What Advisors Need to Know Ken Stiefier

What Advisors Need to Know – Ken Stiefier

John: My guest today is Ken Stiefier. Ken Stiefier is a pure exit planning advisor with offices in Denver, Colorado but whose practice extends all around the United States and has for the last many years. I am going to talk to Ken today about how he started his original profession, how he moved into exit planning. I’m going to ask him to take us through in summary fashion a typical exit plan that he has done and what that process looks like so that you have a better idea of how a comprehensive exit plan is undertaken and implemented. And then I’m going to ask Ken about how he has historically marketed his exit planning practice and what he is doing today, so with that, Ken, welcome to our podcast.

Ken: Thank you very much John, a pleasure to be here.

John: Give us a little bit of background on how you got started in exit planning and along with that what your original profession was.

Ken: Well for all of the advisors who would be listening to this, I started my practice almost 30 years ago. I came up in the insurance world, I was a new person in a new life insurance agency and John you came to our agency some 30 years ago and I came to the conclusion that this is the kind of work I like to be involved in. So I brought you the only business client that I had at the time but that really kind of really started my career. As you remember way back when we didn’t call ourselves exit planners, I was an insurance person who I had a seat at the table where I talked about funding for buy-sale agreements or for deferred compensation. When we started working with a client on their estate planning needs and making sure their estate planning that they did was coordinated with their business planning. I would talk about funding for life insurance trusts, those types of things.

John: So what did we do with that first client of yours?

Ken: Well there were only two of them at the time and they had no key employees, which you asked them, it was the first question out of your mouth, but we said there are only the two of you so you should at least have a buy-sale agreement, so we started with a buy-sell agreement. A couple of years later they grew, they had added some employees, they had added value to their company so we started talking about key person life insurance and plans to incentivize key people. The business continued to grow to the point where they had a nice taxable estate, we started doing estate planning for them and that first client as you well know was our longest running exit planning case, it took 18 years from the time I introduced you to them until the time they sold to an international company and obviously for some very substantial dollars. At that time they had offices in 8 states and Canada and they had grown the business substantially.

John: As I recall a lot of what we did in terms of their exit planning was to focus on motivating and keeping their key people because they came from a realization in those very early meetings and I recall the comment that one of the owners made after we were talking about the structure of the company. He looked at his fellow partner and said you know what, we’re just employees, all we’re doing is earning our salary, and at that point they realized that they really needed to do something if they were going to grow this business the way they envisioned and we really started with a lot of key employee compensation planning and employment agreements and as they expanded into different states, forming different entities for them to minimize some of the tax consequences of growing so quickly, so it all became that we created a written exit plan for them and I don’t know if you recall what that original exit plan was.

Ken: Well I’m not sure I can remember it either. It was like a tree that we planted, it grew roots and it grew branches that maybe we didn’t even anticipate but I think one of the important things that I learned as far as, and that I have incorporated it into my practice now, being strictly just an exit planner, no longer in the insurance field at all, is that quite often I would have a client that said well my CPA said that they could do this or my attorney said well they can do this, but what I learned from you, from all the experiences that you had in your law firm about things that went wrong, that totally derailed their plans, I would encourage any advisor who wants to do this stuff to, yes you may be able to structure the deal, you may be able to do a buy-sell agreement and believe that you’re doing their exit plan because they’ve maybe taken care of business continuity but what happens if your key employee who is central to all of this stuff dies or decides that they want to go and work for somebody else, what’s happened to the exit plan that you thought that you put together because we told them how to structure the deal. So I learned early on that you need to deal with all of these different areas, that there are just a lot of things that can make for a successful exit strategy but their also things that if you don’t deal with it then it can totally derail that. So I think that the need to understand and pull in other advisors is just critical.

John: So Ken if we can go from those early days when we were both learning a lot about exit planning to what you do today as an exit planner, now that you are no longer a financial or insurance advisor, you live and die by the exit plan, that’s your sole source of income is to create and implement written exit plans, tell us in 2 or 3 minutes if you can what that process looks like from your perspective as the exit planner. What do you do once you’re engaged to create and implement that exit plan?

Ken: Well I start out by telling the business owner that it’s probably going to take us no less than 8 months and typically upwards of a year to develop what their unique exit plan is going to look like and probably for that first 3 or 4 months I’m going to have once a week maybe twice a week once hour conversations and we’re going to explore a lot of differing things. I’m going to gather a lot of different information, the nature of the company, whole the key people are, when it was formed, who the stock holders are and then we’re going to start exploring what your objectives are across really 4 different areas from maintaining the value that you have, protecting it, to the need to build value and to incentivize key people, to developing a strategy to sell your business or transfer your business externally to an outside third party or internally to co-owner or son, daughter, key employees. We’re going to talk about business continuity and we’re going to talk about estate planning, because most business owners, their business represents a substantial part of their investable estate so they’ve got to figure a way to get that value out. During that same period of time where we’re helping the business owner clarify what their objectives are and gathering all of this information about the nature of the company, we are having that business owner go through two differing things, one is a financial needs analysis using their financial planner if they have one, if they don’t we bring somebody in to basically quantify what the business owner is going to need in after tax dollars in today’s dollars, not counting the business, assuming that the business is worth $0, just looking at their personal assets or investable assets, reasonable assumptions for inflation, longevity, rate of return and come back with what percentage of their retirement that they are hoping to have or will need to have the kind of retirement that they want to have.

John: So if I could just interrupt you for a second there, so many owners probably say well Ken I don’t need to hire a financial advisor or a financial planner to do this, I’ve got a good idea of what my investments are worth and what kind of income stream they can produce. What is your experience in their accuracy in them being able to do that and how do you encourage them to work with and pay a financial planner to do this?

Ken: Well I tell them that I hope that they are right if they believe that but I cannot take that at face value. I jokingly tell them right up front that I do not want them coming to me 10 years later and saying that they’ve got to move in with me. My experience is that business owners vastly under estimate how much money they are going to need and that it’s not a full blown financial plan but I think that it really becomes very useful information any those that say that they are going to be fine. When they see that in black and white and it makes sense to them, a real sense of comfort comes over them.

John: From the advisors perspective, for the advisors listening in I think it seems to be in my mind very dangerous to simply accept what a business owner is telling you his or her financial needs are and what their likely income stream is from existing resources because you’re going to be building an entire exit plan and implementing it based on information that we assume to be correct and it’s coming from a business owner who has no experience or background in actually determining that financial information for themselves, or they don’t have any expert telling them what they actually have as opposed to what they think they have.

Ken: Well I think it’s part of our due diligence if you will, we’ve got to convince ourselves and be convinced that the plan is based upon solid assumptions. Because that goes back to that first 4 months, in addition to that financial needs analysis we’re having the business professionally valued so that we understand what the business is worth. Because just like where I mentioned that most owners underestimate how much money they are going to need and it is typically around 20-30 percent that they are underestimating, they over estimate how much their business is worth by about the same percentage. So between under estimating how much money you’re going to need and overestimating how much your business is really worth we have to establish those things. From the standpoint of being just a true exit planner it’s during this period of time and I use the analogy with a business owner because I think they can kind of get their arms around it. I tell them in construction terminology I’m like the general contractor, I can’t do anything without my subs and the subs are the attorneys, the CPAs the valuation folks, all the folks that would hopefully be listening to this podcast. So I’m putting together all of the fact patterns and this kind of summarizing the financial needs analysis and the valuation. After that period of time I have really a good idea as to what the recommendations or at least what most of them would be to satisfy the objectives of the business owner. But I also who needs to have a seat at the table, what subs, going back again to that construction terminology I know that we’re going to need the plumper who is the estate planning attorney, I know that we’re going to need a business coach who is going to help develop that management team to create alignment. I know that we’re going to have some type of incentive plan; we’re going to need legal work. So we get that information out to everybody that needs to have a seat at the table and we have a meeting somewhere typically around month 5, it lasts typically 2 hours where all of the advisors now have a view of what the whole plan looks like, what role they are going to have and they understand what the other advisors are going to be doing so that we create a lot of efficiencies for the business owner and for the other advisors that they don’t create something that is going to be in conflict with what another advisor is doing because they have seen what the other advisor is going to be doing.

John: So are these advisors are now getting a seat at the table, are they free to offer their own suggestions, their own recommendations, whether it’s in conflict with your suggestions or not?

Ken: They certainly are, one interesting thing that happened and this was something I learned when I first started doing exits and when I had my first meeting, that first meeting I did not present any recommendations, I just presented the fact pattern and what the objectives of the client were and I reached out to these advisors around the room and I said let’s come up with recommendations to fulfill the objectives of the business owner. And I remember one of the advisors, this was a client of mine in New York at the time who said I charge $600 an hour, and we can be here all day and this advisor really rang my bell because he said you’ve been doing this for a period of time, I bet you you know what recommendations for the most part make sense and I suggest, and he was very pleasant about doing this, but it was one of these things where he suggested that I kind of come up with what the recommendations that I’d been working with my client on, that they have buy in and most likely we will accept most if not all of your recommendations so ever since that one time that’s exactly what I’ve done. So when I get that information out, in addition to all of the fact pattern I am suggesting the recommendations from my experience that I believe make sense and now those meetings have not lasted any more than 2 hours and I would say the minimum has been accepting 90% and we’ve had a number of them that they’ve accepted 100% and maybe just added an additional recommendation or two so you learn as you go along.

John: So what resources do you use to come up with these recommendations and I think you provide a written document that they review, so what is that and how do you do that?

Ken: Well part of it is just through experience. You know what other business owners, the difficulties they had, the things that they wanted and needed to have addressed, but through my association with you over 30 years, but I have also become one of the first members to join Business Enterprise Institute. I get a lot of the information through that relationship through the technical webcast, through the white papers that have been developed, thorough the newsletter that was really a product of BEI. So this is an ever changing world out there and you can’t just say you’ve learned all you need to learn as an exit planner or one of the advisors with a seat at the exit planning table, so the continuing education has been a critical part of that.

John: So and I sometimes tell advisors, I have learned so much more about exit planning since I left the practice of law 10 or 12 years ago than I ever knew as a single advisor because we now have input from hundreds of other professionals from probably a dozen or more professions that can all contribute to the creation of the software that I think you use, the EPIC software, that helps create this whole written exit plan, so you’ve to a vast number of possible recommendations to be able to select based upon the fact pattern and the objectives of the particular client, and I’m assuming you use something like that.

Ken: I think I’m probably one of the poster children of BEI that I probably do the things you envisioned you wanted a lot of other advisors to do. Although admittedly most advisors are not going to hang up a successful other career that they are currently in like I did, my wife sometimes thought I was a little bit crazy to be doing that because I had a very successful insurance career, but it helped fund the development of my business, Exits, right now but I can tell advisors if you wanted to just be an exit planner you can do it, you can make a living. It takes a while to develop that group of subs that I talked about, you do have to do more marketing to educate folks so that by the time they, either their advisors come to you or they come to you, that you have laid the ground work by instilling within folks at least at a 20,000 foot level what exit planning is all about, but for you advisors I think it is important to understand that whether it’s you trying to make the attempt to do this or designating or finding some other advisor who can basically direct the process, coordinate it, I just think that’s an important element of the success of doing exit planning.