In our latest episode, we welcome back Miguel Delgado, Senior Wealth Advisor at Legacy Wealth Management. Miguel previously offered an excellent inside look at financial planning for small businesses, and his insights were so valuable that we knew we had to have him on again.
This time, we’re diving deeper into the challenges that businesses often face, challenges that might need to be added to your radar. For instance, how can you improve employee retention? And for all the business owners out there, do you have a buy-sell agreement in place in case a co-owner decides to exit the business?
Tune into this episode of Absolute Trust Talk to learn from an expert in the field. Miguel’s wisdom could be the key to enhancing your own financial and business planning strategies.
Time-stamped Show Notes:
0:00 Introduction
1:37 We’re thrilled to welcome Miguel Delgado back to the show as we continue discussing building business longevity.
7:31 Need help with employee retention? Listen now for some fantastic recommendations that can help you keep your team happy and engaged.
9:20 Ever heard of a Golden Parachute Plan? Discover this unique incentive that isn’t required for all employees but can significantly boost retention.
11:48 Looking for high-value, low-cost employee benefits? Don’t miss this segment, where we discuss options that benefit you and your employees.
13:14 What happens when business owners lack a buy-sell agreement? Miguel sees this issue frequently. Press play to learn what you can do to prevent potential problems.
18:16 Disability buyout insurance—ever heard of it? Neither had we, but it could be a game-changer. Find out if it’s worth considering for your business.
Transcript:
Hello and welcome to Absolute Trust Talk. I am Kirsten Howe. This is our audio and video podcast here at Absolute Trust Counsel.
My guest today is Miguel Delgado, and this is our second episode with him. Miguel is a CFP-certified financial planner and a senior wealth advisor at Legacy Wealth Management. Miguel began his finance career in 2006 and quickly became a trusted advisor by 2012, just six short years. He started his own independent practice, and he’s worked with over 200 families over the years. His efforts were recognized by the Cal State University East Bay Alumni’s 40 Under 40 Award. So, he’s a go-getter, a young guy making his mark. And that award highlights his influence and expertise in financing even before turning 40. I don’t know how old you are, but that’s impressive. And you don’t have to share.
As listeners know, this is my second episode here with Miguel. In the previous episode, we talked about some of the tax and financial strategies and issues that Miguel works on with his business owner clients. Miguel, welcome again and thank you.
You also help your business owner clients with some of their concerns, which may be less directly about taxes and money and more about the long-term viability of the business. So my first question about that is, how do you even discover these concerns that your business owner clients have?
Questions, lots of questions, lots of good questions. There’s a difference between asking lots of questions and good questions, right? I get them to talk about their business in ways that other people haven’t asked them questions about their business. Like, what’s fun about the business? What could be more fun? What’s going well and what’s not going so well? Or what’s worrying you about the company?
When I started asking these questions, I thought that the answers I would be getting were related to finances. Oh, I’m paying too much in taxes, or my portfolio needs to do better. These are problems that financial advisors most commonly solve. But what I found is that for many business owners, some of the biggest problems they’re facing are employee challenges, challenges in making sure that they’re doing the best for their customers and clients, and marketing things. These things have nothing to do with what I do. But as a wealth advisor or wealth manager, I see that role as somebody who’s all-encompassing finance; I want to know every aspect of my client’s financial situation because everything’s tied together, even some of the things that may not be so obvious.
So asking them questions about the business, finding out, and discovering their intentions with the business in the beginning, was it just to generate cash flow, to help make the world a better place? And then stress test. Ask questions that stress test the company under different circumstances. For example, if they say, “I don’t want my top employee to leave,” what are you doing to keep them? Questions like that. Or “My spouse isn’t working now.” They may have experience in a different industry. My question for them is, do you have a succession plan in place? If your spouse can’t run the business’s day-to-day operations, what will happen if you pass away? And now they become owners of that business. So, just different questions that allow me and them to determine if this business is ready for any potential risks that may come up.
Yeah, I think you’re right. You’ve got to ask good questions. What would happen to the business if something happened to you? Just make them slow down and think about that for a minute. And, okay, so how are we going to address that problem? And I like that one about talking about the spouse, too. Very often, the spouse is doing something else, and they’re not involved in the business.
Another one is they sometimes talk about how they want to sell the business down the road until I ask them, “How much do you think the business is worth now? How much do you need to sell the business for?” This is a key question that most people don’t know the answer to. How much do you need to sell the business in the future to be able to provide you with the income or the benefits that you need? Right. And they might know what the business is worth now. They may have an idea of what they think the business will be worth in the future, but they need a more profound question. I’m just looking at breaking that down, but why do you need that? You want to travel, you’ve got a mortgage, this and that. They need to understand. Those two things are related to each other, but this is business worth and what do I mean?
So, what would you say about the most common concerns that your clients share with you about their business? Yeah, again, I thought when I was initially fielding these types of questions, I was hoping and expecting that I would get questions or concerns like taxes, well, great, I have a solution for that, or investments, well, great, I have a solution for that. But the most common concerns related to the business are employee retention, customer satisfaction reviews, and the business reputation.
And then, for the business owner, it’s work-life balance. I can’t tell you how many times my spouse has told me that I should want less or when I’m going to retire. I keep talking about hiring a management team, and I’m still working seven days a week or five days a week, whatever it is. So, the family pressure of getting that work-life balance is a big one.
Yeah, I can relate to all those things. I think that I always say that one of the best things and, at the same time, the most challenging thing about owning a business is having employees. Employees are great because they help. They take away from you the things you don’t have time to do or don’t want to do, but they bring their own challenges. And even once you have things humming along pretty well in the business, you have steady cash flow; if you’re a small business owner, you never really stop worrying about that key employee deciding to leave, and then the whole business craters back to your desk.
What kinds of ideas do you like to explore with your clients about employee retention?
Yeah. So, I usually start by learning what they have in place now. The most common type of setup that I see is where the employees have a salary or an hourly wage. The next thing that comes with that is some employee benefits, like maybe health insurance and 401k plans. After that, there could be bonuses. Those are typically the most common things I see.
When I hear a business owner talk about one of their biggest fears, which is a key employee leaving the business, I see that these traditional types of benefits aren’t usually good enough. It doesn’t make it sticky enough. If somebody’s getting a bonus, when is the best time for an employee that’s already been thinking about leaving to leave? The day after the bonus. The day after the bonus, exactly. And I’ve seen it happen. And so it’s not sticky enough.
Sometimes, we’ll talk about things like deferred compensation agreements. There are different kinds. It allows the employer to put a vesting schedule. It incentivizes the employee to stay. It also gives some tax benefits to the business when the reward is finally fully vested and given to the employee.
Now, in this age, people and business owners have to be willing to compete for other fringe benefits. I’ve seen things like pet insurance. I’m not saying that every business owner has to offer that but look at the fringe benefits they have available. If they’re already doing all these other things, look at their fringe benefits and the cafeteria plan. Are they matching the 401k plan? That could be another thing.
Then there’s what I call golden parachute plans. They’re also known as golden handcuff plans, but I like the golden parachute plan a little bit better. So, what is an example of that that would be covered by a golden parachute plan?
Yeah, so it’s a perk that you can discriminate against employees. You don’t have to offer it to every employee. So, you can discriminate in that sense. It’s a special type of plan that you select a given number of employees to give it to. But it incentivizes the employee to stay.
You can add a vesting schedule to it. Again, the company can get a tax deduction for this benefit. Usually, it’s in the form of a deferred compensation plan. Sometimes, it could be stock options or phantom stock options. There are different ways to develop it. Call it a golden parachute plan.
But the premise, the concept, is there’s a benefit that’s going to be given later. The employee has to stay for this period of time for them to get that benefit. Throughout that time, they’ll vest a portion into it. And the business gets a bit of protection because if the employee leaves, they get to keep whatever funds were not fully vested.
If the employee does stay, then the reward is given. The company then usually takes a tax deduction at that point. There are different benefits at different time periods for both the business and the employee.
And then there are other ways of structuring where you could even add insurance, like life insurance; for example, this helps protect the business if the employee dies during that period of time. The company doesn’t have to worry about going out and finding a replacement. They’ll still have to find a replacement, but the life insurance benefit can help fund that new employee.
Okay, I think that a salary bonus 401k, even health insurance, is expected. That’s like the standard you; that’s not enough to make somebody stay anymore. That’s what people expect, and they will get it wherever they go. You do have to be, especially in California, right? You do have to be more creative.
Other things that we’ve talked about are long-term care insurance. Can business owners offer that to their own employees and offer to pay for that for their employees?
Yeah, they can offer to pay for a lot of things. Long-term care insurance is one of them. When it comes to long-term care insurance, it’s very expensive. Usually, you only see it done if it’s a C-Corporation type of entity because they get tax benefits for it. They won’t get the same tax benefits under any other form of entity, like an S-Corp, partnership, or LLC. They have a huge expense with no real benefit. It only makes a little sense for them.
Disability insurance is a good one to consider because it’s inexpensive. Group long-term disability insurance policies are very affordable. And it’s a way for the employer to show that they care about the employee. The reality is there’s a probability that some employees will get disabled. And if that happens, the only thing they have to fall back on is the California State Disability Insurance, which isn’t very much. It’s taxable, and it’s short-term.
One thing that I find very common is that I have a business owner who has a co-owner; they don’t have any buy-sell agreement between them. Or even if they have one, there needs to be a way for it to be implemented. And I’m going to throw that over to you, Miguel, to talk about what that even means, you know, the implementation of a buy-sell.
It starts off with, first of all, having something in writing, right? You have to have a buy-sell agreement that’s usually drawn up by an attorney. But then there’s the funding part of it. And if I can go back for a moment, when most people think about a buy-sell agreement or a succession plan, they’re usually thinking about it around the context of death, right? If I die, what’s going to happen to the business? However, the reality is that there are a lot of different forms of exit from the business. It’s not always death. It’s actually not the most common form of exit from the company. There’s a divorce, someone simply wanting to retire, someone who doesn’t want to be part of the business anymore, and there could be a number of reasons why somebody exits the business.
So, if there are partners in place, different owners of a business should agree ahead of time on how the business or that owner’s shares are going to be bought or redistributed amongst the rest of the owners in the event of that exit. Planning that in advance allows for just so much more peace.
Yes, planning in advance is always better than scrambling in a crisis. Right. And so funding the buy-sell really depends on the type of exit, right? If it’s a death, the easiest and most affordable way to fund that is using life insurance.
By funding, we’re talking about an agreement that says if one of us dies, the company buys our shares back. For example, life insurance could pay the company money to enable it to buy those shares.
Correct. Yeah, it depends on how it’s structured. Right, it could be a cross-purchase cell or an entity. But let’s say you and I own a business, and the business is worth a million bucks, and we own 50-50 of it. If I exit the business, you’re going to either have to decide, “Well, do I want his shares, or are we going to allow another investor group to come in? A third party to come in.” If I die, it’s going to be my spouse. Do you want to work with my spouse? Does she want to be partners with my spouse? Right. So those are a lot of the things that have to be addressed upfront, right? How is this going to be handled?
And then the funding, of course, is where will the money come up to pay that half a million dollars or whatever the business is worth at that time? How is the company going to be valued? Are we agreeing on it now? Or do we agree on a formula? Because if there’s a divorce or a death, the surviving spouse or the other spouse on the other side of the divorce may disagree on the valuation of the business. You don’t get to decide. There’s a judge who will decide. And so then permitting or allowing for the funding of it could be either, you know, we agree that we’re going to take out a loan or we’re going to use this insurance policy to help pay for that or whatever the case might be.
What you do here in this context is so valuable that you kind of dig in and see if we even have a buy-sell agreement. What does it say? Is it adequate? Let’s talk about how to fund it, and you can help your clients find the right solutions. Whatever their agreement is, make sure it is their agreement and then help them figure out how to pay for it.
Yeah, these are great conversations because they often start with one of the business owners I’m working directly with, maybe with their personal finances. We start getting the business involved. And now, all of a sudden, I’m talking to the other partner or partners who may still need to do personal financial planning themselves. We’re asking all these questions. And at some point, I typically get the question, “What else do you do?” And so that’s great for me because sometimes it could turn into being able to work with more than just one partner. And helping the business, you know, helping the business helps both partners, even if one of them is not your client, indirectly.
All right. Miguel, I wanted to ask you one last thing before we go. In our conversations before we went on recording, you mentioned to me a product that I have not been aware of, and I think it would be informative for our audience if you told a little bit about this. It’s disability buyout insurance.
Yeah, so in the context of the buy-sell agreements, it’s a little-known fact. I mention how most people, when they think about exiting a business, think about it in the form of a death or retirement. But disability is actually a lot more common than death. If there are multiple partners involved, the same way that we use life insurance to fund the buy-sell of a business, if somebody gets disabled and is not able to return to work, their shares are going to have to either be redistributed back to the company or to the other shareholders.
So how is that done? How do the other shareholders, or how does the business buy out that partner or that owner? And one of the ways to do that is by using a disability buyout policy. So, the definitions of when the policy is triggered are very similar to how a traditional disability insurance policy kicks in. However, rather than paying a monthly benefit that is usually paid out by disability insurance policies, those policies pay out a monthly benefit to help the business owner maintain their lifestyle, pay their bills, etc. It replaces their income. However, the disability buyout is usually handled by either a lump sum payment that goes directly to the business or the other shareholders. It can also be given as a down payment, followed by some installments. You can set it up in different ways to make the premiums a little bit more affordable. But, yeah, it’s a very little-known fact.
I encourage a lot of business owners who have a buy-sell agreement. If they don’t have a disability buyout, it’s not as expensive as you might think. And it’s typically a lot cheaper than coming up with the cash yourself. Because that could happen at any time, and you might need more preparation. You might not have cash lying around to do what the buy-sell agreement requires.
That’s fascinating. Thank you for sharing that. Of course. Well, thank you, Miguel, so much for sharing your expertise with us on working with small business owners. I personally have benefited from this conversation, and I know our audience has as well. Thank you very much.
And remember, this will be a middle episode. We’ve got another episode coming up with Miguel Delgado of Legacy Wealth Management.
Resources Related to This Episode:
- Absolute Trust Talk Episode 137: Maximize Your Wealth: Expert Financial Strategies for Business Owners
- A Will is Not Enough – Securing Your Legacy with Estate Planning Life can change in an instant. A will is not enough to be prepared. Get free access to our actionable E-book Guidebook #1 and start protecting your legacy today. https://absolutetrustcounsel.com/guidebooks/
- Learn how to comfortably define gray areas and assess your own unique needs to effortlessly build a secure future now. Check out Guidebook #2, Estate Planning Beyond the Basics, here > https://absolutetrustcounsel.com/guidebooks/
- Get our free introductory guide to the most used estate planning tool, family trusts, and understand how we plan to help protect your family. Guidebook #3: https://absolutetrustcounsel.com/guidebooks/
- Absolute Trust Counsel would love to offer access to our Incapacity Planning resource page: https://AbsoluteTrustCounsel.com/Incapacity-Planning/. We’ve collected our top planning information all in one place so listeners can find videos, guidebooks, blog posts, and a host of information with tips and strategies on implementing, planning, and protecting themselves and their loved ones.
- We’re pleased to provide a library of e-books to address common estate planning questions and concerns in practical, easy-to-understand language. https://AbsoluteTrustCounsel.com/Resources/.
- ASK KIRSTEN: If you’d like Kirsten to answer your question on the air, please email her at Info@AbsoluteTrustCounsel.com.
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