distributions from the C Corp, you pay an additional dividend tax on that for your personal income tax.
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Okay.
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The dreaded double corporate tax, which is why everyone uses the S-corp.
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Yeah, exactly.
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So yeah, we all we all love double tax.
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That seems fair, right?
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And so anyway, I die I digress.
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We don't we don't want to talk about estate taxes and all kinds of stuff now.
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But so let's say you execute this conversion and your your company at that time is valued at$10 million.
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Okay.
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If you wait then five years and you execute a stock sale of your C Corp, you can get a 10x tax break on the value of your company at conversion.
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Okay.
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So in this example, it's$10 million at conversion.
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You now have$90 million that you can get tax free, right?
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When that business is sold, if it's a stock sale.
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And I say$90 million because that initial$10 million that you created in value at the conversion, that's still subjects subject to capital gains tax.
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But the incremental you can get up to additional$90 million, okay, if you wait five years.
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If you wait three years, you can still benefit from this conversion, but it's 50% of the gain.
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Okay.
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So 50% of that incremental gain could be tax free, right?
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So a tremendous benefit just by knowing that this exists and working with the types of attorneys that have successfully executed this type of reorganization historically.
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Okay.
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And what you're talking about is commonly referred to as an F-type re-org, correct?
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Correct.
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Yes.
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And and the effect of it is to reorganize an LLC or an S-corp that's taxed as a partnership into a C Corp structure that can then over time qualify for the qualified small business tax exemption that you just described.
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Is that correct?
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That's exactly right.
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And with the one big beautiful bill, there were some modest changes to it.
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One change being that prior to the conversion, you have to be less than a$75 million value of your business.
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Okay, so if you're above$75 million, you can't justify anything below that, then this isn't available to you, this QSBS treatment.
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There's a lot of technicalities, you know, related to this.
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That's why you know I advocate specialists in this realm, but it is a substantial benefit.
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The other risk I would point out is that a lot of acquirers, I would say nearly all acquirers, they prefer to do an asset purchase, right, as opposed to a stock purchase.
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And that's because if they do an asset purchase, they can effectively amortize or depreciate that value that they're acquiring, where a stock purchase you can't.
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Also, a stock purchase, and you know this, speaking of the choir here, you're assuming the full liabilities of that corporation, whereas an asset purchase you're not.
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Okay, so there are there are a couple wrinkles, and some would argue, and there is credibility to this, that a stock purchase may warrant a modestly lower valuation, right?
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I don't think it's low enough to you know have the full tax burden, right?
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We're not talking about that, but whether it's 10%, whether it's 15%, modestly lower valuation, you could see that in a negotiation.
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The other thing that we've seen, Nick, is the use of reverse triangular mergers.
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So imagine a structure where a NUCO is the acquirer of the stock, and then the purchaser merges with that company or acquires the assets from that company.
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Uh, and that way you could theoretically create a structure which gives you the best of both worlds, including the asset purchase concept that favors the buyer and the stock sale strategy that favors the seller.
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So there are some complicated structures.
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I'm thinking back to my days when my client Xerox uh purchased ACS and I was involved in a litigation involving their reverse triangular merger, and I learned more about that stuff than I thought I would ever need to know.
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Um but but the other thing that's interesting, Nick, is that this uh qualified small business stock for people who have substantial businesses who might might exceed the protection of a single entity, uh you've developed some stacking strategies that could extend the the benefit of the qualified small business stock uh tax strategy even to many multiples of what a single entity could achieve.
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That's right, that's right.
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And so, and again, like I always like to point out like the personalization aspect of it, right?
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Because depending on someone's heirs, like whether or not they have kids, whether or not they're married, you know, whether or not they have causes that are near and dear to their heart that they're already donating to, that can have a big influence on what strategy is going to be most optimal for them.
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Like none of this is like totally optimized, but that personal aspect is huge.
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However, so let's say you have a scenario.
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So we talked about this conversion strategy.
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Let's say alternatively, you have a scenario where a company was started as a C Corp.
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So it's already been a C Corp, it was under$50 million in value when it was started as a C Corp, and it's just been operating that way for the past, let's say, 10 years, okay?
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That type of situation would most likely be eligible for QSBS, but there's a limitation on how much would be tax free on a transaction.
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It's$10 million, okay?
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And so if you have a single owner and they get this$10 million exemption, there's options to actually, as you mentioned, stack that$10 million across different entities, right?
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So these entities could be a charitable remainder trust, it could be a non-grantor trust with the benefit or the beneficiary being a child or a family member, a parent, a wife, et cetera, et cetera, okay?
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A husband.
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And so if you have multiple tax IDs and multiple taxpayers that own a portion of that corporation, they can then effectively stack these$10 million tax exemptions for each of those entities.
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Okay.
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So they need to be different in characteristic.
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You can't just stack, you know, 10 charitable remainder trusts and sell the stock within those charitable remainder trusts, have the distributions flow back tax-free to you as the first beneficiary of those charitable remainder trusts.
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But there's a number of nuances and there's a number of strategies that have been executed successfully where you can stack multiple$10 million exemptions in order to further not pay not pay capital gains tax on the sale.
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I will say one other thing about QSBS that some that people should go wide eyes wide open into, and that is that there's a lot of states that actually don't recognize QSBS.
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Okay.
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I saw I was working on um an Illinois case recently, a California case.
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And so you're still paying state tax, you're not avoiding the state capital gains tax um for a transaction because of QSBS, but the federal tax is obviously much more common and higher for all taxpayers.
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Okay, so that is that is another important caveat.
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That makes good sense.
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The other, I think, unique value differentiator in what you do and what I've seen in the market is you not only help founders get ready, but help them with tax strategy going in, but you also help manage their investments with uh some non-cookie cutter strategies for how to maximize the return on that after tax money after the sale.
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So why don't you talk about the services that you offer to your customers in the in the context of post-sale and what strategies you've seen as being working the best for your customers now uh after they sell?
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Mm-hmm.
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Yeah, at the end of the day, we're a money management firm.
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Okay.
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Like for us, all of the tax planning and the tax mitigation, people pay me paying less tax on the sale and doing all that planning, that's sort of icing on the cake.
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But at the end of the day, like our job is to manage the money for someone after the sale.
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Oh, and oh, by the way, like because I think I have this nerdy fascination with tax, like we want to do that as tax efficiently as possible because portfolios can essentially bleed out if it's not structured properly with the taxes coming out year after year on ordinary income.
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You know, you try to rebalance your portfolio, you're paying capital gains tax if it's not structured properly.
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Okay, so managing money for business owners, to your question, managing money for business owners is an entirely different exercise in my experience than managing money for, let's say, a corporate executive.
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And the reason why is that business owners live with this day-to-day decisions strategy, cutting costs, figuring out how to grow revenue, and they've controlled all of these cash flows and all of these decisions to increase their net worth over time.
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All right.
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And so when you have someone who's going from that level of control and that mindset, and a lot of them, by the way, don't have many investments or any investments outside of their business.
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Okay.
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So when you get this pile of cash after you sold your business, it's like a completely different emotional paradigm than managing money for someone who has just sort of squirreled money away and grown their retirement or grown even a big pile of money over time.
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All right.
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So the first thing that we do is we start slow.
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All right.
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First, we try to mitigate the taxes on the sale of the business after the sale through investments.
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And you and I have talked through some of those strategies in the past, Rob, but really utilizing tax loss harvesting with some of the money that's been received from the sale in order to generate investment returns first and to be a part of that asset allocation, but also to reduce the taxes on the business sale.
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Okay, so so really marrying investments with tax mitigation to then have more money to make money with, right?
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Like I'll give you, I'll give you a little example.
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Like, let's just say, and I'll get out my um my old school HP 12C here, but let's just say you know you have a million bucks that you save somebody on taxes, all right?
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Let's say it was a yeah, let's just say you save a million bucks, and instead of paying the government that you can invest that over 20 years, earn a 9% return.
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That turns into 5.6 million dollars, right?
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So you can just see, like, by being able to reduce the tax.
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Taxes, you have more money to compound to where you're creating.
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Shoot, that's a nice exit for a lot of people in end of its own right.
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Just the tax savings, right?
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Turning into 5.6 million.
00:22:10.240 --> 00:22:12.480
Okay, so that's one piece.
00:22:12.720 --> 00:22:26.880
But then that type of strategy, you can continue to have that investment which uh participates in the broad US stock market or global stock markets, while also continuing to provide tax benefits into the future.
00:22:27.039 --> 00:22:34.400
Okay, so that's one sort of core pillar of not only generating returns within the stock market, but also reducing tax.
00:22:35.279 --> 00:22:45.119
More broadly, then, when we think about business owners, it's about generating good returns that's going to keep up with purchasing power and then some.
00:22:45.200 --> 00:22:56.799
So think high single digits, low double digit returns, but wanting to do it with much lower volatility so that portfolio can be resilient across all tip all different economic environments.
00:22:56.960 --> 00:22:57.279
Okay.
00:22:57.759 --> 00:22:59.519
Let me give you an example.
00:23:00.400 --> 00:23:09.839
So financial asset prices have historically moved with changes and expectations around economic growth and inflation.
00:23:10.079 --> 00:23:10.400
Okay.
00:23:11.039 --> 00:23:16.000
So if you think about that, it's like think of this stagflationary environment.
00:23:16.400 --> 00:23:20.000
I'm sure you know that term from the Yeah, I was born in 1970.
00:23:20.079 --> 00:23:20.799
I know what that is.
00:23:21.119 --> 00:23:21.519
Exactly.
00:23:21.680 --> 00:23:22.160
Exactly.
00:23:22.319 --> 00:23:23.839
I was in the 70s myself.
00:23:24.000 --> 00:23:25.839
So we know that term, right?
00:23:26.160 --> 00:23:28.400
I was a toddler, but you know, I was there.
00:23:28.640 --> 00:23:38.559
And um, and so stagflation is this idea that the economy isn't growing as fast as people think, but inflation is going up much more than people think.
00:23:38.799 --> 00:23:42.720
Our most recent example was 2022, okay.
00:23:42.960 --> 00:23:51.759
In 2022, that's when we had inflation spiking to 9%, and the economy was like, eh, we didn't go into a recession, but it was sputtering, okay?
00:23:52.079 --> 00:23:59.920
And so if you think about this with financial asset prices in 2022, stocks were down over 20%, all right?
00:24:00.240 --> 00:24:04.559
And so I like to obviously bring things down to first principles thinking.
00:24:04.720 --> 00:24:09.119
So think about your business, think about an MSP, like anything, right?
00:24:09.200 --> 00:24:17.119
It's like if your revenue isn't growing as fast as you thought, but yet your costs are rising more than you thought, what's gonna happen?
00:24:17.359 --> 00:24:28.240
Your cash flows are gonna compress, and when a cat and when the cash flows of a business compress, the valuation, at least temporarily, also goes down, right?
00:24:28.720 --> 00:24:36.000
So it should be no surprise in 2022, that stagflationary dynamic that stocks were down over 20%.
00:24:36.480 --> 00:24:37.039
All right.
00:24:37.279 --> 00:24:44.559
And so that's one of the four examples of how these two variables change and how it impacts asset prices.
00:24:44.799 --> 00:24:51.279
In that stagflationary environment, you want to own assets that are actually participating in the inflation.
00:24:51.440 --> 00:24:51.920
All right.
00:24:52.000 --> 00:24:56.240
And so commodities in 2022 were up over 20%.
00:24:57.039 --> 00:25:05.599
Gold, which has been a long time holding of all of my client partners, gold was up a little bit in 2022, but far outperforming stocks.
00:25:05.759 --> 00:25:06.240
All right.
00:25:06.400 --> 00:25:13.759
So it's not about like predicting exactly where the economy and inflation are going to be.
00:25:13.920 --> 00:25:22.880
It's about ensuring that portfolios have some exposure to the various asset classes in order to generate returns across these cycles.
00:25:23.039 --> 00:25:31.039
I'll give you, I'll give you one last example before like everybody starts nodding off on all my you know economic investment speak here.
00:25:31.359 --> 00:25:34.240
But COVID is another good example, right?
00:25:34.480 --> 00:25:38.720
Q1 of 2020, I don't think any of us can ever forget that, right?
00:25:39.359 --> 00:25:41.759
So, in that environment, what happened?
00:25:41.920 --> 00:25:48.799
So the economy came screeching to a halt, so economic growth was lower than people thought, and inflation collapsed as well, right?
00:25:48.960 --> 00:25:50.000
No one's buying anything.
00:25:50.160 --> 00:25:52.640
Of course, inflation is gonna collapse temporarily.
00:25:52.799 --> 00:25:55.599
That's what's called a deflationary environment, right?
00:25:55.680 --> 00:25:58.240
When economic growth and inflation are going down.
00:25:58.480 --> 00:26:06.160
Of course, lo and behold, if you use the same business analogy, stocks were down 35% in Q1 of 2020, right?
00:26:06.319 --> 00:26:10.400
Because revenue, profits, everything is collapsing at that point.
00:26:11.119 --> 00:26:15.920
However, gold was up 10% in Q1.
00:26:16.400 --> 00:26:21.200
Long-term treasury bonds were up 20% in Q1.
00:26:21.519 --> 00:26:28.400
And treasury inflation protected bonds, so basically inflation-linked US government bonds, they were up 15%.
00:26:28.880 --> 00:26:29.279
All right.
00:26:29.519 --> 00:26:35.680
So again, I'm not advocating that someone should have 30, 40, or 50% in those types of assets.
00:26:35.839 --> 00:26:42.480
But imagine if you had 10% in gold and 10 or 15% in US Treasury bonds, right?
00:26:42.559 --> 00:26:47.119
You're having a very different experience than someone who's 100% in stocks.
00:26:47.279 --> 00:26:56.240
You just sold your business, you're down 35%, and lo and behold, you're letting greed take over and you're selling everything at the bottom, right?
00:26:56.319 --> 00:26:58.880
That I mean, that's that's the natural inclination.
00:26:59.039 --> 00:27:04.559
You took your life's work, you put it in the stock market, and you're just basically getting flushed, right?
00:27:04.720 --> 00:27:13.759
So it's about trying to moderate through these cycles, and then over time, when you're rebalancing and being opportunistic, you can generate a really nice return.
00:27:14.480 --> 00:27:25.359
And what I've heard from some of your clients that you know the the money from the exit is just the tip of the iceberg with what can be done with the investment strategy.
00:27:25.599 --> 00:27:44.240
So, you know, I would say to those founders that are holding on to every last penny, you know, in a sale, uh, you don't need to get every nickel out of your sale if you've got the right uh strategic advisors from a tax perspective and the right investment strategy with the money after closing.
00:27:44.480 --> 00:27:50.720
You could still turn that 5% less than you wanted into a big pile with the right strategies.
00:27:51.200 --> 00:27:52.079
You really can.
00:27:52.160 --> 00:28:04.960
And I mean, the investments, the investment tax strategy after the sale, you know, like it can be the difference between doubling or tripling your net worth over a 20, 30 year period or running out of money.
00:28:05.119 --> 00:28:05.440
Right?
00:28:05.599 --> 00:28:22.640
These small changes, you know, one 1%, 2% of tax drag over a long period of time while you're spending the money and continuing to potentially draw it down, it literally, you know, I've seen the cases where it can be the difference between between those two scenarios.
00:28:23.519 --> 00:28:31.440
Uh if if someone's a business owner, maybe they own a SaaS business, maybe they're the CEO or a founder of a MSP.
00:28:32.160 --> 00:28:39.680
Um how do you determine which of those companies are the best fit for your services?
00:28:39.920 --> 00:28:49.359
How does someone who's thinking about maybe selling their business someday or maybe even involved in currently a process to sell their business?
00:28:49.599 --> 00:28:55.119
How do you evaluate um who's the right customer for your business?
00:28:55.440 --> 00:29:01.759
If you were a SaaS business, I would say, tell me your ICP or ideal client profile.
00:29:02.000 --> 00:29:08.319
But I just want to understand, you know, who's that customer that's most likely to benefit from your services.
00:29:08.640 --> 00:29:09.279
Yeah.
00:29:09.680 --> 00:29:10.000
Yeah.
00:29:10.160 --> 00:29:20.480
So for I don't have any hard and fast minimums, you know, when I think about like this ideal client, but the more money someone has, typically the more impact we can have.
00:29:20.640 --> 00:29:27.359
And not just because it's larger dollars, just because there's different strategies available to different wealth levels.
00:29:27.519 --> 00:29:34.960
Meaning, someone that has a$15 million exit, we can help a lot more than someone that has a$1 million exit.
00:29:35.119 --> 00:29:35.440
Okay.
00:29:36.000 --> 00:29:45.519
But typically, you know, we'll help folks anything from$5, 10 million and up in order to be able to execute some of these strategies, right?
00:29:45.680 --> 00:29:52.400
So, you know, we have clients in that five to ten million dollar range, and we have clients, you know, north of 50 million.
00:29:52.559 --> 00:29:54.880
So it's it's really all across the board.
00:29:55.119 --> 00:30:01.440
But again, this concept of like kind of like five and ten up is where we can really have a bigger impact.
00:30:01.759 --> 00:30:02.559
That makes sense.
00:30:02.640 --> 00:30:13.200
And if someone wanted to start a conversation with you or continue the discussion on the topics that we've discussed today, what would be the best way for them to get in touch with you?
00:30:13.759 --> 00:30:18.960
I would say the best way to get in touch with me is like you can just email us, you can go to the website.
00:30:19.119 --> 00:30:28.880
I mean, the email is info at essentialp.com, you know, E-S-S-E-N-T-I-A-L P is in partners.com.
00:30:28.960 --> 00:30:34.640
And our website, same thing, you know, essentialp.com, where we have contact information there.
00:30:36.079 --> 00:30:41.839
Before we go, I just want to ask you this burning question that I've been thinking about.
00:30:42.799 --> 00:30:44.640
I gotta deliver on a joke right here, Robin.
00:30:44.880 --> 00:30:45.519
All right, I'm ready.
00:30:46.160 --> 00:30:49.200
You want to hear the question first, or you want to do the joke first?
00:30:49.440 --> 00:30:50.000
No, no, no.
00:30:50.079 --> 00:30:52.240
I'm gonna I've got to try to weave a joke into the question.
00:30:52.720 --> 00:30:52.880
Perfect.
00:30:53.359 --> 00:30:54.240
Into the answer.
00:30:54.480 --> 00:31:23.680
Yeah, well, yeah, I would say that you know, my question is if if you had from all of your experience, from Wall Street to everything that you've done in tax and wealth management, investments, if you could say, you know, one bit of advice to a founder or business owner that's thinking about exiting, you know, what is it that you could share with them that's the most meaningful takeaway that you think that they could get from your experience?
00:31:25.599 --> 00:31:32.400
It might it might be a little unconventional, but my advice to that person is don't wait.
00:31:32.640 --> 00:31:32.960
Okay?
00:31:33.279 --> 00:31:36.880
And I don't mean like don't wait, like call our firm and start planning.
00:31:36.960 --> 00:31:38.240
Like, no, I don't mean that.
00:31:38.400 --> 00:31:42.160
I mean don't wait in preparing your business to be sold.
00:31:42.319 --> 00:31:42.640
Okay.
00:31:43.119 --> 00:31:53.920
And the reason why is that the future is entirely uncertain, and you may get hit, you may be the only one in your family that's involved in the business, and you may get hit by a bus tomorrow.
00:31:54.079 --> 00:31:54.480
All right.
00:31:54.559 --> 00:32:15.519
And if you get hit by a bus tomorrow and your business is a mess, it's not ready to be sold, you haven't been diligent about preparing that business, you're leaving your family, like not only have you died, which we're all sad about that, but you're leaving your family who's devastated from your death with now a business that doesn't necessarily have any value.
00:32:15.839 --> 00:32:16.160
Okay.
00:32:16.640 --> 00:32:26.640
And so if you take the steps now to prepare the business to be sold, put some of the pieces in place and have those relationships to where if something does happen, right?
00:32:26.720 --> 00:32:28.799
You you know a broker that can sell your business.
00:32:28.880 --> 00:32:31.119
Like we don't, we don't, we don't do that, obviously.
00:32:31.279 --> 00:32:34.559
But you know a broker, the business is actually prepared to sell.
00:32:34.720 --> 00:32:35.200
Who knows?
00:32:35.279 --> 00:32:38.400
Maybe you do have some other tax and investment strategies.
00:32:38.640 --> 00:32:49.119
But by just preparing the business to be sold and setting your family up for that, you know, terrible situation, I think that's like the best first step that anybody can take.
00:32:49.440 --> 00:32:50.720
Yeah, that's excellent advice.
00:32:50.799 --> 00:32:58.240
And I always say preparing a business to be sold is good business whether you're gonna sell or not.
00:32:58.640 --> 00:32:59.440
So true.
00:32:59.759 --> 00:33:00.480
And what I've heard.
00:33:01.119 --> 00:33:01.359
Guess what?
00:33:01.440 --> 00:33:02.960
You'll make more money along the way.
00:33:03.279 --> 00:33:06.640
And what I've also heard is the exit rate is 100%.
00:33:07.519 --> 00:33:12.079
You're either gonna exit on your feet or not on your feet.
00:33:12.559 --> 00:33:14.000
Unfortunately for all of us.
00:33:14.319 --> 00:33:17.200
And so I heard the death rate is still 100%.
00:33:18.720 --> 00:33:21.440
We need a that's excellent advice, Nick.
00:33:21.680 --> 00:33:25.200
I will challenge you to a lawyer joke contest.
00:33:25.279 --> 00:33:26.160
I'm gonna go first.
00:33:26.400 --> 00:33:26.960
Oh my gosh.
00:33:27.119 --> 00:33:27.839
Oh my gosh.
00:33:28.079 --> 00:33:28.720
Go ahead.
00:33:30.000 --> 00:33:33.119
Why does a shark not bite an attorney?
00:33:36.000 --> 00:33:37.839
Professional courtesy.
00:33:40.880 --> 00:33:45.119
Oh, I'll give you a more of a finance investing one.
00:33:46.319 --> 00:33:47.680
It's gonna be very lame, though.
00:33:47.839 --> 00:33:52.880
Like, um have you ever heard of the two-handed economist?
00:33:53.519 --> 00:33:53.839
No.
00:33:55.039 --> 00:34:04.240
On one hand, it seems like the economy is growing strongly, but on the other hand, there's some cross currents where it could be not as strong as people think.
00:34:04.559 --> 00:34:06.160
Sounds like the weatherman.
00:34:06.559 --> 00:34:07.519
Exactly.
00:34:07.839 --> 00:34:08.559
Exactly.
00:34:09.599 --> 00:34:11.360
Economics, the dismal science.
00:34:11.760 --> 00:34:24.159
Ladies and gentlemen, my friend Nick Bartolo, if you've got any questions about uh qualified small business stock, uh investment strategy, preparing your business to exit.
00:34:24.320 --> 00:34:29.840
I can personally say Nick is amazing at what he does, and he will serve you very well.
00:34:30.000 --> 00:34:43.840
So if you're in the need for additional information about any of those topics, reach him at EssentialP.com or reach out via email, and uh I'm sure he'll take good care of you.
00:34:44.000 --> 00:34:45.679
Nick, thank you for joining.
00:34:46.000 --> 00:34:46.639
Thanks, Rob.
00:34:46.719 --> 00:34:47.440
Great to see you.
00:34:47.679 --> 00:34:48.800
Good to see you too.
00:34:49.280 --> 00:34:54.559
You've been listening to Talk Tech with Rob Scott, brought to you by Monger.
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That's LN.jur.com.
00:00:03.279 --> 00:00:06.160
Welcome to Talk Tech with Rob Scott.
00:00:07.839 --> 00:00:09.199
Welcome to Talk Tech.
00:00:09.279 --> 00:00:13.839
I'm your host, Rob Scott, and today we're visiting with my friend Nick Bartolo.
00:00:14.160 --> 00:00:15.519
Nick, welcome to the show.
00:00:15.919 --> 00:00:17.280
Hey Rob, good to see you.
00:00:17.519 --> 00:00:18.399
Good to see you.
00:00:18.480 --> 00:00:21.440
I really am excited to have you on today.
00:00:21.920 --> 00:00:25.440
You and I have been talking about a lot of interesting stuff.
00:00:25.600 --> 00:00:37.759
And just like I do with other guests that I invite to the show, if I meet somebody that I think is cool and interesting and funny, then I want to invite them to be on my show and you definitely check all three boxes.
00:00:38.079 --> 00:00:41.039
Oh, so you're setting the precedence that I need some funny jokes now.
00:00:41.119 --> 00:00:44.560
So pressures on, challenge accepted.
00:00:44.799 --> 00:00:45.200
All right.
00:00:45.280 --> 00:00:49.679
I'm sure, I'm sure that that won't be a problem for you because I think it comes naturally.
00:00:49.840 --> 00:00:56.399
But for those who don't know you, Nick, why don't you introduce the audience to uh who you are and what you do?
00:00:57.520 --> 00:01:00.000
Well, you know, again, thanks, Rob, for having me on.
00:01:00.079 --> 00:01:01.439
Um, Nick Bartolo.
00:01:01.840 --> 00:01:07.439
So what I do is I founded and run a wealth management firm called Essential Partners.
00:01:07.599 --> 00:01:07.920
Okay.
00:01:08.480 --> 00:01:18.239
So in Essential Partners, what I do is I specialize in working with business owners who are likely to have an exit or sell their business at some point in the future.
00:01:18.400 --> 00:01:18.799
All right.
00:01:18.879 --> 00:01:20.959
So that's that's what I'm up to now.
00:01:21.120 --> 00:01:26.319
I mean, I could I could take you back to birth, Rob, but I don't think we all want to go back that far.
00:01:26.879 --> 00:01:32.079
But I kind of started this journey in working with business owners first as a CPA.
00:01:32.239 --> 00:01:39.760
I kind of came from a very technical background, did accounting, got fascinated in investments during the dot-com bubble.
00:01:39.840 --> 00:01:40.079
All right.
00:01:40.239 --> 00:01:42.400
I call it, I call it the OG Tech bubble.
00:01:42.480 --> 00:01:45.120
I mean, we may have another bubble going on right now.
00:01:45.359 --> 00:01:46.400
Time will tell.
00:01:46.560 --> 00:01:49.840
But I got fascinated with investing during that time.
00:01:49.920 --> 00:01:52.640
And then I realized you could make a career out of that.
00:01:52.799 --> 00:01:56.640
So for 17 years after getting my MBA, I worked on Wall Street.
00:01:56.799 --> 00:02:00.079
And it wasn't in wealth management, it wasn't doing asset allocation.
00:02:00.239 --> 00:02:18.000
It was actually understanding and analyzing businesses, traveling around the world, meeting with CEOs and CFOs of big Fortune 500 companies, and actually making decisions on whether or not we should invest in those stocks, sometimes bonds, for large institutions like pensions, endowments.
00:02:18.159 --> 00:02:21.360
So we were managing money for those types of constituents.
00:02:21.520 --> 00:02:21.840
Okay.
00:02:22.400 --> 00:02:41.280
After doing that for you know 17, 18 years, I wanted to take that and you know kind of be a greedy capitalist, add value to my family, but more so like add value to potential families, where I took this institutional knowledge and then started to manage money for families and business owners.
00:02:41.439 --> 00:02:45.280
So that's what I've been up to over the last lump number of years.
00:02:45.599 --> 00:02:49.599
And and and and that's the context in which I came to know you.
00:02:49.759 --> 00:03:00.080
One of my mentors is a founder of a very successful B2B SaaS company, and and uh you're his wealth manager, and he told me amazing things about you.
00:03:00.159 --> 00:03:08.879
And is so often, you know, this this world works is you know, you you know, it's what circles you run in are the people that you meet.
00:03:09.039 --> 00:03:24.240
And and what I understand about you, Nick, that makes your services different than maybe other wealth management services is you really uh have the expertise to help founders prepare for an exit.
00:03:24.400 --> 00:03:26.400
Uh can you go into that a little bit more?
00:03:26.560 --> 00:03:36.960
I think a lot of people think that they're gonna just build their business, run their business, and one day they're gonna sell it and it's all gonna happen magically, but in reality it's not quite that simple.
00:03:37.120 --> 00:03:42.879
Uh, talk me through how you help founders uh prepare for a potential exit.
00:03:43.199 --> 00:03:43.599
Yeah.
00:03:44.240 --> 00:03:50.879
It's a good point, Rob, because oftentimes what you see is that money is so emotional.
00:03:51.120 --> 00:04:01.280
And when you're a business owner and your whole identity and your cash flow and everything that surrounds your life, your social life is all wrapped in your business.
00:04:01.439 --> 00:04:05.520
Sometimes that decision to sell actually becomes overly emotional.
00:04:05.759 --> 00:04:13.360
So you're having a bad couple quarters, you're dealing with some folks on your team that where you're having to micromanage them.
00:04:13.599 --> 00:04:19.120
You know, I had a business owner recently tell me that they just sick of uh babysitting adults, okay?
00:04:19.279 --> 00:04:24.319
And they're ready to just like take this emotional purge and sell their business, right?
00:04:24.399 --> 00:04:27.040
Which is absolutely the wrong approach.
00:04:27.360 --> 00:04:33.279
So what we try to do, and I think it's like very different than let's say a financial advisor.
00:04:33.439 --> 00:04:45.759
I think people have a lot of can misconceptions or they have accurate uh perceptions of financial advisors in that they take your money, they charge a fee, and they just like put it in a cookie-cutter portfolio.
00:04:45.920 --> 00:04:46.480
All right.
00:04:46.879 --> 00:04:52.240
We really pride ourselves in getting involved in planning well before the sale happens.
00:04:52.319 --> 00:04:54.399
And that's on multiple dimensions.
00:04:54.639 --> 00:05:03.519
So the first thing is that a lot of businesses, they're just they don't know what to do in order to actually prepare the actual business to be sold, right?
00:05:03.600 --> 00:05:05.680
So that's a critical first step.
00:05:05.920 --> 00:05:08.160
Their books aren't in order, right?
00:05:08.240 --> 00:05:12.000
They don't have systems and procedures that are documented.
00:05:12.160 --> 00:05:20.160
They may be the driving force, manager, doer in the business, which doesn't necessarily set it up well, to be sold, all right?
00:05:20.319 --> 00:05:23.120
Those are just like some of the operational aspects.
00:05:23.360 --> 00:05:33.439
But then what we do and where we get involved is actually thinking about quantitatively and processing that decision on if you should be selling your business in the first place.
00:05:33.680 --> 00:05:39.360
What happens if you could potentially sell that business two, three, four, five years down the road?
00:05:39.680 --> 00:05:48.079
And is that money that you're going to have on an after-tax basis enough to actually fund your lifestyle once you sell?
00:05:48.240 --> 00:06:01.600
So you can live your live your life, step away from the business, do the things you've always wanted to do where you didn't have time, where you're in the business, you know, take that trip, pay for your kids' college, whatever the case may be, right?
00:06:01.680 --> 00:06:12.879
So a lot of people don't necessarily connect the dots from that pre-sale decision to sell, how much money they're gonna have after tax and what that's going to mean for their life after the sale.
00:06:12.959 --> 00:06:24.879
Okay, so because the way I look at it is like, how can you possibly know when to sell your business if you don't know how that money is going to be invested and whether or not it can actually support your lifestyle?
00:06:25.040 --> 00:06:25.360
Okay.
00:06:25.680 --> 00:06:28.800
And so I think there is a big planning disconnect there.
00:06:28.959 --> 00:06:34.240
Not to mention, and we can get into it whenever, but not to mention all of the tax strategies that you can.
00:06:34.560 --> 00:06:35.759
Well, let's pause right there.
00:06:36.000 --> 00:06:42.480
Let's pause right there because I've heard a lot of that messaging before, what you just talked about.
00:06:43.040 --> 00:06:49.120
We help people get ready, we help them prepare their business, uh, we help them plan.
00:06:49.680 --> 00:06:54.959
That's not a unique differentiator from what I've seen in the marketplace.
00:06:55.360 --> 00:07:05.839
But one of the things that I think makes what you do very unique is your tax expertise and the tax strategies that you've implemented for your customers.
00:07:06.000 --> 00:07:48.240
And I'd like to jump into your whole reasoning behind focusing so much on tax strategy and the importance of the qualified business stock and strategies that you've developed around that, to where founders today, if they plan correctly and have the right structures, can really significantly reduce their tax exposure, which gives them much more money to finance their lifestyle such that when they do the calculation that you're talking about, the tax savings really put a lot more money in the net take-home, so to speak.
00:07:48.399 --> 00:07:52.319
So, talk about your background with developing these tax strategies.
00:07:52.720 --> 00:07:55.199
What are you seeing that's working the best?
00:07:55.360 --> 00:08:01.600
And what is the state of the art when it comes to tax strategy for founders who are exiting?
00:08:01.920 --> 00:08:02.720
Okay, yeah.
00:08:02.959 --> 00:08:04.800
So that's that's a good point.
00:08:04.879 --> 00:08:10.560
And so there's a few, there's multiple dimensions of this, as you know, as you and I have talked about.
00:08:10.800 --> 00:08:29.600
And it can happen five years before a sale, and if nothing has happened, let's say before a sale, there's still you know strategies that can be implemented that could save 20 to 30 percent of a tax bill after the sale, depending on a multitude of factors, including the timing of the sale.
00:08:29.759 --> 00:08:33.200
So let's just kind of unpack some of those one by one, right?
00:08:33.600 --> 00:08:39.360
So if you have your business set up, you have a longer-term time horizon on when you want to sell.
00:08:39.440 --> 00:08:42.399
Say it's three years, say it's five years, okay?
00:08:42.639 --> 00:08:46.080
And let's say you're sitting there, and a lot of small businesses, right?
00:08:46.159 --> 00:08:47.840
They're they're an S-corp, right?
00:08:47.919 --> 00:08:52.480
They may be, you know, operating as an S-corp because of the tax advantages there.
00:08:52.720 --> 00:09:05.200
And so they can't necessarily, they don't have the entity set up as a C Corp in order to take advantage of Section 1202, which is the qualified small business stock, as you alluded to, all right.
00:09:05.679 --> 00:09:14.159
So if those businesses are an S Corp and they want to take advantage of QSBS, they can actually convert to a C Corp, right?
00:09:14.399 --> 00:09:15.919
There's a special process.
00:09:16.080 --> 00:09:19.759
You can't just go to your local attorney and convert to a C Corp.
00:09:20.000 --> 00:09:32.559
There's a special process in order to do that, and there's attorneys that specialize in that type of transaction or that type of transition to that entity to make sure that it's done properly, all right?
00:09:32.799 --> 00:09:33.919
But let's say you do that.
00:09:34.000 --> 00:09:42.559
Let's say your business is valued at$10 million at the time that you go to convert from an S-corp to a C Corp.
00:09:43.039 --> 00:10:00.240
It is true that during that five-year transition period, there are going to be some tax disadvantages of being a C Corp because the C Corp is an actual taxpayer, 21% for federal purposes, and then any state taxes, depending on the jurisdiction.
00:10:00.480 --> 00:10:02.159
So you are paying more tax.
00:10:02.240 --> 00:10:10.639
So if you take so then if you take distributions from the C Corp, you pay an additional dividend tax on that for your personal income tax.
00:10:10.720 --> 00:10:10.960
Okay.
00:10:11.200 --> 00:10:16.799
The dreaded double corporate tax, which is why everyone uses the S-corp.
00:10:17.039 --> 00:10:17.840
Yeah, exactly.
00:10:17.919 --> 00:10:19.679
So yeah, we all we all love double tax.
00:10:19.759 --> 00:10:20.799
That seems fair, right?
00:10:21.120 --> 00:10:23.759
And so anyway, I die I digress.
00:10:23.840 --> 00:10:27.039
We don't we don't want to talk about estate taxes and all kinds of stuff now.
00:10:27.279 --> 00:10:34.000
But so let's say you execute this conversion and your your company at that time is valued at$10 million.
00:10:34.480 --> 00:10:34.799
Okay.
00:10:35.360 --> 00:10:48.000
If you wait then five years and you execute a stock sale of your C Corp, you can get a 10x tax break on the value of your company at conversion.
00:10:48.159 --> 00:10:48.399
Okay.
00:10:48.799 --> 00:10:52.480
So in this example, it's$10 million at conversion.
00:10:52.799 --> 00:10:57.600
You now have$90 million that you can get tax free, right?
00:10:57.759 --> 00:11:00.799
When that business is sold, if it's a stock sale.
00:11:00.960 --> 00:11:10.879
And I say$90 million because that initial$10 million that you created in value at the conversion, that's still subjects subject to capital gains tax.
00:11:11.120 --> 00:11:16.639
But the incremental you can get up to additional$90 million, okay, if you wait five years.
00:11:16.960 --> 00:11:23.840
If you wait three years, you can still benefit from this conversion, but it's 50% of the gain.
00:11:24.000 --> 00:11:24.320
Okay.
00:11:24.559 --> 00:11:28.639
So 50% of that incremental gain could be tax free, right?
00:11:28.720 --> 00:11:40.639
So a tremendous benefit just by knowing that this exists and working with the types of attorneys that have successfully executed this type of reorganization historically.
00:11:40.799 --> 00:11:41.039
Okay.
00:11:41.279 --> 00:11:46.159
And what you're talking about is commonly referred to as an F-type re-org, correct?
00:11:46.399 --> 00:11:46.879
Correct.
00:11:47.039 --> 00:11:47.360
Yes.
00:11:48.000 --> 00:12:05.200
And and the effect of it is to reorganize an LLC or an S-corp that's taxed as a partnership into a C Corp structure that can then over time qualify for the qualified small business tax exemption that you just described.
00:12:05.279 --> 00:12:06.080
Is that correct?
00:12:06.639 --> 00:12:08.080
That's exactly right.
00:12:08.480 --> 00:12:12.960
And with the one big beautiful bill, there were some modest changes to it.
00:12:13.200 --> 00:12:21.039
One change being that prior to the conversion, you have to be less than a$75 million value of your business.
00:12:21.120 --> 00:12:30.000
Okay, so if you're above$75 million, you can't justify anything below that, then this isn't available to you, this QSBS treatment.
00:12:30.159 --> 00:12:33.200
There's a lot of technicalities, you know, related to this.
00:12:33.360 --> 00:12:39.200
That's why you know I advocate specialists in this realm, but it is a substantial benefit.
00:12:39.440 --> 00:12:52.320
The other risk I would point out is that a lot of acquirers, I would say nearly all acquirers, they prefer to do an asset purchase, right, as opposed to a stock purchase.
00:12:52.480 --> 00:13:02.879
And that's because if they do an asset purchase, they can effectively amortize or depreciate that value that they're acquiring, where a stock purchase you can't.
00:13:03.120 --> 00:13:12.799
Also, a stock purchase, and you know this, speaking of the choir here, you're assuming the full liabilities of that corporation, whereas an asset purchase you're not.
00:13:12.960 --> 00:13:25.679
Okay, so there are there are a couple wrinkles, and some would argue, and there is credibility to this, that a stock purchase may warrant a modestly lower valuation, right?
00:13:26.320 --> 00:13:31.600
I don't think it's low enough to you know have the full tax burden, right?
00:13:31.679 --> 00:13:40.639
We're not talking about that, but whether it's 10%, whether it's 15%, modestly lower valuation, you could see that in a negotiation.
00:13:41.200 --> 00:13:46.960
The other thing that we've seen, Nick, is the use of reverse triangular mergers.
00:13:47.600 --> 00:14:05.519
So imagine a structure where a NUCO is the acquirer of the stock, and then the purchaser merges with that company or acquires the assets from that company.
00:14:05.759 --> 00:14:22.399
Uh, and that way you could theoretically create a structure which gives you the best of both worlds, including the asset purchase concept that favors the buyer and the stock sale strategy that favors the seller.
00:14:22.559 --> 00:14:25.039
So there are some complicated structures.
00:14:25.120 --> 00:14:40.159
I'm thinking back to my days when my client Xerox uh purchased ACS and I was involved in a litigation involving their reverse triangular merger, and I learned more about that stuff than I thought I would ever need to know.
00:14:40.480 --> 00:15:13.840
Um but but the other thing that's interesting, Nick, is that this uh qualified small business stock for people who have substantial businesses who might might exceed the protection of a single entity, uh you've developed some stacking strategies that could extend the the benefit of the qualified small business stock uh tax strategy even to many multiples of what a single entity could achieve.
00:15:14.240 --> 00:15:15.360
That's right, that's right.
00:15:15.519 --> 00:15:21.519
And so, and again, like I always like to point out like the personalization aspect of it, right?
00:15:21.600 --> 00:15:38.720
Because depending on someone's heirs, like whether or not they have kids, whether or not they're married, you know, whether or not they have causes that are near and dear to their heart that they're already donating to, that can have a big influence on what strategy is going to be most optimal for them.
00:15:38.799 --> 00:15:43.919
Like none of this is like totally optimized, but that personal aspect is huge.
00:15:44.240 --> 00:15:47.519
However, so let's say you have a scenario.
00:15:47.600 --> 00:15:50.720
So we talked about this conversion strategy.
00:15:50.879 --> 00:15:55.679
Let's say alternatively, you have a scenario where a company was started as a C Corp.
00:15:55.840 --> 00:16:07.679
So it's already been a C Corp, it was under$50 million in value when it was started as a C Corp, and it's just been operating that way for the past, let's say, 10 years, okay?
00:16:08.159 --> 00:16:18.559
That type of situation would most likely be eligible for QSBS, but there's a limitation on how much would be tax free on a transaction.
00:16:18.720 --> 00:16:20.559
It's$10 million, okay?
00:16:21.039 --> 00:16:34.320
And so if you have a single owner and they get this$10 million exemption, there's options to actually, as you mentioned, stack that$10 million across different entities, right?
00:16:34.399 --> 00:16:50.159
So these entities could be a charitable remainder trust, it could be a non-grantor trust with the benefit or the beneficiary being a child or a family member, a parent, a wife, et cetera, et cetera, okay?
00:16:50.320 --> 00:16:51.039
A husband.
00:16:51.360 --> 00:17:06.880
And so if you have multiple tax IDs and multiple taxpayers that own a portion of that corporation, they can then effectively stack these$10 million tax exemptions for each of those entities.
00:17:07.200 --> 00:17:07.519
Okay.
00:17:08.079 --> 00:17:11.680
So they need to be different in characteristic.
00:17:11.759 --> 00:17:27.839
You can't just stack, you know, 10 charitable remainder trusts and sell the stock within those charitable remainder trusts, have the distributions flow back tax-free to you as the first beneficiary of those charitable remainder trusts.
00:17:28.160 --> 00:17:42.799
But there's a number of nuances and there's a number of strategies that have been executed successfully where you can stack multiple$10 million exemptions in order to further not pay not pay capital gains tax on the sale.
00:17:43.119 --> 00:17:54.480
I will say one other thing about QSBS that some that people should go wide eyes wide open into, and that is that there's a lot of states that actually don't recognize QSBS.
00:17:55.039 --> 00:17:55.359
Okay.
00:17:55.680 --> 00:18:00.480
I saw I was working on um an Illinois case recently, a California case.
00:18:00.640 --> 00:18:16.079
And so you're still paying state tax, you're not avoiding the state capital gains tax um for a transaction because of QSBS, but the federal tax is obviously much more common and higher for all taxpayers.
00:18:16.240 --> 00:18:19.039
Okay, so that is that is another important caveat.
00:18:19.920 --> 00:18:21.119
That makes good sense.
00:18:21.359 --> 00:18:47.759
The other, I think, unique value differentiator in what you do and what I've seen in the market is you not only help founders get ready, but help them with tax strategy going in, but you also help manage their investments with uh some non-cookie cutter strategies for how to maximize the return on that after tax money after the sale.
00:18:48.000 --> 00:19:04.240
So why don't you talk about the services that you offer to your customers in the in the context of post-sale and what strategies you've seen as being working the best for your customers now uh after they sell?
00:19:04.720 --> 00:19:05.200
Mm-hmm.
00:19:05.519 --> 00:19:08.480
Yeah, at the end of the day, we're a money management firm.
00:19:08.640 --> 00:19:08.960
Okay.
00:19:09.359 --> 00:19:20.000
Like for us, all of the tax planning and the tax mitigation, people pay me paying less tax on the sale and doing all that planning, that's sort of icing on the cake.
00:19:20.160 --> 00:19:25.680
But at the end of the day, like our job is to manage the money for someone after the sale.
00:19:25.839 --> 00:19:43.680
Oh, and oh, by the way, like because I think I have this nerdy fascination with tax, like we want to do that as tax efficiently as possible because portfolios can essentially bleed out if it's not structured properly with the taxes coming out year after year on ordinary income.
00:19:43.839 --> 00:19:50.240
You know, you try to rebalance your portfolio, you're paying capital gains tax if it's not structured properly.
00:19:50.400 --> 00:20:04.559
Okay, so managing money for business owners, to your question, managing money for business owners is an entirely different exercise in my experience than managing money for, let's say, a corporate executive.
00:20:04.799 --> 00:20:21.759
And the reason why is that business owners live with this day-to-day decisions strategy, cutting costs, figuring out how to grow revenue, and they've controlled all of these cash flows and all of these decisions to increase their net worth over time.
00:20:21.920 --> 00:20:22.480
All right.
00:20:22.799 --> 00:20:33.200
And so when you have someone who's going from that level of control and that mindset, and a lot of them, by the way, don't have many investments or any investments outside of their business.
00:20:33.359 --> 00:20:33.680
Okay.
00:20:34.160 --> 00:20:51.039
So when you get this pile of cash after you sold your business, it's like a completely different emotional paradigm than managing money for someone who has just sort of squirreled money away and grown their retirement or grown even a big pile of money over time.
00:20:51.200 --> 00:20:51.759
All right.
00:20:52.079 --> 00:20:55.759
So the first thing that we do is we start slow.
00:20:56.000 --> 00:20:56.640
All right.
00:20:57.119 --> 00:21:03.039
First, we try to mitigate the taxes on the sale of the business after the sale through investments.
00:21:03.200 --> 00:21:23.519
And you and I have talked through some of those strategies in the past, Rob, but really utilizing tax loss harvesting with some of the money that's been received from the sale in order to generate investment returns first and to be a part of that asset allocation, but also to reduce the taxes on the business sale.
00:21:23.599 --> 00:21:31.680
Okay, so so really marrying investments with tax mitigation to then have more money to make money with, right?
00:21:31.839 --> 00:21:34.000
Like I'll give you, I'll give you a little example.
00:21:34.160 --> 00:21:43.680
Like, let's just say, and I'll get out my um my old school HP 12C here, but let's just say you know you have a million bucks that you save somebody on taxes, all right?
00:21:43.839 --> 00:21:53.599
Let's say it was a yeah, let's just say you save a million bucks, and instead of paying the government that you can invest that over 20 years, earn a 9% return.
00:21:53.759 --> 00:21:56.559
That turns into 5.6 million dollars, right?
00:21:56.640 --> 00:21:59.680
So you can just see, like, by being able to reduce the tax.
00:22:00.079 --> 00:22:03.279
Taxes, you have more money to compound to where you're creating.
00:22:03.359 --> 00:22:06.559
Shoot, that's a nice exit for a lot of people in end of its own right.
00:22:06.640 --> 00:22:07.759
Just the tax savings, right?
00:22:07.920 --> 00:22:09.759
Turning into 5.6 million.
00:22:10.240 --> 00:22:12.480
Okay, so that's one piece.
00:22:12.720 --> 00:22:26.880
But then that type of strategy, you can continue to have that investment which uh participates in the broad US stock market or global stock markets, while also continuing to provide tax benefits into the future.
00:22:27.039 --> 00:22:34.400
Okay, so that's one sort of core pillar of not only generating returns within the stock market, but also reducing tax.
00:22:35.279 --> 00:22:45.119
More broadly, then, when we think about business owners, it's about generating good returns that's going to keep up with purchasing power and then some.
00:22:45.200 --> 00:22:56.799
So think high single digits, low double digit returns, but wanting to do it with much lower volatility so that portfolio can be resilient across all tip all different economic environments.
00:22:56.960 --> 00:22:57.279
Okay.
00:22:57.759 --> 00:22:59.519
Let me give you an example.
00:23:00.400 --> 00:23:09.839
So financial asset prices have historically moved with changes and expectations around economic growth and inflation.
00:23:10.079 --> 00:23:10.400
Okay.
00:23:11.039 --> 00:23:16.000
So if you think about that, it's like think of this stagflationary environment.
00:23:16.400 --> 00:23:20.000
I'm sure you know that term from the Yeah, I was born in 1970.
00:23:20.079 --> 00:23:20.799
I know what that is.
00:23:21.119 --> 00:23:21.519
Exactly.
00:23:21.680 --> 00:23:22.160
Exactly.
00:23:22.319 --> 00:23:23.839
I was in the 70s myself.
00:23:24.000 --> 00:23:25.839
So we know that term, right?
00:23:26.160 --> 00:23:28.400
I was a toddler, but you know, I was there.
00:23:28.640 --> 00:23:38.559
And um, and so stagflation is this idea that the economy isn't growing as fast as people think, but inflation is going up much more than people think.
00:23:38.799 --> 00:23:42.720
Our most recent example was 2022, okay.
00:23:42.960 --> 00:23:51.759
In 2022, that's when we had inflation spiking to 9%, and the economy was like, eh, we didn't go into a recession, but it was sputtering, okay?
00:23:52.079 --> 00:23:59.920
And so if you think about this with financial asset prices in 2022, stocks were down over 20%, all right?
00:24:00.240 --> 00:24:04.559
And so I like to obviously bring things down to first principles thinking.
00:24:04.720 --> 00:24:09.119
So think about your business, think about an MSP, like anything, right?
00:24:09.200 --> 00:24:17.119
It's like if your revenue isn't growing as fast as you thought, but yet your costs are rising more than you thought, what's gonna happen?
00:24:17.359 --> 00:24:28.240
Your cash flows are gonna compress, and when a cat and when the cash flows of a business compress, the valuation, at least temporarily, also goes down, right?
00:24:28.720 --> 00:24:36.000
So it should be no surprise in 2022, that stagflationary dynamic that stocks were down over 20%.
00:24:36.480 --> 00:24:37.039
All right.
00:24:37.279 --> 00:24:44.559
And so that's one of the four examples of how these two variables change and how it impacts asset prices.
00:24:44.799 --> 00:24:51.279
In that stagflationary environment, you want to own assets that are actually participating in the inflation.
00:24:51.440 --> 00:24:51.920
All right.
00:24:52.000 --> 00:24:56.240
And so commodities in 2022 were up over 20%.
00:24:57.039 --> 00:25:05.599
Gold, which has been a long time holding of all of my client partners, gold was up a little bit in 2022, but far outperforming stocks.
00:25:05.759 --> 00:25:06.240
All right.
00:25:06.400 --> 00:25:13.759
So it's not about like predicting exactly where the economy and inflation are going to be.
00:25:13.920 --> 00:25:22.880
It's about ensuring that portfolios have some exposure to the various asset classes in order to generate returns across these cycles.
00:25:23.039 --> 00:25:31.039
I'll give you, I'll give you one last example before like everybody starts nodding off on all my you know economic investment speak here.
00:25:31.359 --> 00:25:34.240
But COVID is another good example, right?
00:25:34.480 --> 00:25:38.720
Q1 of 2020, I don't think any of us can ever forget that, right?
00:25:39.359 --> 00:25:41.759
So, in that environment, what happened?
00:25:41.920 --> 00:25:48.799
So the economy came screeching to a halt, so economic growth was lower than people thought, and inflation collapsed as well, right?
00:25:48.960 --> 00:25:50.000
No one's buying anything.
00:25:50.160 --> 00:25:52.640
Of course, inflation is gonna collapse temporarily.
00:25:52.799 --> 00:25:55.599
That's what's called a deflationary environment, right?
00:25:55.680 --> 00:25:58.240
When economic growth and inflation are going down.
00:25:58.480 --> 00:26:06.160
Of course, lo and behold, if you use the same business analogy, stocks were down 35% in Q1 of 2020, right?
00:26:06.319 --> 00:26:10.400
Because revenue, profits, everything is collapsing at that point.
00:26:11.119 --> 00:26:15.920
However, gold was up 10% in Q1.
00:26:16.400 --> 00:26:21.200
Long-term treasury bonds were up 20% in Q1.
00:26:21.519 --> 00:26:28.400
And treasury inflation protected bonds, so basically inflation-linked US government bonds, they were up 15%.
00:26:28.880 --> 00:26:29.279
All right.
00:26:29.519 --> 00:26:35.680
So again, I'm not advocating that someone should have 30, 40, or 50% in those types of assets.
00:26:35.839 --> 00:26:42.480
But imagine if you had 10% in gold and 10 or 15% in US Treasury bonds, right?
00:26:42.559 --> 00:26:47.119
You're having a very different experience than someone who's 100% in stocks.
00:26:47.279 --> 00:26:56.240
You just sold your business, you're down 35%, and lo and behold, you're letting greed take over and you're selling everything at the bottom, right?
00:26:56.319 --> 00:26:58.880
That I mean, that's that's the natural inclination.
00:26:59.039 --> 00:27:04.559
You took your life's work, you put it in the stock market, and you're just basically getting flushed, right?
00:27:04.720 --> 00:27:13.759
So it's about trying to moderate through these cycles, and then over time, when you're rebalancing and being opportunistic, you can generate a really nice return.
00:27:14.480 --> 00:27:25.359
And what I've heard from some of your clients that you know the the money from the exit is just the tip of the iceberg with what can be done with the investment strategy.
00:27:25.599 --> 00:27:44.240
So, you know, I would say to those founders that are holding on to every last penny, you know, in a sale, uh, you don't need to get every nickel out of your sale if you've got the right uh strategic advisors from a tax perspective and the right investment strategy with the money after closing.
00:27:44.480 --> 00:27:50.720
You could still turn that 5% less than you wanted into a big pile with the right strategies.
00:27:51.200 --> 00:27:52.079
You really can.
00:27:52.160 --> 00:28:04.960
And I mean, the investments, the investment tax strategy after the sale, you know, like it can be the difference between doubling or tripling your net worth over a 20, 30 year period or running out of money.
00:28:05.119 --> 00:28:05.440
Right?
00:28:05.599 --> 00:28:22.640
These small changes, you know, one 1%, 2% of tax drag over a long period of time while you're spending the money and continuing to potentially draw it down, it literally, you know, I've seen the cases where it can be the difference between between those two scenarios.
00:28:23.519 --> 00:28:31.440
Uh if if someone's a business owner, maybe they own a SaaS business, maybe they're the CEO or a founder of a MSP.
00:28:32.160 --> 00:28:39.680
Um how do you determine which of those companies are the best fit for your services?
00:28:39.920 --> 00:28:49.359
How does someone who's thinking about maybe selling their business someday or maybe even involved in currently a process to sell their business?
00:28:49.599 --> 00:28:55.119
How do you evaluate um who's the right customer for your business?
00:28:55.440 --> 00:29:01.759
If you were a SaaS business, I would say, tell me your ICP or ideal client profile.
00:29:02.000 --> 00:29:08.319
But I just want to understand, you know, who's that customer that's most likely to benefit from your services.
00:29:08.640 --> 00:29:09.279
Yeah.
00:29:09.680 --> 00:29:10.000
Yeah.
00:29:10.160 --> 00:29:20.480
So for I don't have any hard and fast minimums, you know, when I think about like this ideal client, but the more money someone has, typically the more impact we can have.
00:29:20.640 --> 00:29:27.359
And not just because it's larger dollars, just because there's different strategies available to different wealth levels.
00:29:27.519 --> 00:29:34.960
Meaning, someone that has a$15 million exit, we can help a lot more than someone that has a$1 million exit.
00:29:35.119 --> 00:29:35.440
Okay.
00:29:36.000 --> 00:29:45.519
But typically, you know, we'll help folks anything from$5, 10 million and up in order to be able to execute some of these strategies, right?
00:29:45.680 --> 00:29:52.400
So, you know, we have clients in that five to ten million dollar range, and we have clients, you know, north of 50 million.
00:29:52.559 --> 00:29:54.880
So it's it's really all across the board.
00:29:55.119 --> 00:30:01.440
But again, this concept of like kind of like five and ten up is where we can really have a bigger impact.
00:30:01.759 --> 00:30:02.559
That makes sense.
00:30:02.640 --> 00:30:13.200
And if someone wanted to start a conversation with you or continue the discussion on the topics that we've discussed today, what would be the best way for them to get in touch with you?
00:30:13.759 --> 00:30:18.960
I would say the best way to get in touch with me is like you can just email us, you can go to the website.
00:30:19.119 --> 00:30:28.880
I mean, the email is info at essentialp.com, you know, E-S-S-E-N-T-I-A-L P is in partners.com.
00:30:28.960 --> 00:30:34.640
And our website, same thing, you know, essentialp.com, where we have contact information there.
00:30:36.079 --> 00:30:41.839
Before we go, I just want to ask you this burning question that I've been thinking about.
00:30:42.799 --> 00:30:44.640
I gotta deliver on a joke right here, Robin.
00:30:44.880 --> 00:30:45.519
All right, I'm ready.
00:30:46.160 --> 00:30:49.200
You want to hear the question first, or you want to do the joke first?
00:30:49.440 --> 00:30:50.000
No, no, no.
00:30:50.079 --> 00:30:52.240
I'm gonna I've got to try to weave a joke into the question.
00:30:52.720 --> 00:30:52.880
Perfect.
00:30:53.359 --> 00:30:54.240
Into the answer.
00:30:54.480 --> 00:31:23.680
Yeah, well, yeah, I would say that you know, my question is if if you had from all of your experience, from Wall Street to everything that you've done in tax and wealth management, investments, if you could say, you know, one bit of advice to a founder or business owner that's thinking about exiting, you know, what is it that you could share with them that's the most meaningful takeaway that you think that they could get from your experience?
00:31:25.599 --> 00:31:32.400
It might it might be a little unconventional, but my advice to that person is don't wait.
00:31:32.640 --> 00:31:32.960
Okay?
00:31:33.279 --> 00:31:36.880
And I don't mean like don't wait, like call our firm and start planning.
00:31:36.960 --> 00:31:38.240
Like, no, I don't mean that.
00:31:38.400 --> 00:31:42.160
I mean don't wait in preparing your business to be sold.
00:31:42.319 --> 00:31:42.640
Okay.
00:31:43.119 --> 00:31:53.920
And the reason why is that the future is entirely uncertain, and you may get hit, you may be the only one in your family that's involved in the business, and you may get hit by a bus tomorrow.
00:31:54.079 --> 00:31:54.480
All right.
00:31:54.559 --> 00:32:15.519
And if you get hit by a bus tomorrow and your business is a mess, it's not ready to be sold, you haven't been diligent about preparing that business, you're leaving your family, like not only have you died, which we're all sad about that, but you're leaving your family who's devastated from your death with now a business that doesn't necessarily have any value.
00:32:15.839 --> 00:32:16.160
Okay.
00:32:16.640 --> 00:32:26.640
And so if you take the steps now to prepare the business to be sold, put some of the pieces in place and have those relationships to where if something does happen, right?
00:32:26.720 --> 00:32:28.799
You you know a broker that can sell your business.
00:32:28.880 --> 00:32:31.119
Like we don't, we don't, we don't do that, obviously.
00:32:31.279 --> 00:32:34.559
But you know a broker, the business is actually prepared to sell.
00:32:34.720 --> 00:32:35.200
Who knows?
00:32:35.279 --> 00:32:38.400
Maybe you do have some other tax and investment strategies.
00:32:38.640 --> 00:32:49.119
But by just preparing the business to be sold and setting your family up for that, you know, terrible situation, I think that's like the best first step that anybody can take.
00:32:49.440 --> 00:32:50.720
Yeah, that's excellent advice.
00:32:50.799 --> 00:32:58.240
And I always say preparing a business to be sold is good business whether you're gonna sell or not.
00:32:58.640 --> 00:32:59.440
So true.
00:32:59.759 --> 00:33:00.480
And what I've heard.
00:33:01.119 --> 00:33:01.359
Guess what?
00:33:01.440 --> 00:33:02.960
You'll make more money along the way.
00:33:03.279 --> 00:33:06.640
And what I've also heard is the exit rate is 100%.
00:33:07.519 --> 00:33:12.079
You're either gonna exit on your feet or not on your feet.
00:33:12.559 --> 00:33:14.000
Unfortunately for all of us.
00:33:14.319 --> 00:33:17.200
And so I heard the death rate is still 100%.
00:33:18.720 --> 00:33:21.440
We need a that's excellent advice, Nick.
00:33:21.680 --> 00:33:25.200
I will challenge you to a lawyer joke contest.
00:33:25.279 --> 00:33:26.160
I'm gonna go first.
00:33:26.400 --> 00:33:26.960
Oh my gosh.
00:33:27.119 --> 00:33:27.839
Oh my gosh.
00:33:28.079 --> 00:33:28.720
Go ahead.
00:33:30.000 --> 00:33:33.119
Why does a shark not bite an attorney?
00:33:36.000 --> 00:33:37.839
Professional courtesy.
00:33:40.880 --> 00:33:45.119
Oh, I'll give you a more of a finance investing one.
00:33:46.319 --> 00:33:47.680
It's gonna be very lame, though.
00:33:47.839 --> 00:33:52.880
Like, um have you ever heard of the two-handed economist?
00:33:53.519 --> 00:33:53.839
No.
00:33:55.039 --> 00:34:04.240
On one hand, it seems like the economy is growing strongly, but on the other hand, there's some cross currents where it could be not as strong as people think.
00:34:04.559 --> 00:34:06.160
Sounds like the weatherman.
00:34:06.559 --> 00:34:07.519
Exactly.
00:34:07.839 --> 00:34:08.559
Exactly.
00:34:09.599 --> 00:34:11.360
Economics, the dismal science.
00:34:11.760 --> 00:34:24.159
Ladies and gentlemen, my friend Nick Bartolo, if you've got any questions about uh qualified small business stock, uh investment strategy, preparing your business to exit.
00:34:24.320 --> 00:34:29.840
I can personally say Nick is amazing at what he does, and he will serve you very well.
00:34:30.000 --> 00:34:43.840
So if you're in the need for additional information about any of those topics, reach him at EssentialP.com or reach out via email, and uh I'm sure he'll take good care of you.
00:34:44.000 --> 00:34:45.679
Nick, thank you for joining.
00:34:46.000 --> 00:34:46.639
Thanks, Rob.
00:34:46.719 --> 00:34:47.440
Great to see you.
00:34:47.679 --> 00:34:48.800
Good to see you too.
00:34:49.280 --> 00:34:54.559
You've been listening to Talk Tech with Rob Scott, brought to you by Monger.
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