The Freedom Point with Joe LoPresti of Arlington Wealth Management

[00:00:01] On today's episode of The Exit Plan, I talk to Joe LoPresti, who is the founder of Arlington Wealth Management, which focuses on business owners. We talk about the concept of the Freedom Point, which is the financial threshold that allows business owners to live their ideal lives without financial constraints. Doesn't that sound nice? He also highlights the significance of lifetime cash flow planning and the need for business owners to prepare their business for sale to maximize value and ensure a smooth transition. Hope you enjoy today's conversation.

[00:00:32] Well, yeah, I'm Joe LoPresti. I'm the founder of Arlington Wealth Management. We're a wealth management firm that works with business owners in coordinating their personal planning with business strategy into a unified strategy so they could achieve what is what's important to them in life. Okay, great. Can you tell me a bit about your background and your career leading up to this point?

[00:01:00] Sure. So I'm actually starting my 40th year in the wealth management industry. You know, in the early years, I worked for some of the bigger banking brokerage firms and fairly quickly realized that it was more of a sales culture and that didn't resonate real well with me.

[00:01:22] Well, I started to move towards an independent career, which I really did, you know, more than 25 years ago now developing some of my own processes in terms of investment approach. In the early years, I was more of an investment focused advisor. And as my clients got wealthier, I realized they needed more than just investments.

[00:01:48] So we began to widen our focus into offering more advanced planning in areas of concerns that extend beyond investments like tax mitigation planning, lifetime cash flow planning, wealth transfer and estate, you know, legacy type of planning, asset protection. And just these other areas that higher net worth families have concerns about.

[00:02:14] And even further over time, I've focused more on working exclusively with business owners and, you know, helping them with their unique concerns. Okay, that's really interesting. Okay, that's really interesting. What was it like that leap for you from going from being employed in the wealth management industry to kind of setting up your own business? Because that's a big leap to make, right? Yeah, yeah.

[00:02:44] And that's, you know, some time ago now. It's 25 years ago. I started my current company, Arlington Wealth Management. So it's, you know, it is a big leap. And it's, I think people who make that leap, I've come to find are really value freedom above everything else.

[00:03:04] You know, that's why they start a business, they, they want to call their own shots and, you know, want to put their unique twist on their career. So I think, pardon me, I think that's a big topic that we talk to our, our business owner clients about is what does freedom mean to you as you start to think about maybe the end game in your, you know, your career? What type of life do you want to leave, live? What does that personal freedom look like?

[00:03:34] And, you know, how could we help you attain that personal freedom? And what do you really need from your business to be able to live the life that you want? I think it's a big thing that business owners really struggle with and understanding, you know, how they're going to get their income after their business is, you know, either sold or they transition it. If it's an internal transition and really helping them get clarity around that gives them a little bit more confidence into what their future is going to look like.

[00:04:03] What was it about working with business owners that appeal to you? Like, why did you shift your business in that direction? Yeah, that's a real good question. I think it's twofold. One is that I am a business owner. I'm a founding business owner. And, you know, I go through a lot of the same, have the same concerns and go through a lot of the same issues that other business owners go through.

[00:04:28] So, and because I'm also in the wealth management industry, I feel that I'm uniquely qualified to be able to help business owners and understand their unique concerns that maybe, you know, other financial advisors would not have the experience and be able to relate to the business owner like somebody who owns their own business does. So, at what point do you kind of typically engage with a business owner?

[00:04:59] Are typically age 50 and up, you know, when they're starting to think about what their end game is going to look like. Not that they necessarily want to sell in the next, you know, certain number of years, but just that they want to start thinking about maximizing their potential.

[00:05:16] And that's when I find business owners really have a lot of very key and difficult decisions to make through the, you know, say the life cycle of pre-transitioning, pre-sale, how to set the business up for sale, how to maximize that potential. You know, there's a lot of tax decisions. There's a lot of financial decisions. There's legacy planning and wealth transfer.

[00:05:44] Asset protection becomes important for some of them who built up enough wealth where they're going to be okay and their family is probably going to be okay as well. They start to think about charitable planning causes that they, you know, care deeply about. So, and then life after business, right?

[00:06:03] So there's just a lot of decisions that a business owner has to make once they start getting to that end game, say three, five years out or so from their business sale that we could help a business owner with. Kind of guide them down the right path to make smart decisions. That's going to be in alignment with what they want to achieve.

[00:06:25] So it's interesting kind of because business owners have different approaches to how they run their business and then specifically how they remunerate and compensate themselves. And some business owners are very good at, you know, that concept of kind of profit first and paying themselves first and making sure that they as individuals are looked after. Whereas some other business owners are at the opposite end of the spectrum and will do anything for the business and not pay themselves and sort of scrape along.

[00:06:54] I don't know, kind of what have you observed with the clients that you've worked with and how do you think someone's approach to running their business then sort of impacts the decisions they make around wealth management and estate planning and all of that kind of stuff? Yeah, well, it's really, it's all over the place, right? You're absolutely right. There are some business owners that are very good at accumulating wealth outside of their business. Others aren't.

[00:07:22] And, you know, we tend to see that a private business owner is going to have 80% of their wealth inside their company. So maximizing that value becomes very important.

[00:07:34] And there are, you know, certain strategies, tax strategies that could be put in place for the owner that maybe hasn't been accumulating wealth outside of their business that could, you know, really sock away a large amount in certain types of qualified plans like defined pension, defined benefit.

[00:07:55] Plans, for example, in the right type of business are really good where, you know, you could put away hundreds of thousands a year, which also saves in taxes and accomplishes the, you know, kind of that building wealth outside of the business as well for the business owner. So it's really all over the board, Barnaby. It's hard to give you one specific. Yeah, no, I think that's a very interesting point, isn't it? I think that for the majority of business owners, that is the case that most of their wealth is tied up in this business.

[00:08:23] And that's often a very risky position to be in. You know, one of the first rules of investing is to spread your investments, right, and spread the risk. And business owners tend to be extremely concentrated. Yep, that's right. But tell me a bit about the book then, sort of run me through the kind of topics that it covers. And when did you write it? So we wrote the book. It was published early 2024, so about a year ago.

[00:08:51] And it's called Exit by Design. It's really, you know, talking about the things that we're talking about on this podcast. You know, weaving in the personal wealth planning for a business owner with the business strategy to maximize their potential. You know, we call it reaching their freedom point. What is the wealth that they need to live the life that they want?

[00:09:19] And I think the best thing a business owner could do is to design a plan, a unified strategy to get to that point. So we talk a lot about designing a personal action plan, for example. That's where the owner could design the exit on their terms. Because when you get into the actual sales process, it's usually mostly about the buyer.

[00:09:43] Because they're the ones that have to take what you've built to this point and then be able to profit from it, you know, moving forward. So a lot of it's about the buyer during the sales process. But an owner can design an exit on their terms if they engage in some proactive personal action planning. You know, who are the potential buyers? Understanding what they're going to look for in your company.

[00:10:13] You know, will you have a role in the company after the sale or you just want to kind of turn it over and walk away? If so, what will that role look like? You know, how do you want your employees to be treated? What will your life look like? That's a big one for business owners. Most don't know what they're going to do the Monday morning after they sell. And having that thought out ahead of time is very comforting for a business owner. Many regret the sale after they sell it.

[00:10:42] And having a personal action plan minimizes the potential that you'll regret taking that action. That's an interesting point, actually. Because I think, you know, a lot of people listening to this podcast are perhaps at the beginning of their journey. And, you know, maybe there's a perception that kind of selling your business is this, you know, the glorious end goal. And it's the big exit. And everything goes brilliantly from that point onwards.

[00:11:06] But, you know, that's a lot of the exit founders that I have spoken to have really struggled after they've sold, including myself. And, yeah. So I'm interested in kind of what you've seen as to why people regret the sale. Like, is that kind of primarily a sort of financial thing or what else is there? I think there's just a lot of different things that go into it. You know, having that pre-planning in place could shape your legacy better.

[00:11:36] That's a legacy is a big one for business owners because, you know, if you've been in the business for, if you're the founder, which was really most of the owners we work with are the founding, you know, the founders of the company. And so it's their baby. You know, they really feel that it's a big part of their life and it's hard to walk away from that. So getting educated about all things related to exiting a business is important.

[00:12:04] And then designing an exit on your terms so you don't regret it later. Usually they regret it because later they find out that they could have done things differently. So in my book, I jokingly call that the dumb tax, that they didn't know what they didn't know. So you hear a lot of things like, well, I wish I would have known about blank. You could fill in the blank. Sometimes it's a different way of selling the business. I wish I would have known I could have done it that way.

[00:12:33] Or I wish I had known about that there was a way to treat my employees better after I've left. Or a big one is I wish I had known about a tax strategy that could have put a lot more money in my pocket. So we want to make sure that business owners don't have that. I wish I would have known regret after they sell that they know about everything and could at least make the most intelligent decision that's best for them. Yeah. Okay. That's interesting.

[00:13:02] So I thought the thing you mentioned about reaching that freedom point was interesting. And how do you define that? Yeah. So the freedom point is when you've accumulated enough wealth to do what you want, when you want, of course, within the bounds of reason. And you could live your ideal life unbothered by financial constraints. And it's about more than just funding your lifestyle in perpetuity.

[00:13:30] It's securing your freedom of time, who you're spending your time with, the relationships, your purpose in life. As I mentioned earlier, I find that most business owners value freedom above everything else. And that's why they started the business so that they could call the shots. That's why the concept of the freedom point is crucial for a business owner to understand. One of my favorite quotes is from Henry David Thoreau.

[00:13:58] And he said that wealth is the ability to fully experience life. Yeah, sure. We want to focus on the financial goals. We are wealth managers and that's a big focus for us. But true freedom comes when you could step away from your business life, not just with financial wealth, but with your ideal personal life and be able to live that. So that's how we kind of think about the freedom point. There are sort of ratios, aren't there?

[00:14:26] There's this kind of financial independence movement where people look to get enough of their savings and investments in place so that they can essentially live off the dividends and the interest from those savings. And there are kind of ratios where the pot of wealth depends on what your outgoings are. And obviously, the higher your annual outgoings are, the higher that thing is going to be. And it's something like 25 to 1 or something.

[00:14:53] But yeah, I don't know whether that's sort of, if you look at it in those terms ever, that you get to a point where you've amassed enough wealth that that kind of will keep you going. That's exactly right. And rule of thumb planning, I think, is a good start. But really, we find that we want to get into what we call lifetime cash flow planning.

[00:15:13] So we'll put together a lifetime cash flow plan for the business owner that looks at what they need, what they want, and then what their income sources are now or could be at the time after they've sold. And then how much are they going to need from the business to be able to fill in the gap? And a lot of that's just different depending on then how you're getting that income.

[00:15:37] You know, again, taxes are a big part of how much you'll need from the business, not just on the tax on, say, the capital gain when you sell, but the tax on the income you'll receive after you sell. So having tax-efficient income generally need less tax-efficient income if you're not paying as high of a tax rate on that income.

[00:15:59] So there's a lot of planning that could be done around it to really give the business owner the confidence that, hey, now I could see what I really need, where my income is going to come from, and I can live the life that they want. And that's one of the reasons why business owners are so uneasy, I think, is that they don't understand that. They don't know where they're going to get their income or how it's going to be taxed and really don't know what they need from the business to be able to have that freedom.

[00:16:28] Yeah. So how involved do you get in the sale process? Because presumably you're advising business owners before they've put their company on the market, or ideally you are, because the sooner you can put that stuff in place, the better. Right. But then at the point where they say, okay, I'm ready to sell now, how involved do you get with that process?

[00:16:52] Yeah. So once they get to that point where they're ready to sell, it's taking maybe a step back even before then. When we start to engage with the business owner, one of the first things we'll do is we'll determine a couple of things on their business level. One is their business is attractiveness in the marketplace to a buyer, something that we call their sellability score.

[00:17:22] And then we look at the business readiness to transfer to another owner and the owner's personal readiness to transfer to another owner or transfer out of the business. We talked a little bit about that with the personal action planning, and that's a lot of what we could help a business owner become, you know, if they're not ready, we could help them become ready. But knowing the sellability score, you know, different people value businesses in different ways.

[00:17:51] For owners, the business is priceless because we built it. It's everything to us. But to buyers, they look at things differently. You know, they're going to focus on specific metrics that go beyond just making money and are most likely they're much different measurements than the way the owner tends to value their business. So we help an owner understand that, what the buyer is going to look at, help them improve their attractiveness in these different metrics, and that could build their value.

[00:18:20] And then when it comes to the actual sales component, we do have a company that could help be an intermediary in a business sale. We could find a buyer. And we also work a lot with mergers and acquisition professionals that could assist in that end as well. Okay. Okay. I had a question and it's completely gone.

[00:18:46] I mean, I could talk a little bit about some of the metrics that a buyer will look for if you think that would be. Sorry. Yeah, that's what I was going to ask. Yeah. How? No, sorry. My question actually was kind of what's the sort of your criteria for taking a client on in terms of the size and shape of their business? And are there people that you won't take on because they're not profitable enough or they're not set up in the right way?

[00:19:12] We tend to work with businesses that are, say, between a million and 50 million. I know it's a pretty wide swath there in gross sales. And really what we're looking for is an owner that has a lot of complexity to deal with in the coming years.

[00:19:36] Because we really, we hold ourselves out as the personal chief financial officer for the business owner. Right? They're the CEO of the company. And they may even have, if they're a little bit more established and bigger business, they may have a CFO for the business. But, and they're working with an accountant and maybe financial advisors and insurance and attorneys. And maybe they have some business consultants.

[00:20:00] But none of these advisors, or I should say all of them are really giving them what I call siloed advice. And what they need is somebody to bring all of that advice together that creates synergies and is really going to be the advocate for the owner to make sure it's all working for what the owner wants to ultimately achieve. So are you paid, so you're initially paid for by the business, presumably.

[00:20:30] And then after the exit, all being well, you hope that that individual then continues to use your services? Typically, there's a combination. So even, you know, business owners that are, you know, have been in business for some length of time, usually they've accumulated some wealth outside of their business, whether it's retirement savings or just, you know, saving money outside of the business.

[00:20:51] So we can work with them in arranging their investments to be in alignment with what their ultimate objectives are going to be. So we can manage assets and they're generally our asset management fees.

[00:21:05] Then in terms of walking them through the entire consulting process of determining the company value, the readiness, the attractiveness, working to improve it, developing a lifetime cash flow plan for them, working with tax strategy and tax planning, estate and wealth transfer planning, asset protection, all of these areas. There's a consulting fee that, and typically the business will pay for that consulting fee. Yes. Yeah. Yeah.

[00:21:35] Talk to me a bit about this readiness, this sort of sellability score that you've got. Do you have a kind of a sort of template that you use or a process that you go through to assess how attractive a business will be? We do. There's a template that looks at the attractiveness of the business. And generally, it's going to go into those specific metrics that a buyer is going to look at, not the owner, but the buyer. So things like how dependent is the business on you?

[00:22:04] A company that is heavily dependent on the owner isn't as valuable to a buyer unless you plan on working for them. So, you know, understanding that and then working to make the business less dependent on you, say you're three years out from a sale or a transition. That's a big focus that will help an owner focus on and work towards achieving less dependability on the owner.

[00:22:32] What's your competitive advantage? What's your unique ability? Why do your customers use you versus a competitor? Really putting that into and articulating it so a buyer could understand it and being able to transfer that to a buyer is a big part of what a buyer is going to buy. Why they're going to pay a premium price is if you have that competitive advantage. Recurring revenues.

[00:22:57] You know, having recurring revenues is another big one versus having to start at zero at the beginning of every year. You've mentioned this lifetime cash flow a number of times. So just sort of talk me through how that might look or how you go about putting that together.

[00:23:13] Yeah. So we have a process that we go through that looks at, you know, all of all of the the assets of a business owner, whether it's within the business or it's personally held, whether it's financial, if it's real estate or other types of assets. We look at what their needs are from a lifestyle perspective. You know, what type of income that they're going to need to, once again, live the life that they want.

[00:23:38] Then we'll obviously make projections on how much time is between now and when they are ultimately going to sell. And we'll make some projections on the growth of the business asset and the financial assets. And just look at once the business sells and it moves from corporate asset to personal asset, how are we going to get that income to be able to fill the gaps? And what is the tax liability on that income helps with investment planning?

[00:24:08] And having that thought out ahead of time, I think, is another big reason why business owners regret sales after the fact is because they don't do that pre-sale wealth planning. And they just kind of think of it. Well, when I sell, I'll figure it out later. And that's not optimal. You know, having that thought out ahead of time is is a, you know, a relief and confidence builder for business owners. In terms of your client base, I assume the majority are U.S.

[00:24:36] But do you kind of work within people who have international businesses and kind of looking at some of the tax implications of maybe someone has emigrated or they want to after they've sold and the impacts of that? Yeah, some have emigrated. You know, we don't have a lot of experience in working with that.

[00:24:56] We do have some advisors in other countries, Canada and UK, for example, that we can network with and coordinate with because there's obviously unique considerations tax wise and other regulations from country to country. Yeah, yeah, for sure. Yeah. I mean, I've I've I've had done business in the U.S. for a long time. I've lived in the U.S. and moved back to the U.K. And my brother also has a business in the U.S. and moved back to the U.K.

[00:25:22] And it can get can get extremely complicated from a tax perspective. Yeah, sure could. Trying to trying to work all of that out. So I think it would be just useful if you had just a few any kind of tips, words of advice for people who are at the beginning of their journey. And now they have a creative agency and they're thinking about what steps they need to take to get its sale ready. Any kind of parting thoughts? Yeah. As they're early on in their career?

[00:25:50] Yeah. Yeah. Or just at the beginning of their journey of thinking I might want to sell this this business one day. Yeah, it's very interesting that I'm a certified exit planning advisor with. And so I'm a member of the Exit Planning Institute and they do an annual survey of business owners. They call it the state of owner readiness.

[00:26:10] And more and more what we're seeing is that younger business owners are really thinking about these things early on in their career compared to, say, the baby boomer generation. They didn't think about this. They don't think about it till the end of their career. So we are seeing more and more, you know, Gen Z business owners, for example, that are really building their business with the end in mind. And that's that's very intelligent. It's very smart.

[00:26:37] It will optimize the value and it also optimizes, let's say, their work life balance while they're in the business. Because a big part of thinking about the end in mind is, as I mentioned earlier, dependency on the owner and the less dependent that it could that the business could be on the owner, the more valuable it is. And that's helps business owners out while they're in their career, too, where they have more freedom of time and better work life balance.

[00:27:03] So that's one thing that I would really focus on is, what do you want that end game to look like? And think about not just how you're going to make your money this year. Think about how transition ready your business can be. Because the more transition ready it is, the more valuable it is, the more income you'll have, the more freedom you'll have. And the better off you'll ultimately end up being.

[00:27:28] And if you're very successful, who knows, you may get unsolicited offers to buy your business. And if the buyer comes in and really looks at the details and they see this business is just not ready to transfer it to another owner, you're going to miss potentially an opportunity that could pass you by. Fantastic. All right. Well, that feels like a nice place to wrap it up. So thank you very much. Thank you, Barnaby. Appreciate it.

[00:27:56] Thank you very much for listening to the Exit Plan podcast. If you enjoyed it, please leave us a review to help other people find us. If you would like your question answered in M&A Q&A or are wondering what's next for you and your business and want to chat about an exit plan, drop me an email on barnaby at foxcogroup.com or get in touch with me on LinkedIn.