S4E38 – Darryl Lyons- Lower Taxes with Smart Exit Planning

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Key Timecodes

• (00:51) – Show intro and background history
• (03:05) – Deeper into his background history and business model
• (04:02) – How business owners can prepare for an exit
• (06:02) – Understanding his business strategies
• (09:24) – Deeper into his business model
• (09:49) – Understanding his tech business model
• (11:20) – How entrepreneurs can reduce the taxes impact
• (16:42) – Did he recommend his clients to invest in real estate?
• (18:06) – A big lesson learned from a mistake or business nightmare
• (20:55) – A key takeaway from the guest
• (22:34) – What is the worst advice he ever received
• (23:04) – What is the best advice he ever received
• (24:01) – Guest contacts

Transcription

[00:00:00.320] – Show Intro

Hey, this is Sean Tapper, the host of Payback Time, an approachable and transparent podcast on building businesses, increasing wealth, and achieving financial freedom. I like to bring on guests to hear authentic stories while giving you actionable takeaways you can use today. Let’s go.

[00:00:17.510] – Guest Intro

Are you a small business owner looking to eventually sell your business? Believe it or not, most small business owners won’t be able to get what they’re asking for. In other words, they’re not going to be able to sell their business for as much as they’d like. However, if you take the right steps up front, you can better position yourself to sell your business for more and at the same time save money on taxes. In this next episode, my next guest talks about strategies business owners can put into place to set themselves up for a better exit and a better life after their venture sells. Please welcome Darryl Lyons.

[00:00:51.960] – Sean

Darryl, welcome to the show.

[00:00:53.550] – Darryl

Thank you for having me. I appreciate it.

[00:00:55.200] – Sean

Yeah, thanks for joining me. So why don’t you kick us off and tell us about your background?

[00:00:59.350] – Darryl

Yeah, so I didn’t grow up with much money. In fact, I was edging the trailer that we lived in, and the trailers have skirting on it, and so I was edging the skirting. And if you edge too close, you crack the skirting. I kept thinking, How do people have houses with foundations, like concrete foundations? At that point, I just became curious about money. That was when I was 17 or 18, and I haven’t stopped being curious. Went to St. Mary’s here in San Antonio, got a couple of degrees, ended up later in life, went to law school at Texas A&M online, and just became really nerdy in this money business. We started in RAA 17 years ago called PAX, P-A-X. It was interesting. When we first got started, me and these guys, we got this national endorsement by this self-proclaimed hillbilly from Nashville called Dave Ramsey. He really was a tailwind for our growth. We participated in his… We walked right alongside his journey. We’re We’re still very friendly with him, but we’re no longer a part of his… He’s got this program where he endorses people. We’re not a part of that anymore. But man, he’s a great g uy in his organization’s top-notch.So that was a big tailwind for us.

[00:02:11.920] – Sean

Talk about a windfall there, right?

[00:02:14.460] – Darryl

Yeah. That was such a blessing.

[00:02:15.740] – Sean

His business really started to catch traction. It feels like, what do you think, maybe the mid 2000s, around the time when you started your business, maybe a little earlier?

[00:02:24.440] – Darryl

Yeah. So we jumped on, I guess that was about 2002, maybe 2003. And so, yeah, we were really early. I think he was under 100 employees. Now, he’s well over 1,200 employees. So, yeah, we were really early adopters of Ramsey. In fact, I wasn’t a fan of Ramsey because I had my CFP and all these letters behind my name. I thought he was for insophisticated people, and I was an intelligent young CFP. But my mom really wanted me to read his book. Frankly, I was in debt, and he was the best strategy to unwind that debt for my family. So we did the baby steps and followed it and the envelopes, and it really helped me.

[00:03:05.130] – Sean

Cool. Well, let’s talk about your business a little bit. Then I want to transition to one area you know a lot about, which is exit planning. We’ve got a lot of entrepreneurs in our audience, and they want to How do they put the right foundation in place so they can sell their business at some point? So before we do that, why don’t you tell us a little bit about your firm?

[00:03:23.750] – Darryl

Yeah. So PAX Financial Group, a Registered Investment Advisory Firm. We have 25 employees. We manage about just under 700 million in assets. We have a consulting service where we also do exit planning for business owners. So we think deeply about exit planning. Actually, it happened as a result… And by the way, we also do group 401(k)s and group health. So a lot of our clients in the exit planning space actually come out of those group relationships. And what we found is that they really stumbled through the exit planning process. And so we just try to figure out how to be a solution in that marketplace.

[00:04:02.660] – Sean

Awesome. All right. Well, let’s dive into that a little bit. What can business owners start doing today to prepare themselves for an exit?

[00:04:10.730] – Darryl

Yeah. So you’ve got the qualitative side and the quantitative side. So the quantitative side is something getting your books in order. Oftentimes, we’re doing our dry cleaning through the through the company PnL. That’s fine and dandy, but it really needs to get cleaned up as you get closer to the exit plan. But really, the biggest challenge I see, and statistics support this challenge, is just the identity that you have in your business and trying to find life post-business and what that does to your soul, so to speak, because the majority of people who make that transition are actually disappointed and unhappy after they sell their business. They’re lost. Some of that is also just preparing mentally and start practicing that transition and communicating with your spouse Because you can only reshuffle spices and frustrate your spouse so long. And there’s only so much golf. And I always think about some of the retirees that are all about Fox News and flower beds, and they just grumbble. Just thinking deeply about what that next chapter looks like.

[00:05:16.640] – Sean

So it’s not just the business, the financials, the business, getting it ready for that, but it’s actually the lifestyle, the psychology. You’re almost talking them through… Like, paint a picture for me of what you want your day to look like, and then do that over weeks and months.

[00:05:31.510] – Darryl

Yeah, we have a process where we map that out. Like, okay, we’re going to get really remedial here. What are you going to do on Monday? Yes. Okay, what time are you going to wake up? And the other thing, financially, it’s just all overlaps because when you retire every day is a Saturday. And we know, statistically, people spend the most money on Saturdays than they do any other day of the week. And so if every day is a Saturday, you might blow through your money pretty quickly. So let’s really think about what life looks like. And So it does get granular.

[00:06:02.350] – Sean

Now, speaking to the businesses that you serve, are you serving a lot of… We’re talking service businesses or maybe manufacturing, or do you get into tech at all?

[00:06:12.840] – Darryl

I think our profile is very similar to what our economy looks like today. We’re in San Antonio, just south of Austin. There’s some tech businesses just north of us and more and more coming. The economy in America, in general, is very much a service-oriented. So you can imagine a lot of the companies that we help are service-oriented, even if it’s an IT support company. Many service-oriented companies. A few manufacturing, although that’s not a huge part of our business model, and then a few tech, but to your point, a lot of service.

[00:06:45.490] – Sean

Got you. Okay. Speaking to service, I’ve talked to a lot of people in this space. They’ll go 10, 20, 30 years building a service business, and then they try to sell it, and the most they’re going to get, we’re talking like one or two X EBITDA not even revenue. And it can be a disheartening moment. You put your heart and soul into something, and then you can’t sell it for a whole lot. Do you run into those situations a lot? And how do you coach your customers through that?

[00:07:12.450] – Darryl

Yeah, almost every situation, the entrepreneur or the business owner thinks they’re going to get more than they get. That’s just almost 100% of the time. It’s frustrating. I get it. It’s your baby. Of course, if that’s the situation, you’re going to get one time, then you’re just like, Well, I’m not selling it. I’m just going to just go another year and just to let this thing die. Sometimes it gets to the point where it’s an indictment. It’s a problem to your customers and your employees and your vendors. You don’t want to leave them hanging. That’s the main thing. Some people are Can think about it ahead of time. I had one guy just recently. We were going through this conversation, and he was very serviced. It was all about him, the name. Everything was him. We talked through how do we create an and something that could extend beyond him. He really started to… He started to focus in on that more than anything and actually developed something that could outlast him. But it’s just Systems and processes and people. And you really have to, Stephen Covey, begin with the end of mind, and it takes some time to get there to make that transition from I’m the face to it’s more than that.

[00:08:27.710] – Darryl

And that does bring value.

[00:08:30.790] – Sean

Putting systems and processes into place. With this particular customer you were working with, how long of a timeline was that? Was this like a six month, nine month, twelve month project?

[00:08:40.280] – Darryl

Years. Yeah, years. Okay. Very, very difficult to do. It just takes a lot of time. Of course, finding the right people, the people that can… Because especially if you’re a solopreneur, there’s a degree of arrogance, so you have to shift to a degree of humility that people aren’t going to be able to always finish your sentences. You I want them to have the same spirit, but you have to have some degree of flexibility in the execution. So there’s that part of it that I think is really challenging when you go from being the guy or the gal for so long and you want to build an infrastructure, you do have to take a step back and say, I’ve got to allow people to be people and not do exactly what I want for the benefit of making this thing be more scalable. Sure.

[00:09:25.050] – Sean

You don’t have to say the business or the person you’re working with, but can you give us an idea of the business this model?

[00:09:31.610] – Darryl

Tricky. I know you asked that question. I can’t because he’s relatively famous, unfortunately. There might be people on this. You have a great reach, so I’ve got to be careful that I don’t allude to that person. Sure. But it is a service-oriented person.

[00:09:48.970] – Sean

Got you. Okay. Let’s transition to tech. I know Austin being a tech hub, I’ve been there before in the tech community, networking a little bit. With that, the multiples can be a little higher, especially SaaS businesses. Can you give us an idea of what businesses you work with there in tech?

[00:10:06.210] – Darryl

Yeah, it’s mainly just… For us, it’s an overlap between service and product manufacturing. But the interesting thing about that is that’s been more strategic acquisitions versus outright sales, at least in our experience. In other words, a firm that wanted to tuck a product to their ecosystem that that product can be leveraged to their clientele. And so we’ve seen more of that in the tech space than I have seen outright sales. I do get outright sales, but it’s usually after the fact, and people have windfall of money and need us to help with. I’d like to get it beforehand. Sorry to go too much, but if I can get that person to meet with me beforehand, I can sometimes reduce the taxable income of their transaction. And so sometimes, even my own clients will tell me, Hey, I just sold my business. I’m like, What? And so the busy entrepreneurs are just so doggone busy that I’ve really got to stay on point and try to get them in front of the transaction as much as I can. So the tech guys move really fast. So the ones I’m working with, sometimes I’m just late in the game just because they’re just driving a lot.

[00:11:20.940] – Sean

It’s like pump the brakes. I can save you some money on taxes here. Just slow down. So on that note-Oh, my gosh. And I talk to people in your line of work, wealth managers that are like, Yeah, if you could talk to me about your business, and before you get to a situation where somebody is going to buy you, we need to be talking here about tax reduction strategy. Could you give us an example of how you could help some entrepreneurs reduce the tax burden?

[00:11:50.450] – Darryl

Yeah. Our business, we’re in San Antonio, so a lot of our community are faith-based individuals. So a lot of Christians in the San Antonio, Texas, area. And so many of them have a process of giving to their church or to their community or nonprofits. And so if you have this desire to give and you don’t like the IRS, then what we’d like to do is advance some of their giving before the sell of the business. We’ll actually give a percentage of their business to a donor-advised fund. It’s actually a fund that’s It creates an immediate tax deduction subject to limitations and then reduces the future capital gains. The economics work real well. The only person that doesn’t get the benefit of this transaction is the IRS. But it’s perfectly legal and it’s done all the time, and it’s a way for us to be able to give money to a charity. Of course, it’s an illiquid gift prior to the transaction. But when the business sells, then it becomes liquid, and then you start giving it away to charities nonprofits.

[00:13:01.080] – Sean

Got you. Okay, good one. What else do you have in mind?

[00:13:06.960] – Darryl

You’ve got to think through a little bit your qualified planning. For example, if you have a little bit of runway, you can set up some qualified plans. It depends on the size of the business, but suppose a 401k, and you can construct the 401k to maybe put a little bit more money in there, stack on top of a 401(k), a profit sharing plan, and maybe contribute more than beyond the normal limits. And so that’s very attractive. But also, considering portion of those contributions to be a Roth contribution. Then what’s really critical is a lot of times business owners will sell before age 65 when they get Medicare. So we’ve got to bridge this gap and thinking through how they cover their health insurance in that gap. So we’ve got to strategize and plan out what type of health insurance they’re going to get. And then we could use a Roth IRA distribution to fund that health insurance premium. So it’s a little bit… I know I said a lot in a short amount of time, but my main point is this. Sometimes people won’t sell their company because they don’t have health insurance. And there are strategies on how you can bridge that gap that I think are very thoughtful and creative.

[00:14:25.670] – Darryl

Right.

[00:14:26.220] – Sean

Don’t let it be a factor that’s holding you back. There are creative ways you can get around that.

[00:14:31.750] – Darryl

All the time. I’ve seen a lot of people hate their job, hate their company just because of health insurance. And so there’s ways around it.

[00:14:39.540] – Sean

And again, it goes back to what you said, is people hanging on to a business and you’re not doing any favors for your customers or even employees, if you have them. It’s like, if it’s not for you and your heart’s not in it, I would probably expedite this process.

[00:14:53.640] – Darryl

In the RIA business, we’re actually the worst. Now, this is me casting stones a a little bit, but we have a lot of RIAs that probably should retire. They’re no longer… They’re just milking it and just hanging out. And I see them in my community and they’re good people, but they’re just not as sharp as they used to be, and their technology stack is lacking. And it’s probably about time. And I understand why they’re still hanging it in there, but it really hurts their clientele.

[00:15:25.260] – Sean

Yeah. It’s probably like cruise control. Throw them into a fund and then go play golf.

[00:15:30.560] – Darryl

Yeah. I get a lot of that. I win that business, but it’s really not good for anyone. So if you’re an entrepreneur and you’re a business owner doing that, it may feel like you deserve it, but there are indirect consequences of that.

[00:15:44.590] – Sean

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[00:16:46.930] – Sean

Do you ever recommend your customers go into real estate? Now, I’m not talking single family, double family, stuff like that. We get a lot of, for context here on payback time, we get a lot of people that are real estate investors, but they focus on syndicates. So we’re talking 200 units, 500 units, something that’s really safe, probably getting 10% a year. Do you ever recommend, like a business owner, you have a big windfall event, let’s put some money into a syndicate?

[00:17:13.330] – Darryl

I can’t recommend investments outside of the ecosystem of the SEC. I get a lot of them that… I haven’t got any lately now, I think about it, but probably five or six a year, and some of them I consider personally. But we do it in a qualified sense, and that can be… Recently, we’ve been doing a lot of the… The names escape me all of a sudden, but the private debt. I kept going to equity, but private debt Which is similar to a syndicate, but it’s more under construction of an SEC umbrella. But yeah, to answer your question, it’s not uncommon for somebody to have a basket of securities with me and some private securities, and then also to I have a syndicate on the side. And then I just do it once over on some of that stuff just as a friendly thing.

[00:18:05.900] – Sean

Sure. Right on. Can you share with us, of course, you don’t have to mention any names or even business models, but a mistake, not a nightmare situation, a big aha moment like, wow, don’t do that in the last few years.

[00:18:21.040] – Darryl

Yeah, I was talking to somebody this morning, one of our advisors. We have 10 advisors. They’re awesome people, and they just bounce stuff off each other and me, too. But We were talking about this. I had a business that sold his business to his key employee, and he did it in a… To where I’m just going to give you a percentage of the revenues over the next 10 years. I understand that he did that, but it wasn’t a capital transaction. He did it. He constructed it in an ordinary income transaction. It could be good, it could be bad, but I wish you would have come to me. But basically, let’s say it’s… I’m just going to make it up as a million dollars because I don’t remember the exact number. A million dollars. And so every year, he gives the the key person a check for $250,000. He deducts that off his books, and then that key person has to pay ordinary income and FICA taxes on it. And that was considered their handshake buyout agreement. That’s That’s not how buyout should work. It should be, I’m going to sell this asset to you, and it’s a capital gains, and it’s much more tax-efficient for everyone.

[00:19:42.490] – Darryl

I’m trying to make this story as short as possible, but I hope you get the point. Yeah.

[00:19:46.600] – Sean

What you’re doing is you’re like, Hey, you can either pay the income taxes or capital gains. You’re going to save a lot more money with capital gains.

[00:19:55.580] – Darryl

That’s the point I was trying to make. I think that’s That’s not an uncommon mistake. You’re just trying to get a deal done easy. I think probably the biggest picture, if I could connect the dots on several of these situations, is one, trying to go cheap and not engage legal counsel, that’s what I see a lot. I’m just trying to make it, Hey, I know somebody, I’m going to sell it. I think that’s probably the one thing I see. I’m going to guess 50 % of the time.

[00:20:24.960] – Sean

Wow. I see that with a lot of small business owners that they want to do the payout plan, handshake agreement over four years, five years, sometimes seven or 10 years. And if there’s so much that can go wrong, things can change, business can go under, and then that person doesn’t really get their full payout. That’s a problem. I see this a lot, small business owners. So, yes, thanks for that context.

[00:20:53.160] – Darryl

Yeah, it happens a lot.

[00:20:54.900] – Sean

Yeah. Awesome. Well, before we jump in the rapid fire round, is there one key takeaway you can give to entrepreneurs that are looking to sell their business someday, some advice you can give them today?

[00:21:06.550] – Darryl

Yeah, begin with the end of mind. Stephen Covey said that. And what is it that you want to do? In an ideal scenario, it may not play out, but do you want to let this thing fade? Do you want to sell it? Some people want to give it to their kids. Some people want to sell it to their kids. Some people want to sell it to their employees. There’s trade offs in all of those scenarios. But if you can think about what you want, you actually build a company, whether it’s consciously or subconsciously, with that end goal in mind. Awesome.

[00:21:36.630] – Sean

All right, let’s transition to the rapid fire round. This is the part of the episode where we get to find out who Darryl really is. If you can, try to answer each question in about 15 seconds or less. Ready?

[00:21:48.660] – Darryl

Ready.

[00:21:49.300] – Sean

All right. What is your favorite podcast?

[00:21:53.140] – Darryl

Craig Rochelle’s Leadership Podcast.

[00:21:55.380] – Sean

Okay, nice. All right. What is a recent book you read and would recommend?

[00:21:59.660] – Darryl

I actually am not patronizing, but John Dini’s The Exit Map. He’s a guy here in San Antonio. I just recently read it. He does a good job in talking about exit planning.

[00:22:08.320] – Sean

Exit planning. Nice. All right. And what is your favorite movie?

[00:22:12.190] – Darryl

This is so embarrassing, man.

[00:22:14.060] – Sean

It’s The Karate I hate a classic.

[00:22:17.110] – Darryl

I’ve always loved that movie.

[00:22:20.620] – Sean

It is a classic. I have to ask, have you watched Cobra Kai?

[00:22:24.470] – Darryl

Of course, I watched it, but it just didn’t do it for me.

[00:22:27.010] – Sean

Not the same, huh? Okay. No.

[00:22:29.100] – Darryl

But I laughed, and then I got over it. After a little while, I got cheesy. Sure.

[00:22:32.950] – Sean

It is cheesy. Yeah. All right. A few more serious questions. What is the worst advice you ever received?

[00:22:41.510] – Darryl

It was broad in general. It was fake it till you make it. I had one guy that told me, You’ll be a lot better in this business when you get a Lexus. And I just thought that was disingenuous and unauthentic. And I bought into it. I got a set of a Lexus, a BMW, and got caught up in that lifestyle. But it just wasn’t me. Me. That was bad advice.

[00:23:02.940] – Sean

Awesome. Thanks for that perspective. All right, flip that equation. What is the best advice you ever received?

[00:23:09.450] – Darryl

Get in over your head. It’s surprising what happens. You just do things that you’re afraid of. I got on a board once, ended up becoming the chairman of the board. Seven years later, the mayor named a park after me because I got in over my head and I was in somewhere I didn’t know I didn’t have any skillsets. Things just worked out and it was amazing.

[00:23:30.660] – Sean

Pushing yourself out of your comfort zone. I love that.

[00:23:32.720] – Darryl

A hundred %, yeah.

[00:23:33.300] – Sean

Right on. All right, last question here is the time machine question. If you could go back in time to give your younger self advice, what age would you visit and what would you say?

[00:23:43.210] – Darryl

Let’s see, like 22 maybe, and that would be worry less. I mean, it was a waste of time. It was a waste of energy. And then the coping mechanisms you put in place to just settle down just aren’t worth it. And so I would just worry less.

[00:24:00.380] – Sean

Good call. All right. And where can the audience reach you?

[00:24:04.300] – Darryl

Two best places, PAX Financial Group, PAX Financial Group. Go there. I do have a podcast, Retire in Texas, so that’s a decent one to connect with me. I don’t do a lot of social media, but I am on LinkedIn. I think that’s a very professional platform. So follow me on LinkedIn, and I like to produce content there and connect with people through there versus Instagram.

[00:24:27.840] – Sean

All right, Darryl. Thank you so much It’s been a great time?

[00:24:30.820] – Darryl

Yeah, it’s been fun, Sean. I’ve enjoyed it. All right.

[00:24:33.060] – Sean

We’ll see you.

[00:24:33.950] – Darryl

Thank you.

[00:24:34.390] – Sean

Hey, I’d like to say thank you for checking out this podcast. I know there’s a lot of other podcasts out there you could be listening to, so thanks for spending some time with me. And if you have a moment, please head over to Apple Podcasts and leave a five-star review. The more reviews we get, especially five-star reviews, the higher this podcast will rank in Apple. So thanks for doing that. And remember, this show is for entertainment purposes only. If you heard any stocks mentioned on this podcast, please do not buy or sell those stocks based solely on what you hear. All right, thanks for your time. We’ll see you.