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Bill Black, the Exit Coach, discusses the importance of creating a business exit plan and offers a free report to help. The Exit Coach Radio Show focuses on providing information for baby boomer business owners planning their exit. Guest Vincent Mastrovito talks about insider-outsider dilemmas in family businesses, highlighting differences in objectives and characteristics between insiders (active managers) and outsiders (passive owners). They emphasize the need for mutual respect, communication, and understanding to navigate these dynamics effectively. Hi, everyone. It's Bill Black, the Exit Coach, from The Exit Coach Radio Show. One of the biggest questions I get on the show is, what exactly goes into a business exit plan and when should I start creating mine? Well, I always tell people that the best time to start was five years ago, but the next best time is now because you never know when you might need it. So we put together a free report that describes what an exit plan is and what you should know. You can get it free by texting EXITPLAN, with no spaces, to 44222. That's EXITPLAN to 44222. Again, text EXITPLAN to 44222. Welcome to The Exit Coach Radio Show, the show for baby boomer business owners who are looking for cutting-edge information as they plan their three- to ten-year business succession and exit. Every week, we interview top professional advisors for their best tips, strategies, and precautions so you can be well-planned. And don't miss our one-minute Exit Coach Tip of the Day on ExitCoachRadio.com. And now, here's your host, The Exit Coach, Bill Black. Well, hey, everyone. Thanks so much for joining me today. It's always a pleasure to have you with me, and especially when we have a guest like you as joining us first off this morning. He's been with me many times. As a matter of fact, you'll find his last interview up on our website right now if you want to go check that out at ExitCoachRadio.com. He is Vincent Mastrovito, and Vince is a certified exit planning advisor, and the name of his company is Prometis Partners. They do great work for business owners who are contemplating their exit and their exit strategy. Today, we're going to talk about yet another topic, and we're going to talk about family business insider and outsider dilemmas. Vince, welcome once again to the show. Thanks so much for joining me this morning. Bill, as usual, thanks so much for having us on the program. We thoroughly enjoyed talking to you and your audience, and just really appreciate the time to catch up. Well, it's always a pleasure, Vince, because you bring very clear ideas to our listeners, and that's what they're looking for with this type of information is, you know, I know I can go to an attorney and get confused in about 10 seconds. I want to know what are the big issues I should be thinking about, and how can I clearly address those? And one of those issues, as we're going to talk about today, is the insider-outsider dilemma, and we're going to talk about that in just a moment, but before we do, Vince, as usual, can you just give us a heads up on how you started Prometis Partners and what you all do and what kind of clients you tend to serve? Certainly, most of our markets, Bill, are from business owners from about $3 million to about $30 million. We have gone down to about $1 million, but that's 3 to 30 is usually the range that we will work in for the most part, and Prometis Partners was really a spinoff from another business that I had, a wealth management firm, and the work just got to be so intense that we were doing and the demand that we had for it that we decided to make it its own entity so that we could specialize in this area, and then I sold off the wealth management piece of it to my old partner and focused 100% of my attention here, and it's been working out beautifully with the education of business owners and helping them understand some of the steps and some of the things that they really need to be thinking about internally to give them a higher probability of success with whatever goals that they may have with their business. Well, I think you're in the right place at the right time. There are a large number of privately held baby boomer business owners, that's right now age 54 to 72, and they're really starting to think about, you know, how do I pass this business on or how do I back out of it and live to tell about it, especially when it's a family business, and one of those things is, you know, I have what I call insiders and outsiders inside of my business. Now, when we talk about selling a business, a lot of times we talk about selling to an insider, which is employees, or outsider, which is an outside buyer. We're not talking about that here, right? We're talking about in family business the difference between insiders and outsiders, so let's start with that and clarify for our listeners what we mean by insiders and outsiders today. Yeah, so an insider is going to be obviously someone who is a majority or a shareholder with inside the business, working in the business on a daily basis. They're operating it. They could be CEO, Vice President, Marketing VP, Executive, or an employee, but they would be a shareholder on the inside of the business, and on the outside, we could have a non-active shareholder, owns shares in the company, could be a retired shareholder, could be someone that's ill, could have spent stock that was gifted to family members that were not active and had other lives that they led themselves, separately from the business, but they ended up with shares of the company anyway, so we're kind of really going to those people inside of the family circle. Okay, that's great, so this is all inside the family circle, but you have some that are actively managing and some that are passive owners, and of course, what's the problem there? Well, they have different objectives, right, so let's talk about what some of those objectives are. What typically would an insider's objectives be? Well, I've got five that I list out that are usually pretty primary, because usually when you have an insider inside the business, you have someone that has a lot more access to knowledge and information, right, and if I compare that to someone who's an outside, non-active owner, they're going to have less access to the knowledge and information, so inside, again, is they have more knowledge and information. They are probably a bit more steeped in the business, so they don't recognize what others don't know, because they're so entrenched inside of the business. They have, obviously, probably a bit more power and status in making important decisions and critical decisions inside the business. They certainly carry a much heavier burden with themselves on a day-to-day basis, because they live, breathe, and eat the business every single day, and then also, they may also view outside owners as more of a parasite, because they're not inside the business every single day. Yeah. Those are kind of the ones that I work with primarily. You can imagine the person who wakes up thinking about the business goes to sleep, if at all, thinking about the business. Everything revolves around the business and the employees within, and all of the minutia that goes with that. I get it. Yeah. It makes a lot of sense, as opposed to the outsider who just wonders, what? What do the outsiders tend to think about as their characteristics? Yeah. Those are, as I mentioned earlier, they have a lot less knowledge of the information going on. It just depends on what their activities are and how much they want to know. They also want to feel more connected to the business. Even though they're not working inside the business, they still feel a sense that they really want to be connected to the business in some way. That can take so many different forms of what they're trying to accomplish. They also may be confused or overwhelmed about the responsibilities, like, what does it really take to run this business? Because if they're doing a completely different profession and they're outside shareholders, they may not have a grasp of exactly the responsibilities it takes to run this type of business. They will also feel a bit disrespected by some of the owners and managers, just depending on how that relationship is. Then they also may feel like the inside owners or shareholders are receiving some inflated salaries or bonuses or perks that may be taking away from some of the benefits that they feel that they deserve. Those just have to be clarified. Yeah, it really is. I see it more regularly than what I would like to see, but it does happen. Listeners, if you're like me, you're picturing business situations. You might even be in one of these. You might be picturing, yeah, that's me. I don't know everything about what goes on in the business, but I still am an owner and I still want some respect. I still want to feel like I can be part of what goes on there, have some say in it. Vince, once we have clarified what these dilemmas are, what are some codes of conduct? How should outsiders and insiders treat each other? Yeah, I think a lot of it boils down to you should accept all owners as owners and be respectful to each other, first and foremost. I think obviously the inside owners are going to be extremely emotionally attached to this business because they're there every day. You have to have a good communication level to the outside owners and letting them understand why things are operating a certain way. On the other side, though, the outside owners need to understand what's going on. The outside owners need to understand that the reason why this business is sustaining itself for the length of time that it has is because these folks probably know what they're doing. You need to be open to how they're managing the business, even though it may not be the way that you feel that it should be managed. Looking at it from a perspective is, are these the best decisions for this business and its sustainability? We can agree to disagree, but we should have respect for all people. There should be some openness about the accountability for what each side of the sense is actually doing so that you have communication back and forth and also just to create an inner room effect for non-employed owners of the business. Make sure that you're listening to each other, I think, are really key factors. These may sound overly simple, but it's very difficult to do when you're trying to run a business. Then provide them with some adequate information and go as far as letting them know that if they're having a problem understanding the financial statements in the frequency that you see them, to maybe go as far as just scheduling an appointment with the CPA or the accountant and maybe have a separate meeting that helps them get a better grasp of why the accounting practices are the way that they are, because that's going to be very critical. And to be an educator, educate them as to why the business is actually being run the way that it is. There's a list that I could probably go through as to why people really need to do it. A lot of it certainly is common sense, but there are some things as to why you really want to make sure you're doing things, because at the end of the day, you both are shareholders. You certainly are viewing it from a slightly different perch when you view it, but you ultimately want the same goal, and that's where they need to be at. Absolutely, and in publicly traded companies, they have things called shareholder meetings. And of course, those shareholders in the audience don't have anything to do with the day-to-day operations they're looking at. They want to know what's going on financially, and so they put together these shareholder meetings, and they spend a lot of effort to put together all the information about how the company is doing, what the company's direction is, what's going on in the industry, and accounting wise and all that type of a thing. So, could we take a clue from publicly traded companies as far as creating those types of agendas and those types of meetings to communicate effectively? I think you absolutely could do that. I mean, you can scale it from a $40 billion company to a $4 million company and certainly take a lot of the same applications that they're utilizing and put it inside of your shareholder meetings for your inside and your outside shareholders, and you could have discussions at least twice a year that would bring them in and show them why things are being run the way they are and allow them to ask questions and encourage them to ask questions and get involved. And certainly, you have to have the primary ones there that are going to be voting on stuff, but I think it's a great way to build that continuity because the challenge that is out there, Bill, as you're very well aware of, is when you tie in family with money and growth, a lot of funny things that can actually happen during that process, and just the more upfront you are and the more you communicate, I just think it's that much easier to become successful in the business. Yeah, I totally agree with you, and I think that in those shareholder meetings, like publicly traded companies, typically it's for shareholders, but you can bring a spouse or someone else you might communicate with. So now we're kind of getting into the topic of what we call family business meetings and things like that, but the concept is that, as you mentioned, there needs to be clear communication so that everybody can get on the same page and understand, okay, if it's like, we never hear what's going on, we don't know why the business is doing well or not doing well or why we got our dividend check or didn't get our dividend check or what's going on. So creating that format would take a lot of pressure, I would think, off of the inside active shareholders as well by saying, well, let's save it for the shareholder meeting. It really would. It takes a tremendous amount of pressure off of everybody to be able to openly, like you always say, Bill, is you want to be happy at Thanksgiving time or Christmas time or whatever the holiday is. You want to make sure that there's really no tension between people when they're having these family functions or these holidays, and I really do. I think it's very, very important and would be very easy for the current active shareholders to just go through and communicate and help people understand a little bit more about what's going on in the business and why and what's happening in the industries and why we need to do things the way that we do. It helps for these folks that are on the outside to understand, well, gee, I didn't really think about that. We're trying to compete against, obviously, other competitors in our industry, and the industry has its own ebb and flow economically, so there are going to be periods of time that maybe you do and maybe you don't get a dividend because we have to put more capital or buy more equipment inside of the business, continue for it to grow and sustain itself. Yeah. Of course, with this topic, there are many potential situations where it may have come to pass that people are shareholders in one way or another. It could have been estate planning where the patriarch or matriarch of the business, the founder, dies and leaves shares to all of their children equally, even though only one of them or two of them out of four works in the business, as an example. There could be a lot of situations where people became shareholders, but as you mentioned, and I think very rightfully so, they're still shareholders. That's the way it is, and they need to be respected and treated and communicated with as such. Yeah. They really do, and they're also family, so you've got two connections to that stock. One is DNA, and the other one is the actual stock that you're going to have, and I think that however they attain the stock is however they attain the stock. The other thing that has to be looked at is you also want to give them an option with any of the agreements that you have in there that should they want to cash out their stock, what kind of options would they have that would not put the business in any adverse situation? Certainly, there could be some non-active business owners that may want to just cash out of their stock and go do something else with it. You wouldn't want a ton of that coming at you at a bad financial time if cash flow is low, so you have to have the documentation and the processes in place that will address the issue and allow for both parties to accomplish their goal without hurting the business and its goals and sustainability too. Yeah. For those of you listening that are owners, shareholders of your business and thinking about what you're going to do within your business continuity planning, it's very important to consider a lot of these issues as you think about, well, maybe I shouldn't leave my company equally to both active and inactive or insider and outsider as we're calling them, people in my family because maybe I'm setting up a family squabble down the road if I don't do this carefully. There are other ways to approach that and certainly a lot of thought is given to that in estate planning. Vince, what's the effect on the business when they don't have continuity? Well, it's not to be positive. You're going to have a tremendous amount of distrust between both insiders and outsiders. I've seen it completely trash a number of businesses. We were in the midst of a fourth generation transfer and that is exactly the reason that it happened, that this very particular reason with outsiders and insiders and the business has since folded and they're just trying to sell the real estate and it's a very profitable business. It doesn't happen 100% of the time but certainly the strain financially and from just an emotional perspective if you're not getting a loan could really, really hinder the progress and sustainability of the business because it's just too much bickering going back and forth. Certainly on the other side, if you do have strong continuity, then I think you have a group of people that are really working together in unison. A couple of suggestions that I always give to people, I said, look, why don't you take some of the non-active or outside shareholders and why don't you let them assist and help you with maybe some of your community involvement or maybe you let them just sit on the advisory board to get a little bit more input as to what the business is. They're not there on a day-to-day business but there could be some things that this business is doing in the community that they're really good at and they could really help promote the business within the community or they could just serve on the advisory board or both. There's plenty of other actionable items for outsiders that they can work together on and become a unit together and understand each other and still go through the main cause of what this business is really trying to accomplish and to complete what the legacy is of this business within the family. I love that. That's a great idea. I'm writing it down as I do most of the things that you say, Vince, because I have a situation just like that. The question I wrote down is how can I get non-active shareholders more involved in the business? It doesn't have to be give them a job doing something meaningful in the business. There are a lot of things businesses are doing to become more visible and active and meaningful in their community. That's a wonderful idea that you just gave us. I love it. Now, when owners are thinking about this, and again, we do have holidays coming up, as you mentioned. It's a great time to think about these types of things. What are some of the things you think people could say to non-active? Maybe you picture the active shareholders listening or the insiders listening and they're going to be talking with outsiders at the holidays. What are some of the questions you think they might think about to ask those people to have a meaningful conversation about where the business is and where it's heading? I think you could sit down with a cup of coffee with the outside shareholders and just let them know what some of the goals are that you want to try to accomplish during the holiday season. That is pretty widespread. You certainly could feed some homeless families. You could help some underprivileged kids. Certainly, a lot of businesses have helped kids with their sporting events and their uniforms and some of their travel. You could be helping with the churches in your area that you're a part of or that you want to contribute to, the schools that you're with. These folks that are not working in the business every day and are on the outside, talking to them about what kind of an impact that you want to have in this community and how they can really help this business, help the community, which in a sense really helps everybody at the table, I think would just be a fantastic conversation. I just think that when you can involve people like that and they feel part of the business even though they have a different profession, then they just start to feel a sense of more involvement and they feel like, wow, I'm really part of something that's special within my family and within this business. I think that that's pretty dynamic. That's a great idea, a great place to leave it for today, Vincent. It's been a real pleasure to have you on once again. We covered some great ground today. I really appreciate you helping us with that. Prometis Partners is located in Grand Rapids, Michigan, but you can call them from anywhere. Their office number is 616-622-3070. Tell Vince you heard him on Exacoach Radio and I'm sure he'll buy you a cup of coffee. So Vince, is there any other, it's Prometis. Tell us your web address. I'm sorry, I don't have it up right here. That's right. It's Prometis Partners. It's Pro-P-R-O-M-E-T-I-S-Partners.com. So you just go to PrometisPartners.com. It has our email in there and there's plenty of information in there for people to download and read and if you want to reach out and contact us either by phone or by email, everything is right there on the website. And I really appreciate the time, Bill. I think your radio show is just fantastic and getting out to the listeners and people who are serious about really capturing as much value acceleration that they can get in their business and preparing them for the inevitable transition out. Thank you for listening to Exacoach Radio. www.exacoachradio.com