Ep 13 - The Business of Planning: Financial Strategies for Business Owners

Voiceover: [: 00:00:00

Now, your host.[00:00:30]

Metcalf Partners and on the [: 00:00:45

And, and we've always defined it as, as three key, [00:01:00] uh, clients. If we're, if we're gonna kind of identify and break 'em down, they usually fall into one of three buckets, right? And one of which is gonna be what we call our emerging affluent clients. And that's gonna be a, a younger person that's maybe a higher earner that wants to put [00:01:15] together a plan, maybe Adoesn't have a huge asset base right now.

years of retirement, [: 00:01:30

And then the third one, and this is the one that we really wanna focus in on today. And if I'm being [00:01:45] honest, it's one of my favorite type of clients to work with is the business owner client. And when you look at a business, I'm talking about a small business owner, there's a lot of different things, uh, that we can do for, for a small business owner, uh, and a lot of ways that we can help them, whether it's to save money on taxes, [00:02:00] to just kind of get started and putting away a nest egg to exiting their business.

h, so that we can basically. [: 00:02:15

Ethan's gonna hit on some retirement plans that, that we do, uh, that don't require a third party administrator. Uh, and then Eric's gonna hit on some insurances that we do. If you think about a business, you've got key employees, you've got a lot, a lot of insurable interests, [00:02:45] and, uh, and we can certainly help through those.

we've learned some tricks of [: 00:03:00

And I think we're gonna go ahead and start, and let's talk about different Ethan different retirement plans, um, that we do as an organization.

There's, there's three main, [: 00:03:15

Uh, for that business and they're just saving money into a pre, pre-tax traditional IRA or they're looking at a joint account and they're just putting the minimums or the maximums into those accounts. And for reference, [00:03:45] an IRA the most you can put into an IRA is a is just around $7,000, give or take, depending on if you're over or under age 50.

cture. How many employees do [: 00:04:00

The, the first one I'll talk about, uh, it's one of [00:04:15] our favorites. Uh, it's called the solo K, or an individual K. Um, the K at the end of that is it's 401k. Um, and. You, you can have this plan, this solo k if it's, uh, just you in the business. Um, there's a [00:04:30] caveat. You, you, your, if your spouse is employed, um, they can also have a solo K that's attached to that business.

business, husband and wife, [: 00:04:45

The [00:05:00] employer can do a profit share on top of that and put up to $70,000 total, uh, inside of that solo k. So for a husband and wife that are running a business together. They can put about $140,000 away into these plans. So very, [00:05:15] very unique. Um, also all these plans we're talking about today have a Roth component as well, so you can get a pre-tax, uh, contribution and get a tax deduction in the year you make that.

t some Roth dollars in there [: 00:05:30

Um, personally that's my favorite one. I we really love working with, with clients [00:05:45] that are just like husband and wife, are really, really small business owners and can really show them the impact that those solo cake contributions can do for them over 20, 30, 40, 50 years.

Jeb Graham: And I don't know if you hit on this too, but I love what the other thing we love about, so Okay.

Right, is that you [: 00:06:00

Than what a full 401k is. And I am, I'm with you, Ethan. That is, that is my favorite plan, uh, to do with a client just because they can put away so much money. There's so much tax benefit and it's so, [00:06:30] it's just not costly. It's just easy.

Ethan Hutcheson: So, yeah. And, and the costs deter a lot of folks from. From signing up for a 401k, they think, wow, this is gonna cost me, you know, $20,000 a year to keep this 401k up and running.

there's, there's so many tax [: 00:06:45

Very, very cost efficient. Um, so don't think that you're gonna be paying out the wazoo to have these plans in place. They're, they're, they're extremely beneficial and, and very, very [00:07:15] low cost. And a lot of times the, the costs that are associated with 'em are tax deductible to the business. Um, so if you're doing it the correct way, you can, um, kind of, you know, use that to your advantage when you're setting these plans up.

about is a Sep IRA. Um, this [: 00:07:30

These are employer only contributions, so if you know I'm an employee at a business, I can't make contributions to that. My boss or the business owner has to contribute on my behalf to the plan. [00:08:00] Um, very, very low cost. Super simple. Um, there, there's really not a lot of lot to these and, and actually recently, um, given all the new legislation that's come out, um, and I haven't seen one of these yet, but you can do a CEP Roth IRA as [00:08:15] well.

Um, so that, that's unique. Um, and again, it's, it's a great way to get to get Roth dollars in there.

m: And that, that's new, just: 2025

Yeah,

Ethan Hutcheson: [: 00:08:30

But, um, you know, nothing, nothing right away. And Ro Roth step IRAs are, are, are one of those, um, again, very low cost, very straightforward, uh, and, and, and, and super easy to set up. And the, the last one we'll talk about, and we do [00:09:00] see these fairly often because they are typically for, for teams or businesses that have more than two employees.

on limits for a simple IRA in: 2025

It, it's kind of just like setting up an IRA for your employees and your business. Um, it's a bit scaled down than a 401k, so there's not a lot of different components that are in there, but the investment options are very fluid. You can invest in, you know, a lot of anything under [00:09:45] the sun for the most part, you can put into a simple IRA.

[: 00:10:00

And the other option is a, um, a 3% match to whatever the employee [00:10:30] contributes to those plans. Um, very, very low cost. Super straightforward. No, IRS filings like the 401k. Um, the, the big downside with simples is the contribution limits. Um, as I mentioned earlier with, with SEPs and solo Ks, [00:10:45] if you structure 'em correctly, you can put about $70,000 away into these things.

e is the lowest contribution [: 00:11:00

Jeb Graham: The great thing about the simple though is I feel like really the place there is for a business owner that's not as worried about stocking an a bunch of money of their own away, but is really wanting to provide a benefit [00:11:15] to their employees and maybe their employees aren't at an income level where they're gonna ever probably exceed those, those contribution limits anyway, that makes their life a lot simpler.

er. Yeah. Uh, then having to [: 00:11:30

Ethan Hutcheson: definitely,

e, there's, there's a lot of [: 00:11:45

And that's something that we can help walk a business owner through as they're, and that's a big part of what we're doing with business owners is trying to help them figure out which one of those plans. Makes the most sense. And I [00:12:00] know Eric, we were talking, uh, yesterday and we kind of went through some different insurances and and stuff like that.

il Absolutely. It's too late [: 00:12:15

Eric Wymore: yeah. You take 'em sort of, you know, kind of the second step. And you know, during this process and you're looking at some kind of a risk management or executive compensation that's kind of go hand in hand and.

that comes to mind is a key [: 00:12:30

Or maybe you're, have someone that's, you know, an intellectual property and, and this is the person that if. Something happened to them, it would take some time to re to [00:13:00] replace them. And so oftentimes a business will put in what's called a key person or a key man insurance plan where they actually purchase an insurance, a life insurance policy.

insurance policy or it could [: 00:13:15

Uh, so it's a great way for business to utilize a small dollar [00:13:45] amount and an insurance policy to ensure that if something happens to that key person that. They can take the time and won't have a, you know, a large revenue loss. Uh, to find that person. Um, typically [00:14:00] goes hand in hand is when you have that key person you want to keep 'em.

y some kind of a, of an, uh, [: 00:14:15

And they may already be maxed out on all their 4 0 1 Ks [00:14:30] and their off 4 0 1 Ks and so on, and here's another way for them to defer their compensation. For future payments, right? So you're gonna take a little bit less income this year and you're going to [00:14:45] defer it for a future payment out in the fu in the future.

, and then each one of those [: 00:15:00

A retirement plan to bridge that gap between when you're done working, [00:15:15] maybe take a little bit of time off before you wanna start drawing down on your retirement accounts and so on. Um, plus there's, there's a couple of different things that are involved in there. Um, there's other supplemental, it's called a crc, and we won't go into great detail, but just kind of get that [00:15:30] general idea.

If you're a highly compensated executive and you've already maxed out on your 4 0 1 Ks and your other retirement plans. And you want to defer some of your comp to lower your current income tax bracket. There are ways to do that. Mm-hmm. Um,

Jeb Graham: [: 00:15:45

Like if you're a business owner, number one is like an example that I would think about would be like someone that's a, a [00:16:00] sales person that is generating millions of dollars of revenue for your company, right? And if that person dies, that's millions of dollars of revenue that you're missing out on. So that's a big time insurable interest right there, right?

y that's gonna help you as a [: 00:16:15

And then by the way, when they retire, they can keep that life insurance policy. To basically, um, you know, change the beneficiary to a family member. So, so there's just a lot of diversi diversity there and I feel like it's, it's an un personally, I feel like that's an underutilized tool [00:16:45] for business owners, in my opinion.

with, uh, business owners on [: 00:17:00

So imagine if you have several different owners in a business. I think the, the fear is that, you know, one of them passes away and then [00:17:15] all of a sudden you become in business with their, their significant other or their children. And you know what a buy sell agreement does is it puts in some kind of a legal binding contract that says if there's a triggering event that [00:17:30] happens.

other, you know, decision to [: 00:17:45

And there's different valuation methods that are gonna be put into that buy sell agreement. There's different ways to [00:18:00] fund it. Oftentimes in the beginning stages, it's funded with a life insurance policy. You know, what a cheap way, if you've got a, you know, a business that's worth a million dollars and there's two owners, you know, rather than [00:18:15] having each of them have a half a million dollars sitting aside to to buy out the other member, you can easily buy a.

eir lives. The business owns [: 00:18:30

Uh, but again, those are, those are conversations and, and, and, you know, that provide that. Continuity in the business, you know, if something were happen, there's plenty of risks out there. Um, you know, there. And, and this is just one [00:19:00] way, or these are three elements that we use a lot of times to help kind of mitigate those risks as we, as we sit down with, you know, business owners in our, in our practice.

viously buy, sell agreement. [: 00:19:15

We're gonna basically help with that life insurance. And, um, but [00:19:30] again, the, it's not an uncommon story that somebody doesn't have a succession plan in place and something happens to the business owner or a key employee and, and, um, and they're kind of in a pickle. And so I think helping the business owners prevent that.

Is a, [: 00:19:45

And I would say that every business owner, their dream is, is kind of that final exit someday. And, uh, you know, and maybe not every business owner, but I think that's. Pretty [00:20:15] prevalent is people kind of have this idea that they're gonna work, they're gonna build up this business, and then they're gonna have this kind of glorious exit.

nk about in a business sale. [: 00:20:30

There's a little bit more to it than that. And um, and I think a few of the things that we can talk about is, is kind of what type of. How people are selling businesses and what type of [00:20:45] business transactions that we're seeing. And I'd say that most of them fall into one of three categories. Uh, one of those categories would be internal succession.

ther key employees, a lot of [: 00:21:00

They understand the business and, and they're the mo probably the, [00:21:15] the most prepared to be able to move it on. Uh, after, after the initial business owner is gone. And then we're also seeing people, maybe they don't have that internal succession plan, so they're going through business brokers, right? So you might, there's a lot of business brokers out there.

[: 00:21:30

And oddly enough, the, the. Environment has been very, very favorable for those organizations. For a number of years, we've had very low interest rates. [00:22:15] Uh, we've, people have had a lot of cash on hand. Uh, so it's, it's basically been, uh, kind of a, a heyday for some of these private equity organizations. And so, so that's what we're seeing.

nd of two different types of [: 00:22:30

Pretty easy to calculate. But then there's the, the more complex ones, which would be, uh, as, as a multiple of ebitda, uh, which is [00:23:00] basically the profitability of the organization. Um. And when you're selling on the profitability of the organization, there's a little bit more involved in selling, right?

lot of times they're scaling [: 00:23:15

Um. So in the, I feel like in the private equity world, that's, that's what we're seeing [00:23:30] more of. And some of the numbers that we're seeing are pretty ridiculous, right? As far as mm-hmm. Multiples of ebitda, a lot of times it can be 10 to 15 times ebitda, depending upon the size of the business, even higher than that in, in certain circumstances as well.

But, so from the business [: 00:23:45

And that's [00:24:00] what I've run into anyway. A lot of the times these things are selling with almost no basis. So if you, if you have a five or $10 million transaction, uh, you may be on the hook for the capital gain on the entire amount of that transaction. So, so planning accordingly for that [00:24:15] is very, very important.

f of the money for them over [: 00:24:30

Um, so, you know, there's, there's direct indexing options now there's a lot of different things that you can do, [00:24:45] uh, with as someone that has a large lump sum of money and, and tax harvesting just to make sure that, that you're tax efficient with how your dollars are invested. Um. And then, yeah, so the tax efficient reinvestment and, [00:25:00] and just knowing your basis, I think calculating and knowing your basis.

, you get a lump of cash and [: 00:25:15

And, and maybe not quite as much as in the business broker world, but, but many times, uh, you're getting, you know, if you do a $10 million transaction, [00:25:30] a lot of times you may get 5 million or $7 million up front. And then a lot of that other payment is deferred based on, on the income of the organization, uh, staying where it is or growing.

for growth in that first few [: 00:25:45

See you later. That's a, that's a tough way to sell a business because I think there's a lot of risks with that because you can end up, uh, you know, losing [00:26:15] clientele because maybe they're. They have a great relationship with the business owner and so on and so forth. But I think, like when you think of all these things, the, the key is if you, if you think about wanting to sell your business and you're going down that road, the time to think [00:26:30] about that is, is now, right?

ransaction. Do your research [: 00:26:45

So

multiple years to grow your [: 00:27:00

Ethan Hutcheson: Exactly. Don't call us in July and wanna sell in August to be, yeah. It's tough. And I think that's kind

Jeb Graham: of natural. I think some people just do that.

hey're like, well, I'm done. [: 00:27:15

Eric Wymore: Well, and we, and you, I mean, I'm gonna touch on that private equity deal a little bit.

we've been pretty surprised [: 00:27:30

And, and so it's, uh, the, the sooner, the better if to start engaging or having [00:28:00] some of these discussions and, and building up. Building up like, you know, strategies and, and mm-hmm. Ways to, ways to implement them for sure. Is really important. Yeah, absolutely.

the day, it's your business, [: 00:28:15

Ironing, ironing that out and figuring out what's best for you and your family well in advance so that you can go to the table with, Hey, here's what I want and here's kind of [00:28:30] how we wanna structure this. And just having all that stuff well in advance just makes the process so much easier for everybody involved.

I agree.

and hopefully there's a few [: 00:28:45

Uh, that's thinking about any of these things, uh, about that, that subject matter. So thank you for joining and, uh, [00:29:00] this is Metcalf Money Moment, the podcast, and we're signing off.

e provided valuable insights [: 00:29:15

Disclaimer: Jeb Graham, Ethan Hutchson and Eric Wymore are registered representatives with and securities offered through LPL Financial Member FINRA SI PC Investment advice offered through W CG Wealth Advisors, a registered investment advisor, W CG Wealth Advisors and Metcalf Partners Wealth Management is AR separate [00:29:45] entity entities from LPL Financial.

The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations for any individual to determine which strategies or investments may be suitable for you. Consult the appropriate qualified professional prior to making a decision.

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