How To Take Advantage of Liquidity Events

Foreign.

Investor, much like a business owner in that aspect are they're investing or a deferred benefit. Right. It's something down the road. The real estate investor wants the cash flow. Right. You ideally want to invest in an asset that's going to produce positive cash flow. But the deferred benefit is that liquidation event where the equity turns into capital and understanding the truth that money must reside somewhere. Again, I like this approach and Rich, this would be sort of similar to if you think of along the lines of an ifa, but with a very clearly defined objective where the business owner's already positioned for that future event and then you can help them along the way to maximize the value of their business. The, the participating whole life contract is really something that's bolstering the balance sheet of, you know, their, ideally their holding company anyway. But this is. Yeah, I like the approach, especially given that we deal with so many business owners and real estate investors.

Yeah. How many times have you heard the comment, you know, parenthetical to that, you know, hey guys, I can fund this contract for two, three years, but what if I have that down year? How many times we heard that? What if I can't pay it in the fourth year? And we know there's a lot of different things. The way we look at it is there is multiple ways to fund a contract. There is out of cash flow, as you know, maybe we dip into cash value if needed to. But I also like to have that funding mechanism of some sort of line of credit supported with the contract as well. So at any given year I can say, you know what, I may not fund it, the cash value may not fund it. I might have a bank funded in that given year. But so I always like setting it up on the front end with the, with the optionality of who funds the contract. So when that client says, gosh, I don't know, four years now I can fund it, I've got an answer which is, no problem, I can have a bank come in and fund that given year. We'll catch up those payments later. But we're not sacrificing performance. We're not sacrificing the systematic deposited to the contract. We always are giving optionality to our client. And that's through a properly structured premium finance kind of line of credit supported with the contract. There you go.

And so you do a lot of work with sort of the premium financing. But I'm curious, you know, Jason, just maybe even take us back a little bit further. What was it through your career as you Know, an attorney and so forth that led you to begin to even see and understand the power of parents for the business owner endeavor. You know what, what was the first kind of domino for you that, that tricked, that allowed you to say, wow, this is like a really powerful financial vehicle that could be utilized by business owners, Correct?

Yeah. And this goes back probably 18 years ago now. So think of the business owner. The business owner is always facing one thing. Cash flow today, but scaling in the future. How do they pay the bills today? How do they cash flow today but scale for the future? And so whatever the asset was, we're looking at a fleet of trucks, we're looking at a piece of machinery. We always ask ourselves, there's three ways to acquire this asset. We could rent or lease the fleet of truck, we could buy the trucks all cash or we could finance that fleet of trucks. Now, and I've now said this to everybody, I say this all the time, everybody listening. There are three ways to acquire any and every asset. Any and every asset, there's three ways to acquire. You can lease it, you can buy it all cash, you can finance it. Tell you a funny little story is this is, goes back a couple years when my kids were little and we got a bounce house for a birthday party. So I said, and my wife said, okay, well, I'm going to go Home Depot, I'm going to rent the air pump for the bounce house. So I went to Home Depot, got the air pump, no big deal, took it back in three hours, it was fine. Then the next weekend, the kids like that was so much fun. Dad, go get that air pump. Let's do the bounce house again. So, so I went back to the Home Depot and got to the air pump and the guy said, if you're going to use this a couple times, you're better off just buying it. I go, you're right. So then I took the air pump to the register and the person said, we now have a 0% credit card. 0% for 24 months if you put it on credit. If I can acquire an air pump three ways, I can rent it for a couple hours, buy it all cash or finance it. I can do that with any and every asset. And life insurance is no different. It's a function of two things. Is on the front end, how long are you going to keep this asset? Hey guys, I am going to go move to your town and my wife and our three kids, we're going to live there for two months. Should I buy a house for two months? It's two months. Should probably rent for two months. Hey guys, I'm going to move to your town and I'm going to live there for 20 years. Should I buy a house or or rent for 20 straight years? Probably should buy. Should I have a mortgage or buy all cash? Well, that's an analysis of what rate of return does your money do. Do you want to sock it in this thing? Do you want it liquid? Like what do you want to do? My point is this and just the level set is any and every asset needs to be looked at on a funding schedule of do I want to rent the asset, buy the asset, all cash or finance the asset? And that's it. That's with every single asset in the marketplace. So Richard, that's kind of how I stumbled into from, for lack of a better word, into looking at financing. Life insurance was just in that analogy.

So first time that we've had bouncy house to par whole life insurance. I think in a podcast, Jason.

So I love it.

That's fantastic.

There's a first time for everything.

Yeah.

You know Jason, I really thinking like a business owner, given that we all are business owners, that is one of the biggest. When they're dealing with a liquidity event, it can not only impact the business owner, but it can have a significant impact on the family as well. Because the, the one, the one element that the financial advisory community tends to focus on when you hear the words generational wealth is they, they've been conditioned to believe that cash is the biggest ingredient to that and it just isn't. It can create a lot of problems when business owners go through all size liquidity events. And so when you have a perfect place to park that capital and then the business owner can still control how they finance the things that they're going to need through the remainder of their lifetime. But now they have an asset that is going to continue growing no matter what for as long as they're alive. And it's going to deliver proceeds of death benefit exactly when those proceeds are needed the most. Talk about having a key ingredient to set up a great platform for generational wealth. In addition to teaching the kids and the grandkids and the great grandkids about how to be good stewards of everything. You want to keep the money in the family once the business has been liquidated, you don't want it liquidated from the family. You don't want that event to happen. Business liquidation event is fine, but the family, the family's wealth liquidation should be off the table.

Stewarding is a word, as you know, just we use a lot in our firm. We use, are you stewarding? Well, you could have all the money in the world and you have the opportunity to waste as much as you want or overspend on a vacation again, but are you stewarding? Well, you've been given these resources, allowed to have these resources and rented them for a period of time. Are you stewarding? Well, I'll follow up on that liquidation event because I don't think I spelled it out exactly, and I'm just going to give this at a very high level is think of that client, we all have. Think of that client that's participating. 50 grand, 100 grand into participating whole life contract they're using as working capital in their business. Great. And they love it. They understand the features, we all understand it. Great. I want you to ask that client, or maybe the client will ask you, hey, when I get $5 million for the sale of my business, how are we going to put all of that into the whole life insurance contract? Because right now I'm limited by 100 grand. So my best day, the biggest, most monumental day of my life, when I sell my business for $5 million and I receive that check, the biggest day of my life, how am I going to put it into my favorite asset class? How am I going to do it? Most people then go, well, we'll get another contract at that point. No, the person's set to retire at that point, they don't want to do it again. And we can get to insurability and everything else. But a little planning, we can get there. And, and again, let's just use round numbers. Let's just say was we assumed a $5 million sale 10 years from today. Let's just, let's just say that's going to be our round numbers. And it can be flexible. We look at getting a life insurance contract of $500,000 spread over 10 years. Think of it as a 10 pay. A bank's going to fund that 500,000 again, we're going to finance it. So at the end of five years or ten years, excuse me, you have a $5 million loan secured by whatever amount of tax free cash value it is. 5.5 million, 5.56 million. Whatever the performance is, we just know it's greater than the $5 million that's been put in over 10 years. Now when I sell my business for $5 million, instead of going to Wells Fargo and putting it there, I'm going to take that 5 million, come over and pay off this premium finance loan. Now I've got nothing in Wells Fargo, but that's okay because they now have cash value of 5.5 or 6 million. It's a way to make a one time distribution. It's into a life insurance contract in the future.

100%.

Reminds me of what Bob Shields would say, Jason, what's the best way to save? Repay policy loans.

Pay your loans.

Yeah, yeah.

It'S I think for, for business owners in particular who are listening to this, who are watching this, one question that you should be asking yourself today is do I anticipate that my business will be same size or larger 10 years from now using that exact same time frame. If you anticipate that your business is going to grow, which most business owners possess that ambition, otherwise they wouldn't have gone into business to begin with. And you sit down and evaluate, okay, there are a number of ways that you can exit the business. You can have a liquidation event like the three of us are talking about. You get sick, you die early, God forbid you experience a critical illness, you experience matrimonial breakdown, financial insolvency event, or heaven forbid you disappear. Like, do you have a plan in place to address all of those possible outcomes the business owner would stack, rank it and say, well, the liquidity event is right at the top of my list. That's what I'm hoping is going to occur. Okay, where are you going to warehouse the money when you achieve that liquidity event? Certainly don't hope it's going to be on the books of someone else's bank. Let's get it into your own system so that you can control it. And you haven't interrupted any of that accumulation. That still doesn't change. The cash value in the policy still rises daily, uninterrupted by the fact that we've got premium financing, we've got an immediate financing arrangement in place. Some construct where some other system is funding the premiums required for the contract. Boy, what a great position to be in. You've got uninterrupted compounding for a decade. You experience the event, it lands inside of the very warehouse that you have stack ranked as your best asset. And you've never interrupted any of the daily growth. It's brilliant. You pay no tax on the daily buildup. Like, it's just brilliant.