091 - The Pillars of Protection: Risk Strategy, Insurance, and the Key Players

 Risk management is a crucial practice that business owners should implement and revisit regularly. On this episode of CyberSound, the team explores strategies to safeguard businesses from various angles, including legal, economic, and personnel-related risks.

Jason and Michael welcome Darren Violette of Profectus Financial Partners to explore the broader landscape of risk and how strategic planning, insurance, and strong employee retention can elevate your business valuation. 
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Disclaimer:
 

This material contains the current opinions of the presenter but not necessarily those of Guardian or its subsidiaries and such opinions are subject to change without notice. Profectus Financial Partners offers fee-based planning, wealth advisory services, and securities through Park Avenue Securities LLC (PAS) and insurance through The Bulfinch Group Insurance Agency, LLC. Fee-based plans may include tax and wealth planning suggestions, but we do not give tax or legal advice. You should consult your tax or legal advisor regarding your individual situation. Darren Violette is an Investment Advisor and Registered Representative of PAS and Financial Representative of The Guardian Life Insurance Company of America (Guardian), supervised from: 160 Gould Street, Suite 310, Needham, MA 02494, 781-449-4402. PAS is a wholly owned subsidiary of Guardian. Profectus Financial Partners and The Bulfinch Group are affiliated, but neither firm is an affiliate or subsidiary of PAS or Guardian. Darren Violette, CA Insurance license # OM18222; FL Insurance license # P171418. PAS is a member FINRA, SIPC. Links to external sites are provided for your convenience in locating related information and services. Guardian, its subsidiaries, agents and employees expressly disclaim any responsibility for and do not maintain, control, recommend, or endorse third-party sites, organizations, products, or services and make no representation as to the completeness, suitability, or quality thereof. 2023-163344 Exp 10/25

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Transcript

00:02

This is CyberSound, your simplified and fundamentals-focused source for all things cybersecurity.

Jason Pufahl  00:12

Welcome to CyberSound. I'm your host, Jason Pufahl, joined today by CEO, Michael Grande. How you doing?

Michael Grande  00:18

Great, great to be here.

Jason Pufahl  00:20

And we have a special guest today, Founder of Profectus Investments, Darren Violette, how are you doing?

Darren Violette  00:29

I'm well, how are you?

Jason Pufahl  00:30

Good. I'm excited to have you here. We've known each other for a long time, we've talked an awful lot about sort of personal and business risk, so I'm looking forward to this conversation. And it's a tiny bit of a deviation, probably from our normal format, where I'd say we're talking about cybersecurity issues or IT issues or actually, I feel like we've been doing a lot about AI. But I think ultimately, it's a risk management discussion, right, where we have built a business, hopefully people listening to this have also built a business, and business protection is a concern for them. And I think really, the discussion today is is really meant to center around that.

Michael Grande  01:11

There's so many variety of concerns and issues that business owners have to deal with. And it's great to be joined by a professional that can walk us through some of the other ways to mitigate some of that risk.

Jason Pufahl  01:23

So I think, maybe quickly teeing it up, Darren, I know that we talked some about how to protect the people involved in a business. And I'm going to keep it as general as that because I know you can speak to it a whole lot more eloquently than I can.

Darren Violette  01:37

Yeah, I mean, we were talking and just how much, what we do professionally rhymes, because you're working on the cybersecurity side to protect the business from that risk, but there's so many other areas of risk, you know, things like the legal and liability side. Obviously, there's economic factors as the world changes and evolves around us, you know, there's natural disasters, and when we're in some of those areas, and then really where my professional sphere sits is, what happens if there's the loss of a business owner or the loss of a key employee? How do we, how do we protect against those risks?

Jason Pufahl  02:13

So, so loss, early exit because of something great happened to them, or potentially, right, the early departure because of a death or something like that? What causes are you generally protecting against? 

Darren Violette  02:27

Yeah, great question. So, we always hope it's the voluntary exit, you know, there's either a great sale or somebody retires, and there's a, there's an internal transfer to a key employee or a family member. But there's also a lot of things that aren't the way we want to exit. And we need to be prepared for those things like death, disability, some of divorce, it could be a loss of professional license, we really hope not the case, but it can be criminal convictions. You know, those things do happen. And, you know, not our area, but those are all things that should be written into the, what's called a Buy Sell Agreement. It's a legal document that lays out in advance of these events exactly how that would happen.

Michael Grande  03:12

And are there ways to, you know, I'll use the term very generally right, insure, but, you know, use financial instruments or insurance instruments, to to fund some of these things, especially for small business owners who who have so many challenges ahead of them, as you enumerated before. You know, are there ways to to try to lessen some of that risk, or at least fund some of these other things in the event of these either catastrophic situations, and in some, in some cases, positive, but mostly to the negative that we're trying to insure against?

Darren Violette  03:51

Yeah, and the nice thing is a lot of them rhyme, right. So I mean, the, the first and simplest thing to do to prepare for these is just to create a really strong business. So when there's good cash flow, and there's good cash reserves, you're better prepared against some of these things. Right? So, it is a financial shock to the system when these things come along. To your point, though, that's that's not usually sufficient. You know, there's not a lot of businesses with real sustainable, enterprise level value, that have enough cash on hand to handle something like this. So generally speaking, you wouldn't want to have written into the legal documents specifics, so there's no insurance for if there's a divorce, and a spouse wants half of your value of your ownership. But what you can do is you can write it in such a way that there's a staged payout for that. So it's not a hey, tomorrow, we got to write a check for 50% of the value of the company.

Michael Grande  04:54

That could destroy the business that not only valuation, but liquidity and ability to operate. 

Darren Violette  05:01

Precisely, I mean, how many businesses genuinely fail, versus how many of them get to a point where their cash flow doesn't sustain them? And these are the things that can be so disruptive, they could crush a company. But to your point, there are also insurance products, right? So for the early death of an owner, you can protect against that with life insurance, the disability of an owner, whether temporary or permanent, there's a few different types of disability insurance that can protect against that. And, you know, the types and amounts and all that are obviously particular to a situation, but that can be protected per pennies on the dollar. Those are, in some ways, those are the easy ones, some of the other ones are a lot more complicated. 

Michael Grande  05:43

So, you know, I learned a great lesson, and you actually delivered the lesson to me about during the planning process, and actually, during the execution process of some of these instruments and policies, you know, they can be designed with the best of intentions. But obviously, businesses evolve and ownership evolves and needs change. And hopefully valuations change, right upwards, in many cases, hopefully. But there's also some key tax strategies, and I know, we're not here to talk tax strategy, and none of us are in that arena, right, always consult a professional when it comes to tax guidance and advice. But, you know, businesses need to be aware that, you know, the value that they may derive from some of these insurance instruments may be taxable, and in some cases may not be. Just touch on that briefly, I found that to be intriguing. 

Darren Violette  06:38

Yeah and you're, you're hitting on a couple of layers, right, where as the valuation changes, your legal document might give a formula for the valuation. But if your funding mechanism is only half of that, you could have a legal obligation to pay without the financial means to pay. And then to your point around the taxation pieces, if policies are not structured correctly, there's a few different ways you can design these, so it sort of gets down some rabbit trails, but if they're not designed correctly, the proceeds can be taxable. And that should never be the case, it should be designed and structured appropriately in advance, such you avoid taxation, from an income tax standpoint. And there's also ways you can structure it where it does, it does or does not go into the valuation of the company. And that impacts how the benefits are structured as well. So there's a lot of wrinkles to dealing with it correctly. You got to get it right on the legal side, and you got to get it right on the financial side. Well, to your point, I'm not the legal advisor there.

Jason Pufahl  07:44

I mean, these are hard conversations to have, though, which I think, you know, if there's a takeaway that I've had from from sort of working with Darren is, tackle some of these conversations upfront, decide how you want things to happen, you know, if, for example, I were to die, like, what, what do we want to do relative to my part of the company and my wife, and thinking through that upfront, is a lot easier than thinking through it after, you know, when everybody, when there's a certain amount of duress?

Michael Grande  08:16

Always good to have a good plan in place, right?

Darren Violette  08:20

I'll use some Tony Robbins language, talk about it in a cold state, not in a hot state. Right, when calm, our minds are prevailing, it's a much better time than when someone just lost a spouse. They're panicking about a payout or somebody is permanently disabled. That's not the time to have the conversation. It's a great point.

Michael Grande  08:42

One of the other areas that, you know, we touched on early on and you know, there's business risks and concerns as it relates to employees, growing companies have a lot of things to be concerned about, you know, employee retention, turnover, offering, you know, an attractive benefits package, and also ensuring certain key people in an organization that may be really hard to replace in the event of a loss for whatever that reason may be, perhaps talk us through some of those options. 

Darren Violette  09:13

Good point because when you're in a small company, it may be possible that we wear more than one hat in the company, and we've become really important to that company. My guess is most of the folks listening today, you have one or two people that are driving the majority of your sales, or one or two people that are the majority of your actual industry expertise. Someone is the technical mind on the team. And absent that person, you lose their ability to drive the business or to complete the business. Now you have to hire them, and you have to retain your clientele while you got the person up and running, who's replacing them. So when we have somebody, and we'd call it a key person, it's just the really simple but technical language, is we want that person protected so that the company gets an influx of cash, if that person leaves abruptly. And you can do that in multiple ways, too, you can do that through life insurance as well, if they pass away, you get an influx of money. But you can also tie that in with strategies like a retention stay bonus. You know, hey, Jason, if you stay working for me for the next 10 years, you know, and I know your kids a little older, but let's pretend your kids are going to school at that point, I'll pay 25,000 a year for four years for them to go to school. But if you leave in year seven, you forfeit that benefit. So you leave on me, I've been setting aside dollars, right? So I get that money back. But if you stay, it's great for my business. And it's great for you, you tie in the, I need dollars, if you leave abruptly, if you pass away, I can get a death benefit to do that. But if you stay, well, that's good for the value of my company all along. And that's really what we're trying to do with all these strategies is drive the valuation of the company up, the better we mitigate our risks, the more valuable our companies are.

Jason Pufahl  11:18

So actually, that's the question I was actually going to just ask, which is, how appealing or how attractive is it to maybe a prospective investor or prospective buyer, when you've got some of these protections in place like is that is that viewed favorably? 

Darren Violette  11:32

It's a massive driver for valuation, you hear the KPIs like what actually brings the value to bear. If my best people can walk out the door the day after I sell my business, a buyer is going to be really scared off by that. But if I've got contracts in place, if I've got strategies in place that highly incentivize them to stay for a number of years, well, there's a confidence in the buyer that there's going to be a continuity to the business, and really the relationships they have with our clientele.

Michael Grande  12:08

One of the key takeaways from the conversation so far, it really has been the need to not only be, you know, forward looking, and, you know, try to try to think of as many different scenarios as possible, but perhaps also be creative in some of the solutions that you need to design because, you know, every situation is not identical. And you've got to, you've got to plan for a lot of different situations. 

Darren Violette  12:34

Especially with employee retention, because everybody wants to just throw money at a problem, but it doesn't necessarily work. If I give you, hey, every year, if you hit your metrics, I'm gonna give you a great bonus. The day after you get the bonus, you can walk out the door, because someone else could offer you the same money. When you use some of the more creative strategies, yes, there's money upfront, people need to live and enjoy their life along the way, but when I it's also tied in with a way to to keep you around with me, the proverbial golden handcuffs, I know it gets a bad rap, but it's a good strategy. Because we both win, you win by staying, and I win as the business owner by keeping my best people around. I mean, you run a business, you know what it costs to replace somebody who leaves. Even when you can replace it from a business sense, you never make up for the cost of transition. 

Michael Grande  13:32

Yeah, there's cost of transition, training, time lost, customer confidence, reputation risk, there's so many variables to consider with that.

Jason Pufahl  13:43

So, are these strategies that you think are applicable to a specific size business? Or is it hey, you're a sole proprietor, but you should still be, or maybe you're two people, right? And you should be thinking about some of these potential risks, like, is there a threshold?

Darren Violette  14:04

I'd say we think about it differently if you're merely a onesie twosie sole proprietor type shop, where it's your personal planning will address a lot of these issues, just as much, if not more so than the business planning. As there's multiple owners, as there are employees, that brings in the need to adopt these strategies. You know, if you're a 5000 person firm, the loss of one person, unless they're C suite, probably is a it's a dent, it's not a major crushing event. So at some point, the scale of a company, if an engineer leaves Apple tomorrow, they probably don't notice, an engineer leaves a firm of 20 people, you're gonna notice, that's gonna hurt. 

Jason Pufahl  14:48

That's logical thinking for sure. Any, we talked a little bit before this and we said we can take, we can cover you know, a half dozen bullet points and make this a one hour long webinar right, so any points, though that you'd like to make relative to the personal protection side of business ownership, and maybe some key employee, key person?

Darren Violette  15:15

I'd say the biggest concern that I have is, most business owners will deal with this once, and then they set it aside and don't readdress it. And I got to suspect in your business, you'll say the same thing is, if you're not actively working on it, it grows really stale and ineffective. I constantly see valuations and funding of where they were 7 or 10 years ago, and trying to encourage getting an updated valuation, updating the legal documents, updating the funding mechanisms, readdressing those, what the benefit packages are, I mean, even a 401K plan with a match is an employee retention. It might not be an amazing one, but it is one and continuing to look through as, what are the things that our people care about, they value, and tying that into what you want as a business owner? And how do you marry those together? 

Jason Pufahl  16:14

And annually, do you think that's a worthwhile exercise? Is that too frequent?

Darren Violette  16:19

It's not. I would settle for every two years on a valuation. It's something we actually do for people, we run valuations as part of our practice with business owners, we, we're partnered up with a firm that does that they have a ton of great data, they don't do it for an IRS grade. If somebody's passing away, and the IRS is looking for a payout, you need the 10 or $20,000 valuation done. But if it's for planning purposes, it's it's a great software, it's a great company we work with, and we get very valuable actionable info out of there. And what I appreciate, again, to tie this back in is, all of that work is done to tie into the valuation of the company. So that you now know, when we put these things in place, the software we use gives us the change in the valuation on, based upon the implementation of those things. So as the business owner, you get to see how your work is driving the value of your company, because we really, that's what eventually we want to sell our businesses, maybe at 50, maybe an 80, but it's someday, we want to sell it and maximizing that value to the next buyer. Why wouldn't we want to do, you don't want to leave valuation on the table, for nothing.

Michael Grande  17:38

I would, I would feel that in many cases without sort of regularly visiting valuation, risk management strategies and other key pieces, key employee retention, and general employee retention, many business owners probably aren't aware of of the certain levers that they can pull that really have a great impact on business valuation. And really, at the end, I think our takeaway today, is that really good sound business risk management will drive good valuation.

Darren Violette  18:11

Absolutely.

Jason Pufahl  18:12

Yeah, no substitute for planning, right?

Michael Grande  18:15

Absolutely.

Darren Violette  18:16

And it doesn't have to be that complicated. These aren't necessarily like major endeavors that take months and years to put in place. Some of these are really simple things.

Jason Pufahl  18:27

So that statement I love because I feel like on the security side, I have discussions with clients all the time around business continuity planning, and everybody thinks that's a year long activity that includes every single person in the company. And I always say, it can be, or you can have a couple of conversations with some really key business owners, and figure out what you're really worried about, like, let's not make it more onerous than it needs to be. 

Darren Violette  18:54

Well, and probably an overused phrase, but you hear progress is better than perfection. And it applies here. I'd rather you do something, and start to work on this, then make it into a massive project and do nothing, right, you know, chunk it out, take a piece at a time, put it on the Gantt chart if you're an engineer and do a piece every quarter for the next two years. That's fine.

Jason Pufahl  19:15

Just do something. That's a good takeaway.

Michael Grande  19:18

Just do something.

Jason Pufahl  19:20

Darren, it's, it's been a pleasure. I mean, I feel fortunate to sort of be able to work with you both personally and professionally. It's great to have you on the podcast, your guidance is always is always spot on. So if anybody wants to have you know, have a further conversation about this is probably a tiny bit further afield. So maybe these are better questions for Michael than me. But happy to converse with anybody who wants to and Darren, thank you very much for joining today. 

Darren Violette  19:28

Absolutely.

Jason Pufahl  19:31

Thank you very much.

19:55

We'd love to hear your feedback. Feel free to get in touch at Vancord on LinkedIn and remember stay vigilant stay resilient this has been CyberSound.