469 Kelly Finnell

Jeffrey Feldberg: [00:00:00] What if you could exit your business and still leave a legacy that lasts for generations?

Kelly Finnell has spent over four decades guiding business owners through one of the most important and often emotional decisions of their lives. How to exit their company without losing what they've built. As one of the nation's foremost experts on Employee Stock Ownership plans, ESOPs Kelly has helped hundreds of entrepreneurs turn employees into owners preserving company culture while securing financial futures.

He's not just a consultant, he's a strategist, a teacher, and a legacy builder. Kelly is the author of The ESOP Coach, A Definitive Guide to Using ESOPs As A Succession Planning tool.

His advice has reached international stages, having spoken at over 300 events from the US to London and Sydney.

What makes Kelly's approach different is that it is not just about the numbers.

It's about the people.

His work focuses on aligning the goals of founders with the long-term health of [00:01:00] their companies and the futures of the people who helped build them.

If you think succession is only about selling or the ownership ends at retirement, this conversation might just change how you see the future of your business.

And before we start the episode, a quick word from our sponsor, Deep Wealth and the Deep Wealth Mastery Program. Here's Bill, a graduate, who says, the Deep Wealth Mastery Program has transformed the KPIs we're using to accelerate growth and profits.

Or how about Emry, who says, and I love this, and I quote, the Deep Wealth Mastery Program helped me create the right mindset for both growing my business and later my future exit. I now know what questions to ask, what to do and what not to do, which is priceless. The team and I have found dangerous skeletons and gaps that we're now addressing due to the Deep Wealth program. Today, our actions have a massive ROI. 

Absolutely love that. 

And now, speaking of growth and adding value, check out what Bruce says, and I quote, As a business owner, [00:02:00] I'm always looking for new programs, systems, CEO peer groups, and strategies to improve my business. Hands down, the Deep Wealth Mastery program is the absolute best. I'm both growing my business and preparing for a future exit at the same time. It doesn't get any better. 

And I gotta tell you, as I hear these testimonials, this is exactly why I do what I do. My mission, the team's mission here at Deep Wealth, is to literally change the social fabric of society, one business owner at a time and one liquidity event at a time.

The Deep Wealth Mastery program, it's the only one based on a nine figure deal. And that deal, that was my deal. You know my story. I said no to a seven figure offer. I created a system that we now call Deep Wealth Mastery and that's exactly what helped myself and my business partners welcome from a different buyer, a different offer, a nine figure deal.

So if you're interested in growing your profits, preparing for a future liquidity event, Whether that's three years away or 33 years away, and if you want to optimize [00:03:00] your post exit life, Deep Wealth Mastery is for you. 

Please email success at deepwealth. com. Again, that's success, S U C C E S S at deepwealth. com. 

We'll send you all the information about the Deep Wealth Mastery Program, otherwise known as the Scale for Ultimate Sales System. Better yet, why not hop on a complimentary strategy call? We'll see where you are at your business and what's standing between you and your financial independence and your dreams.

So that's where you want to be. You want to be with other successful business owners, entrepreneurs, and founders, just like you, who are looking to create market disruptions, whether you're a startup, whether you've been in business for three or four decades, whether you're manufacturing, whether you're a high tech, SaaS, low tech, whatever the case may be.

Come on in and network with other business owners, with other businesses, just like you, because they all want to lock in their financial freedom and enjoy both success and fulfillment. Again, the 90 day Deep Wealth Mastery Program, it has your name on it. All you need to do is take the next step. Please send an [00:04:00] email to success at deepwealth. com. 

Welcome to another episode of the Deep Wealth Podcast.

Deep Wealth Nation when it comes to the final chapter for your business, you're moving on to other perhaps ventures or greener pastures. What are you gonna do and how are you gonna do it?

You know, we're all about that here in the Deep Wealth podcast, but I bet you may not have thought of one incredible opportunity that's right in front of you, but most business owners miss.

What is that?

Well, you're gonna hear all about that. We have a very special guest in the House of Deep Wealth. Kelly, welcome to the Deep Wealth Podcast. It's really a pleasure to have you here. You and I have been chatting offline, what's your story? What got you from where you were to where you are today?

Kelly Finnell: Well first, Jeff, thanks very much for having me. I really appreciate the opportunity to discuss the ESOPs employee stock ownership plans with your audience. I got into the ESOP consulting niche totally by accident in 1978. I had just finished my first year of law school and I got a [00:05:00] job working for a firm up in Massachusetts.

And was working for a group of pension lawyers within this firm. And we had meetings every Monday morning where they discussed requests that they had received for various research projects. And the head of the department on this Monday morning said, I've gotten a letter. This was 1978.

No email. I've gotten a letter. From a person in Louisiana who wants us to prepare a white paper on ESOPs. So this was 1978. ESOPs had only been part of the law for four years at this point, and all of these experienced pension lawyers looked around at each other and said, I don't know anything about ESOPs.

And at the conclusion of the discussion they said, let's give this project to the kid. And at that point I was the kid and so I spent much of that summer researching and writing about ESOPs. Now, I had gone to law school thinking I was gonna be Perry [00:06:00] Mason and be in the courtroom doing litigation.

I had zero interest. I. In business as an undergraduate, never took a business course. The only time I went into the business building was to meet the girl that I was dating that I've now have been married to for 47 years. She was an accounting major, so once a week I'd meet her in the business building and we would go to lunch together.

But other than that, had no business undergraduate education. But I fell in love with this idea of helping business owners. Sell their companies to their employees through this tax advantaged ESOP structure. So next year I had two more years of law school and I decided I was gonna do everything I could to catch up.

And learn business. So instead of taking the courses on litigation and procedure and all of those things, I focused my last two years of law school on business related courses. And graduated in 1981, passed the [00:07:00] bar exam that summer. And so this is. What I've done since 1981, so 43 years now in the ESOP business.

Jeffrey Feldberg: Okay, so for Deep Wealth Nation, for some of our members, Kelly, they're hearing the word esop, Employee Stock Ownership Program, and they're saying. Wow, never heard of this before. What exactly is this? What does it mean for me? Why an ESOP over the more traditional Exit where perhaps it's another company or private equity or venture capitalist coming in to buy me out or even a competitor.

And so you shared some of that of how this ESOP back in the day when it just came out fascinated you, but there's an affinity there. So what was it really, the story behind the story of the ESOP that has you keep on coming back, that you're now really the king of ESOPs out there?

Kelly Finnell: Yeah. Well first, just because I have a hammer, I don't think. Every situation is a nail. So ESOPs are not right for everybody, but for people who have the following situations and the [00:08:00] following goals, and ESOP can be the best solution possible. I talk to a lot of business owners who say that I have been very fortunate to be in the position that I am today where I can cash in on my life's work.

For a big check and provide Wealth for me and generational Wealth for my family. But I want to do that while at the same time taking care of those people who have helped me get to this point. I didn't do this by myself. I've had a team of people and I know if I sell to private equity or to a strategic buyer.

That not only are my employees not going to be rewarded, they're probably going to be hurt as a result of that transaction. And this company represents my family legacy. I want to, I. Protect and reward my employees. I want to preserve the company culture because our success is based on the way we treat each other and the way [00:09:00] we treat our employees and our customers.

And I know that if I sell to a third party company, culture is destined to change. So for business owners who wanna cash in on their life's work for full, fair market value. While at the same time protecting and rewarding their employees, protecting the legacy that the company represents to their family and preserving company culture and ESOP is the best solution.

Jeffrey Feldberg: Okay, and by the way, you both nation, when you go to the show notes. Go there, click on it because there's a link to Kelly's book, the ESOP coach using ESOPs in ownership succession planning. And we're gonna dive into that in terms of some of the things that you're talking about there and what's going on with that.

But let me ask you this, because I'm sure members of the Deep Wealth Nation, as they're hearing us talk. They're saying to themselves, and I've heard other business owners say this. Okay, Kelly, I hear you on the employees stepping forward and buying the business, and yeah, I love what that can do for the legacy of the business, for my [00:10:00] legacy, we're carrying on the tradition, we're looking after them.

How in the world though, could my employees compete when it comes to dollars and cents for private equity or as strategic coming in and putting all these zeros in front of me?

Kelly Finnell: Yep. So in terms of competing with private equity in 43 years, about 30% of our clients each year. Have received an offer from private equity before they come to us and we discuss an esop. And in every one of those situations, not one single exception, the ESOP paid more for the company than the best offer they receive from private equity.

that's a little counterintuitive, but when you think about that, it makes perfect sense. Private equity is an alternative investment strategy. You've got a lot of very wealthy people who are gonna allocate 10% of their net worth to an alternative investment, like private equity, and they're not happy with an 8% return on that.

They can get [00:11:00] that in the stock market. They're looking for, 15 to 20% plus kinds of return. And so my experience with private equity is that they're trying to. Find people who are desperate to sell and who don't know that there are other options and aren't experts on valuation. And in my experience, they're underpaying for the companies that they're purchasing.

So we've never had a single situation where the ESOP paid less than the best offer that the business owner received from private equity. Strategic buyers can be different. For a strategic buyer, they're gonna recognize such large synergies as a result of the acquisition that they can pay a strategic price, which might exceed a financial buyer price.

And then ESOP is limited to paying the maximum amount that a financial [00:12:00] buyer would pay. And so there are situations where. We talk to business owners. They've been approached by a strategic buyer, and we analyze their financial information and tell them, that's what you should do. If you're looking to maximize value, you can do it with a strategic and ESOP is going to pay you less.

And so it's not as simple as an ESOP versus. Every type of third party purchaser. But when we're talking about an ESOP versus private equity, an ESOP almost always pays more.

Jeffrey Feldberg: And so with that mechanism that you're talking about there, where an ESOP can pay as much, possibly even more than let's say private equity or venture capital or just a. A financial buyer, traditional financial buyer coming in, what's the mechanism behind that you'd want people in our community to know?

How exactly is that working? Are we taking offers that [00:13:00] we've received to a, a bank or to a lending source and saying, here's what we're getting. Here's fair market value. What can you do? Or what does that look like?

Kelly Finnell: What happens is in an ESOP transaction, there is a business owner who's the seller in the transaction, and then the other side of the transaction is the ESOP trustee. So that is the purchaser in the transaction. So the ESOP trustee has a team of people that assist it with the transaction, including a valuation Advisor and trustee legal counsel.

And so the responsibility of the trustee team is really twofold. First, to ensure that the trustee doesn't pay more than fair market value for the stock that it's purchasing, because the job of the trustee is to represent the interest of the employees, and if the trustee overpays, then that's to the detriment of the employees.

The second is to make sure that all the terms of the transaction are commercially reasonable. And so what [00:14:00] happens is the company hires an ESOP trustee. You go through the same type of due diligence process that you would in a sale to any other third party. Except the team performing that due diligence is the ESOP trustee, their valuation Advisor and their legal counsel.

And so after the due diligence process is complete, then we go through the same type of back and forth with letters of intent that you would go through with a sale to a third party. And at the conclusion of the process. The business owner knows what the price and the other terms are going to be, and they make a decision as to whether or not that's sufficient.

And if so, they sell to the trustee.

Jeffrey Feldberg: Interesting in terms of the mechanics there, and I'm sure that's not just a separate episode. That's probably a whole series that we can do on that. Kelly, lemme circle back though to something that you're sharing and we've seen the same thing here, and in fact, [00:15:00] that's where, if I can give a shameless plug out there to our mastery program, the 19 day de Mastery program.

We see that you're right. The traditional method when companies are purchased, and more times than not, it's an unsolicited offer, and it could even be from a strategic or more likely private equity venture capital. Most business owners are leaving anywhere from 50% to over 100% of the deal value. On the deal table.

So in other words, I'm speaking to a friend, oh, hey Jeffrey, we hit it out of the park. We sold our company for X, Y, Z. Well, guess what? They probably left X, Y, Z or more. But they don't know it and it's too late, obviously at that point. And so you're talking the same language that we're talking here at Deep Wealth.

You're talking all about preparation, and I know this is a big deal for you and in the ESOP coach, you talk a lot about that. So for the Deep Wealth Nation, when it comes to preparation. What would you want them to know of what they should be thinking about today? Even [00:16:00] though an Exit for them, it could be years away.

What would you want them to know today?

Kelly Finnell: The first thing that they need to do is educate themselves. And so most people don't know much about ESOPs. They've never considered it as a liquidity strategy, and there are lots of ways for them to educate themselves. They can go to our website, we've got lots of material on there, including piece called the succession planning Guide.

And that will give them a very basic. Easy to understand explanation of what an ESOP is, how it works, and how it can benefit the owner and the employees for a deeper dive. They can get my book and it's written for business owners. It's the only ESOP book. It's written for business owners. All of the others are written for lawyers and CPAs and investment bankers and commercial bankers, but this is written in business owner language and it's full of real life case studies where the names have been changed, and I found that's [00:17:00] where many business owners learn best is from case studies.

They like the story, they find a case study that they can identify with, and that really helps them understand whether or not this might be a good option. If it is, then we're happy to have a conversation with them and their professional advisors to answer all of their questions. And if they decide at that point that an ESOP is worth exploring, then they'll engage us to do a feasibility study.

And in that feasibility study, we're gonna answer the four key questions that they have. The first is a ESOP specific valuation. If I sell to an esop, what would I expect the purchase price to be? Because if the purchase price isn't right, then the strategy doesn't make sense. The second question is, how is the transaction going to be financed?

And so most ESOPs are financed with three sources of capital Bank loan company cash. Seller notes. And so we're gonna [00:18:00] give them a very specific estimate of how much each of those three pieces will be. It's critical that they know how much cash it closed they're going to receive, and then we'll do all of the modeling of the cash flow to service that debt.

And so we'll project out their EBITDA and their other pieces of debt will include capital expenditures and. All of those potential cash flows that the company is going to have to pay so that they can determine whether or not an ESOP is affordable. Then we'll talk to them about corporate governance.

How's the company gonna operate after the ESOP transaction? And the quick preview of that is not much changes. The people that were running the company before the ESOP are going to continue to run the company. One of the most common questions I get is whether or not the ESOP trustee will take over the business, and the answer is no, and they [00:19:00] won't even serve on the company's board of directors.

And so then we'll talk about stock appreciation rights or sars. Most every business owner tells us that all of my employees are important, but there's some employees that are critical and I want to do something extra for that mission critical group. And so all of their employees will have an ESOP account, and then those three or four or five critical employees that successor management team, in addition to their ESOP account, will have stock appreciation rights.

And so that will give the business owner all of the information that they need in order to make an informed decision. About whether or not this is the right answer. So yesterday I had a meeting with two owners, their CFO two of their accountants and their lawyer where we presented the completed feasibility analysis.

And they're gonna think about that for a couple of weeks and then give us a [00:20:00] decision as to whether or not they want to implement the transaction. So that's the process for deciding whether or not an ESOP is an appropriate strategy for a company.

Jeffrey Feldberg: Thank you so much for putting that out there. And so when you're talking about that, actually Kelly, you're taking me back. Is something that you said in your book, the ESOP coach, and you hold nothing back. You put the good, the not so good and the really not so good help there being polite. And what would you want a member in the deep health community to know in terms of some of the typical, we'll call them mistakes or missteps that most entrepreneurs are taking when it comes to, Hey, maybe this ESOP really is for me, but they've done something or they haven't done something.

That's a tough truth for them, and I know there's a number of them. If you had to pick one of them, what would that be?

Kelly Finnell: I think that the biggest misconceptions that we see business owners harboring about ESOPs and unfortunately these [00:21:00] misconceptions. Often are supported by their professional Advisor team because there aren't many lawyers or CPAs that are aware of the advantages of an ESOP and how it works. I would say that the biggest misconceptions that we see are is that first and ESOP's not gonna pay as much as another type of financial buyer that I'm gonna lose control.

Of my company, which absolutely is not going to happen. There wouldn't be 7,000 ESOPs out there. If the owners lost control and the inmates were running the prison after the transaction those companies would not be effective. Other issues that we see are business owners not understanding the tax benefits that are available within esop.

So just to touch on a couple of those. If you have a 100% ESOP owned company, that company is gonna operate on a tax-free basis from here on out. [00:22:00] So you can have your current company be taxed the way a church or a synagogue would be taxed. And people hear that and they think, there's no way, it's too good to be true.

Uncle Sam's gonna find out about that it's a loophole and gonna shut it down. Well, nothing could be further from the truth. There. Are huge companies out there that are taking advantage of this tax free status. Public Supermarkets is the largest ESOP owned company in the country. They've got 350,000 ESOP participants, so this is not a secret.

Most people aren't aware of it, but Publix competes very well with Kroger because they're in an industry with razor fin margins. They have a huge advantage because they don't pay tax and Kroger does. And so we also, last year BDO, one of the largest accounting and consulting firms in the [00:23:00] country sold 40% of their company to an esop.

And so one of the misconceptions that I've heard for years is that ESOPs are for the financially unsophisticated. That smart, successful people sell to private equity or to strategic buyers, they don't sell to ESOPs. Well, I think that myth has finally been dispelled once and for all. There's not a more financially sophisticated institution than BDO, and they decided that an ESOP was the right course for them.

Jeffrey Feldberg: And so Kelly, when I take a step back and I reflect on what you and I have been talking about, really the following points are coming front and center for me. So for a business owner, when it comes to legacy, and to your point, once I sell a company, I. Oftentimes, I won't have any control of what happens to that.

So if the new owner, if they wanna expand it, great. If they want to fire the team, well that's up to them. If they wanna shut it down and sell it for parts, as they say, well that's also up to them. So I don't really have any [00:24:00] control, and maybe in the short term I might, but long term that goes by the wayside, that's not happening.

So in terms of legacy and ESOP helps me as my business owner. I can protect that. I can protect the years or likely decades that I put into this, that it's going to continue. And then talk about Wealth distribution in a great way. Capitalism, taking the Wealth that we can create and then spreading it.

Among the many, you're talking about the tax advantages. So every employee who's an owner. Because the company is now not taxable as an esop, a hundred percent esop. Well, there's more money left in the pool for the company to grow, to expand, to do other things, to create even more profits and all the owners of the company now, AKA, the employees are benefiting from that.

And then from an employee side of things, what I'm hearing you say is, well, because the employees own it, they're controlling the destiny of the company, the direction of the company. Listen, there are no guarantees in life other than death and taxes, but it sounds if I'm doing my job and I'm stepping up to the plate and I'm doing what's expected of me in terms of [00:25:00] security, my employee security, I'm likely gonna have more security on the employee side than I would in another situation.

How am I doing with that?

Kelly Finnell: Absolutely. To the extent I own an interest in something. And the classic example is if we think back to when we first were getting started in our adult lives, many of us rented housing. After that, we got to the point where we were able to purchase our house. I would bet you that everybody has had the experience of knowing that when they own something, they take much better care of it than when they're renting.

I. The same applies to businesses. If I own a piece of the business, I'm gonna be much more attentive to doing everything I can to increase the company's profits and to decrease expenses.

Jeffrey Feldberg: So true. And actually Kelly, as you're talking about that, my eldest child recently moved out and was calling over the [00:26:00] weekend and Oh yeah we're cleaning the outside windows and just making sure everything is all nice and neat. But to your point, and this is something every entrepreneur strives for, Hey, I don't want my employees thinking like employees.

I want them to think like owners. They'll perform better, we'll make better decisions. The company will do better, our clients will appreciate that. And with an esop, that's just a given. That's an automatic. And so Kelly, how does the operations change in terms of, okay, now. Every employee is an owner of the company.

So what does that mean in terms of throughout the year of, okay, what's going on and the financial reports and distributions, what should we expect?

Kelly Finnell: Yeah, the most important thing to know is that employees don't have a vote. How the company is run the board of directors controls how the business operates on a day to day basis. But the employees do have a financial interest in the company, and it's critical that the employees understand the potential of the esop.

So one of the [00:27:00] things that we help our clients do, and one of the things that is critical to the success of an ESOP owned company is that there be constant communication to the employees. Educating them about how the ESOP operates and how it can be not only a retirement plan, but a Wealth creation vehicle for them.

And so most of our clients, we provide them with a quarterly, two page newsletter that most of them send to all of their employees electronically. Every quarter we do annual meetings. We encourage them to have ESOP events. We encourage them to market not only the ESOP internally to their employees, but also to their customers, and to explain to the customers that since our employees own this company, they have a stake in taking better care of you as our customers.

And so communication is critically important to maximizing the benefits of an esop.

Jeffrey Feldberg: And so for [00:28:00] ESOPs, you can correct me again into E if I'm off base with this, terms of preparing for today, I wanna say that the numbers in terms of at the lower end to the higher end, starts off typically for ESOPs, that they may have a range of. Five, $6 million all the way up to around a hundred million dollars.

How am I doing with that in, in terms of a typical range for ESOPs?

Kelly Finnell: Yeah, we've seen the ESOP market move upscale in terms of the size of the companies that are doing it. But as a general rule I would suggest that unless a company has at least $1 million of EBITDA or of adjusted ebitda, that it's probably too small. To do in esop. So I always say that ESOPs are not for micro sized companies, they're for small to midsize companies.

But today we're working with two companies that have $75 million of [00:29:00] ebitda. And over the last five years, our median sized client had 4 million. Of ebitda, and that's not just us, Jeff. That is what we're seeing throughout the ESOP community. So there are some billion dollar ESOPs being done now. That's very rare.

More common. We're seeing transaction sizes of 10 million to a hundred million.

Jeffrey Feldberg: There's always gonna be outliers on either end of that, as it always goes, no matter what we're doing. And so I liked how at the beginning, Kelly, you were saying, Hey. Come speak with me and the team, and if you're not a fit, we'll be the first ones to tell you that you're not a fit. So talk to us about that.

And one of the things that you mentioned very early on, you may have an offer from a strategic that's just astronomical because they have a. A competitive advantage that they are willing to pay for and they want to dominate in a particular area, and that's terrific. That's not always gonna be the case, but that is one instance where perhaps an ESOP doesn't [00:30:00] make sense.

What would be some other instances where ESOPs really, Hey, yeah, Jeffrey, you could do that, but it's probably not gonna be in your best interest in terms of an esop.

Kelly Finnell: That's a great question, Jeff, and a very important question. And so an ESOP is a form of internal transaction. I'm selling to people within my company, and so in order for an ESOP to be a viable option, I. It's imperative that the company have a strong successor management team. If I as the owner, am I gonna cash out and eventually move on, it's critical that there be a team in place that can run the business after I leave.

And so that's one of the most critical factors. And so. Aside from the financial factors that we mentioned, that you need to have at least a million dollars of ebitda. I would say the other critical consideration is that you need to have at least 35 employees, and you need to have a strong successor [00:31:00] management team.

So my best ESOP candidates are companies where the boss comes in late, takes a long lunch, and leaves early, a situation where he is already. Transition the day-to-day operation of the company to his successor management team. That's really where ESOPs work best.

Jeffrey Feldberg: So in that scenario, and I completely agree with you, and that's one of our focuses here at DeWalt, Hey, does the company run without you? Even if you have a management team, a leadership team does it. On without you. And sadly, for most business owners, the answer is no. But I'm hearing you say, yeah, if the company runs without the owner, then is a great candidate in terms of the founder, the owner, when they transition to an ESOP scenario, and I know every founder's journey, it's unique and it's different.

That said, generally speaking, are most of them staying in the business? Are they leaving the business completely? What does that look like?

Kelly Finnell: Almost all of them are [00:32:00] staying involved. Generally they're transitioning from an day-to-day operational role. So they might be CEO of the company now to a more strategic role maybe as chairman of the board, and they're moving their successor management team up to fill the voids that, that, that created.

But we generally see them serving as chairman of the board. Keeping a close watch on the company's financials being there as a resource to advise that successor management team. And so most of our clients are staying involved. We hear often from business owners that I don't ever want to Exit my business.

This is. Part of my family and my spouse married me to have dinner, not lunch. And if I played golf more than twice a week I'd destroy my back. So I wanna stay [00:33:00] involved in my business. I want to cash in on my life's work and get some liquidity to secure the financial. Future of my family for generations to come.

And if I can do that and stay involved and make an impact, then that's the perfect scenario. I.

Jeffrey Feldberg: And Kelly, I know again, every company, their situation is unique and is different. That said, a general rule of thumb, so how does it work if a company is worth. You can pick whatever valuation you wanted, a hundred basis points and a hundred basis points. It could be a hundred million dollars, it could be $10 million.

It could be something more. It could be something less. If that's the value of the company. How does it typically work in terms of what the founder, the business owner is receiving in terms of day one, and then is it being paid over time? What does that typically look like?

Kelly Finnell: It varies pretty significantly as you could imagine. But as a rule of thumb, which is what I think you're asking for with caveat that there are [00:34:00] exceptions. As a rule of thumb, the business owner could expect to get about 40% of the value of the business paid to him in cash at close, have seller notes for the rest of it.

That cash at close would be financed with a combination of company cash and bank debt, and then those seller notes are gonna have very attractive returns associated with them because the seller notes are gonna be subordinated to the bank debt. So when I talk to a business owner initially about seller notes, they say, not interested, but.

When I tell 'em, look, instead of selling notes, we could go to the mezzanine lending market and get some subordinated debt and that will give you another tranche of cash at close. And they say, great, what's that gonna look like? And when I explain to 'em, it's gonna have, a 15, 20% return, the Mez lender lender's gonna want control of the board and so on.

Most of the time, the reaction of the business owner is. [00:35:00] Man, I wish I were in that business. And so then I say to them, I have an opportunity for you to be in that business. You can be the subordinated debt lender and you can get those types of returns while continuing to have control over your company.

And so that turns what initially is perceived as a negative, often into what is perceived as a positive.

Jeffrey Feldberg: Absolutely, you're getting a great return on investment. You have a hand in the future and the destiny of the company. There's really likely not many surprises because it's you, it's the same team. It's a different structure in terms of ownership. Everything else is more or less the same. And so Kelly, we spoke earlier about preparation.

I would imagine that for most business owners and founders, when it comes to succession planning, and I know at EFS, you and the team, you talk a lot about that. Most entrepreneurs, what kind of grade would you give them in terms of the preparation for [00:36:00] succession? Are they thinking about it a plus? Are they not even thinking about it?

It's an afterthought. They're gonna get an F on that particular area. What's that looking like from your experience?

Kelly Finnell: Almost all of our business comes from referrals from professional advisors. And so often those professional advisors has bridged that gap and the company is well prepared for succession planning and for doing a transaction. So I don't know in general what kind of grade I would give most companies, but for the companies that come to us because of where they're coming from a referral from a strong CPA or attorney.

Or Exit planner or investment banker. We're generally getting companies that I would give, a grade of a b plus to a plus in terms of their preparation. I.

Jeffrey Feldberg: And on the preparation side, we spoke about this earlier, but let's circle back to that for just a moment. So in terms of the preparation. Coming outta this [00:37:00] episode, and this isn't the wrap up mode. We're just saying, Hey, here's a low hanging fruit for a listener in the default nation. If they were to do one action today before they go to the next meeting, the phone call, any activity that they have after hearing this episode, what one action would you advise 'em to take that could really move the dial when it comes to preparation?

Kelly Finnell: Well, the valuation and financing of most companies, whether you're doing an ESOP or a sale to a third party, is based on adjusted ebitda, and most business owners don't understand that until they start planning for their Exit. And so I would suggest that they work with their CPA or if they have an Exit planning Advisor or investment banker, work with that professional that's very knowledgeable about the valuation triggers and create metrics so that you can maximize.

That [00:38:00] adjusted EBITDA for the future and also start preparing in advance for due diligence. So create a data room, get a questionnaire from one of those professional advisors that will help you know what the purchaser is going to look like and going to look for in a transaction, and so do all the preparation that you can in advance.

Jeffrey Feldberg: Absolutely. Step four of our nine-step roadmap is due diligence and exactly what you're talking about on the EBITDA adjustments. And for a lot of business owners, they don't get it. They're saying, okay, well wait a minute. I'm gonna remove some personal lifestyle expenses from the business, so the business is more profitable.

But now I'm paying more taxes. Well, yes you are. That said, when it comes time for your Exit, you're getting more money. So whatever you're paying tax wise in terms of increased taxes, multiply that by whatever multiple your business is worth, that's how much more you're gonna be ahead. And for a lot of entrepreneurs, they don't quite connect the dots on that.

Kelly Finnell: Well in you're converting income that's taxed at [00:39:00] ordinary income tax rates to value in the sale that's taxed at long-term capital gains tax rates. And so that's a significant difference.

Jeffrey Feldberg: And it also makes for a much smoother process so if, as an example, I'm a business owner and I say, Hey Kelly, I wear two belts and two suspenders. We have tripled the amount of inventory that really the business doesn't need that. So now that you're taking over, I'm gonna remove that inventory and you don't need it.

Just take me at my word. Well, the ESOP trustee is probably gonna say, yeah, Jeffrey, we hear you on that. We just can't do that. We've been running the business this way for 20 years, or however many years. We gotta keep on doing that, as opposed to, Hey, my ESOP is three years away. Let me reduce that inventory level to show that, yeah, the company can survive on a third of what we have and nothing happens to it.

And so that preparation is absolutely key. Really hear you loud and clear on that. Before we do go into wrap up mode, Kelly, is there a question I haven't asked, a theme or topic that we haven't yet covered that you'd like to [00:40:00] share with the Deep Wealth Nation?

Kelly Finnell: I think that it's important for your listeners to just have an open mind and not make an assumption in advance. About the four Exit planning paths that I see. So that would be a sale to a financial buyer, a sale to a strategic buyer an esop or die with my boots on. Don't make an assumption as to which of those might work.

Best work with professional advisors. Read all of that you can. Go to it with an open mind and based on a lot of research and data, decide what you're gonna do.

Jeffrey Feldberg: Absolutely Kelly. Step three, future buyer and a nine-step roadmap. That's one of the things that we share with business owners. It is not for you to figure out today who the future owner is gonna be. Focus on the business. When you go to step six advisory team, you'll have the right people around you, Kelly, in this case, yourself, who can come in and say, yeah, an [00:41:00] ESOP makes sense and here's what it could look like, or, you know what?

Not this time. Here's some other options that you may wanna consider. I. But to put the time, the focus, the energy into let's grow the business, let's create a market disruption, let's take it to the next level. So I absolutely agree with you on that. And so, Kelly, as we head into wrap up mode, it's a tradition here on the Deep Podcast.

It's really, my honor, my privilege, where I ask every guest the same question. It's a fun question. Let me set this up for you. When you think of the movie Back to the Future, you have that magical DeLorean car that will take you to any point in time. So imagine now, Kelly, tomorrow morning, you look outside your window.

Not only is the DeLorean car curbside, the door is open and it's waiting for you to hop in what you do, you're now gonna go to any point in your life, Kelly, as a young child, a teenager, whatever point in time it would be. What would you tell your younger self in terms of life lessons or life wisdom, or, Hey Kelly, do this, but don't do that.

What would that sound like?

Kelly Finnell: I think that I would probably as an undergraduate, perhaps not majored in [00:42:00] business. But taking more finance and accounting courses. That's the lifeblood of a business is understanding finance and accounting. And I've learned it, but I had to learn it the hard way. I had to teach myself. And I've got a friend, I majored in philosophy as an undergrad and I have a, one of my best friends got his undergraduate degree in philosophy and then went to accounting school.

I wish I had followed his path. He would. Practiced accounting was a CPA for his entire career, but he was a philosopher, CPA.

Jeffrey Feldberg: I love that. And so what I'm hearing you say is understand financing. Counting as early as you can. Even if in your example your friend is going off and I'm gonna be a philosopher, but hey, I understand the numbers, I know what that's all about. And really getting a good grasp on that. I love that. And Kelly, in the default nation, somebody has a question they wanna speak with you and the team perhaps, or even ready for an esop, and they're looking for an Advisor like yourself to take them to market.

Where would be the best place online [00:43:00] to reach you?

Kelly Finnell: The email address is kfin[at]execfin[dot]com. Feel free to send an email go to our website. There's lots of very helpful information there, and we will be very responsive, get back to you and do anything that we can to help answer questions and help you make an informed decision about whether or not an ESOP might be an appropriate strategy.

Deep Wealth 

Jeffrey Feldberg: Nation the great news is it doesn't get any easier. This is all in the show notes. Go to the show notes. It's a point and click. It's all there for you. Well, Kelly, it's official. This is a wrap, and as we left to say here. Deep Wealth may you continue to thrive and prosper while you remain healthy and safe.

Thank you so much. So there you have it, Deep Wealth Nation. What did you think? 

So with all that said and as we wrap it up, I have another question for you.

Actually, it's more of a personal favor. 

Did you find this episode helpful? 

Have you found other episodes of the Deep Wealth Podcast empowering [00:44:00] and a game changer for your journey? 

And if you said yes, and I really hope you did, I have a small but really meaningful way that you can actually help us out and keep these episodes coming to you.

Are you ready for it? 

The dramatic pause. I'll just wait a moment. Drumroll, please. Subscribe. Please subscribe to the Deep Wealth podcast on your favorite podcast channel. When you subscribe to the Deep Wealth Podcast, you're saving yourself time. Every episode automatically comes to you, and I want you to know that we meticulously craft Every one of our episodes to have impactful strategies, stories, expert insights that are designed to help you grow your profits, increase the value of your business, and yes, even optimize your post exit life and your life right now, whatever you want that to look like.

And every time you subscribe and a fellow entrepreneur subscribe, it's a testament to how together, Yes, we are. We are changing the social fabric of society. One business owner at a time, one liquidity event at a time. So don't let the momentum stop here. Subscribe now on your favorite podcast channel.

[00:45:00] You'll never miss an episode. You'll be the first to hear from the top industry leaders, the innovators, the disruptors that are really changing and shaping the business world, and maybe you're commuting, maybe you're at the gym, maybe you're taking a well deserved break that we spoke all about on this episode.

The Deep Wealth Podcast, it's your reliable source for the next big idea that could literally revolutionize your business. So once again, please hit that subscribe button, stay connected, inspired, and ahead of the curve. And again, your next big breakthrough moment, it might just be one episode away. Maybe it was even this episode.

So all that said. Thank you so much for listening. And remember your wealth isn't just about the money in the bank. It's about the depth of your journey and the impact that you're creating. So let's continue this journey together. And from the bottom of my heart, thank you so much for listening to this episode.

And as we love to say here at Deep Wealth, may you continue to thrive and prosper while you remain healthy and safe. 

Thank you so much. 

God bless.