Keeping your superstar employees with Kevin Monaghan

Announcer:

If you’re going to take the risk of running an agency, shouldn’t you get the benefits too? Welcome to Agency Management Institute’s Build a Better Agency Podcast presented by HubSpot. We’ll show you how to build an agency that can scale and grow with better clients, invested employees and best of all, more money to the bottom line. Bringing his 25 plus years of experience as both an agency owner and agency consultant, please welcome your host, Drew McLellan.

Drew McLellan:

Hey, everybody. Drew McLellan here with another episode of Build a Better Agency. Many of you are at an age where you are starting to think about succession or if you’re not thinking about succession, one of the things you’re thinking about is, “I’ve got a killer, fill in the blank, senior-level employee that I want to keep for a long time. How do I do that?”

And for many of you, the natural default decision is, “I’m going to make them a minority partner or I’m going to give them equity in the business.” So today, we’re going to talk about all of that, if it’s a good idea, how to do it well, and then dive deeper into sort of some best practices around that, and also some alternatives to that. So let me tell you a little bit about our guest.

Kevin Monaghan, interesting background. He started working on television shows like The Office and Parks and Rec, which my daughter is very excited that I’m actually talking for my first time in my podcast of someone she actually cares about. But anyway, so he did that and then he went into the financial realm and financial consulting.

And today, he owns a company called Intuitive Compensation Group. And what I find fascinating about this is Kevin’s sort of focus is using his skills in working with business owners to help them retain key employees, develop buyout strategies and even navigate family businesses in all of the buyout situations that happened and that lots of agencies are in that role.

He loves to teach entrepreneurs how to help, protect, create incentives and compensate other owners inside the company and key executives. His whole thing is why pay out more salary or give away ownership when there might be a smarter way? So this is going to be a fascinating conversation. Kevin, welcome to our podcast.

Kevin Monaghan:

Thank you, Drew. Thanks for having me.

Drew McLellan:

You bet. As I was saying in the intro, one of the things that happens with a lot of my agency owners is when they have a key, especially in this hiring environment where a lot of agencies, their best employees are being stolen by clients or corporations or bigger agencies. So they’re really concerned about hanging onto their talent.

For many of them, the sort of knee-jerk reaction is, “I know what I’m going to do. I’m going to offer them equity to get them to stay.” Good idea or not so much?

Kevin Monaghan:

A tough idea. There’s a lot of reasons why. When you give somebody equity, you are staking a claim and it’s easy. It’s an easy solution for the business owner because if you give them 10% or I’m going to give you 2% a year for five years, you give it to them. It doesn’t cost you anything today. So it’s just easy to transact, “Hey, here’s this.” There might be some gifting or tax consequences, but it’s not too much out of your pocket because you’re giving it to them.

And typically, you haven’t done a valuation too much on it as well, or you’re just in that partnership. You’re starting it up and you give away equity to somebody to come onboard. But the problem with it is you don’t know how much you just gave them 5, 10 years down the road. You can build a $40 million company. You can build a $2 billion company or you can just build a company that chugs along.

The problems with it is what if something happens outside of your control, would that person then leaves? Their spouse gets transferred to Idaho so they have to go and they choose to go with you and now, he owns 10% of it. Now what do you do? You can’t give somebody else new 10%, and this person is not going to have the same … They’re not going to be putting anything else into it and usually, people are smart enough to get equity that’s not dilutative, which means that you can’t get it back or you can’t just dilute them to zero.

Everybody saw that Facebook movie on how they diluted the share so they know [crosstalk 00:04:10] to look for those types of things. So giving away equity creates a lot of problems and especially when you have a situation where if your employee leaves that has that equity, and I’ve seen people leave with minor stakes of equity and their name was on the company, and they go to another firm, how do you get it back? They want liquidity. “Hey, I want my money for this,” and you don’t want to buy them out because it was their decision to leave.

So now you’re stuck and the problem with being stuck is what if in the future, the tax law is changed where instead of paying yourself a higher salary, it makes more sense to do equity distributions. Now that person is getting paid year over year over year for no work and that’s really the worst scenario. So those are the tough parts about equity that we see out there.

Drew McLellan:

Well, the other thing that I see is that when you give someone stock, when someone has to buy in even if they’re buying in at 2% or 5% or whatever it is, when they’re buying in, they have skin in the game. Who’s not going to take free shares? So it’s not a very accurate way to see how invested this person is in the company.

Kevin Monaghan:

Right. So buying in is another way. I run into that a little bit less often because it’s not, now you’re buying in, you’re putting money. And usually that comes with a raise. So, “Hey, you’re making $100,000. I’ll give you $120,000 but this $20,000 is going to go into buying the shares.” So they buy in. The problem is it’s really hard to sell those shares, or it’s really hard to get the value back out of it.

So business owner has used this as a way sometimes to raise money even, but the problem is selling it on the outside. Imagine if you’re going to [crosstalk 00:05:57] and you’re going to bring a new employee in. Is this new employee going to commit to buying a company when they come in to buy it? So I know people out there who are in their late 50s who are now sitting there with 10% of four different companies getting nothing for it and it’s doing nothing for them overall that they just hope that it sells one day and that they benefit from that.

Drew McLellan:

Well, for most agencies, it would be unacceptable to them to have someone owned shares of their business if they weren’t active in the business. So what happens is they give the equity. And then as you say, some event happens and it could be that they just get hired away. It could be that they have a spouse move, whatever it is. But then the owner is in the position where they have to buy back the equity that they give away to begin with.

Kevin Monaghan:

And that’s a fun fight. You want to value the business as low as possible. They want it valued as high as possible. And what if they leave during a time when you weren’t liquid? You just bought another media agency or you just something or invested in something and you’re not liquid. I got to take out a loan? That changes your cash flow.

So yeah, those are the issues.

Drew McLellan:

For the agency owners that are listening that have that junior employee and they’re not ready for whatever reason, we’ll get into selling shares and that, but not ready … The employee isn’t ready to buy in. The owner may not be ready to sell and do the valuation and do it properly to sell the shares. How else, what other golden handcuffs can an agency owner use to keep their young talent that is not involving owning their company?

Kevin Monaghan:

Sure. So let me do this. Let me go to a high profile example and then go back into the media relation. So if we look at the University of Michigan, they hired a coach, Jim Harbaugh in 2013. And what they did was, at that time, they made him the highest paid coach coming into college and they gave him a contract that paid him in two ways. One of them was a compensation strategy that we used that’s called split dollar.

So University of Michigan, it was public. Based on his age, people try to extrapolate numbers but the concept for his compensation package worth something like this. The University of Michigan would pay him $5 million salary and $4 million would go into another vehicle. Now, we listed equity as one of the ways to compensate people. There’s profit sharing. There’s benefits. There’s revenue sharing, other types of things.

What we looked at is using different tools and one of the tools that we used and this is outer left field, stay with me, cash value life insurance. So, the university-

Drew McLellan:

… do that, yeah.

Kevin Monaghan:

So the University of Michigan, you put $4 million into a cash value insurance policy. Fast forward two years later, they paid him $5 million and $5 million in salary, $4 million and $4 million into a cash value insurance policy. Now, the reason that they have the confidence to pay him that type of money was because the $4 million into the insurance policy was loaned or used as collateral.

If Jim Harbaugh left, and he went back to NFL to coach, all of a sudden, the University of Michigan after two years, can pull back $8 million. How many business owners out there especially in marketing agencies would pay their employees more if they knew that if they left, they could recoup some of their salary that they paid them?

Drew McLellan:

So in that scenario, was there a time frame like you’re vested in X number of years and then you get to keep the money?

Kevin Monaghan:

Correct. So of the compensation strategies that we used, you can put a time frame on it. You don’t have to. You can put a time frame in writing. You can make a handshake agreement. You can just put it in the employee’s name and trust him. You can put a legal document in place that says you need to work this long. And there’s a lot of rules around the different ways to structure it.

So we come in to try to help people do that. But let me give you an example as an lieu of equity compensation strategy where I continue with the Jim Harbaugh here for a second and say, “Here he goes with, he’s got this loan now for $4 million for two years.” Let’s say that Jim Harbaugh wins one of the top ball games. They can have an agreement where if you win the top ball game, boom, I forgive the loan. So you got to performance incentive to do that.

Now, in that scenario, if you forgive a loan in a compensation package, Jim Harbaugh now owes the taxes on that so you got two carrots on a stick. One is I can forgive the loan, two is you do really well, I can bonus you the taxes.

Drew McLellan:

Got it.

Kevin Monaghan:

That’s a high level example with millions of dollars and those exist. But they also all the way down the chain to three people coming together to develop a digital marketing agency, who are just starting where they each own a third and they’re two months into it, they’re already worried. “I’m producing more or I’ve sold more a third, a third, a third stake. I’m doing 60% of the work.” They’re already getting into these “oh, my goodness” scenarios, how’s this going to play out?

So the compensation strategy can help all the way down to a new company startup that-

Drew McLellan:

As partners?

Kevin Monaghan:

Two people start a 50-50 company, five years later, it’s usually 80-20 of who’s doing the work. Very rarely does it stay still. Compensation strategies are designed between partners, between employees, to keep them there. But the practical or the tactics where it works for agencies is that you start a digital agency and you are getting clients who are paying you thousands of dollars a month and you’ve got one guy who’s bringing in, let’s say, he’s adding two net clients a month. So he’s bringing in $4,000 new a month.

But now he wants partnership. He wants agency. What we normally hear is an owner will promise them, “If we keep going in this direction, I’ll do this for you. If we keep doing this.” So what’s nice about our compensation strategies is it starts putting money behind the promises. And the business owner, we can structure it so that it’s all on the business owner’s books or it’s all in the employees, or you can work together with a strategy.

But what it starts doing is it starts placing dollars in a vehicle where there’s known numbers behind it and there’s known incentives too to put things away. And the reason that you use cash value insurance is because while it’s boring, you don’t want your compensation to be … You want the business to be the risk and the go-to getting. You want the compensation to be there when you need it. So that’s why we used … It might be boring.

Drew McLellan:

And when you put it in an insurance vehicle, what are the tax implications for that? So do you pay tax on the growth or you pay tax on the initial deposit?

Kevin Monaghan:

So let me take a step back here and say there’s a couple of ways to structure this. Business owners care about two things. The first one is going to be they care about control. The second one is going to be taxes. So in a world where we’re focused on control, the business owner will typically buy a life insurance policy with cash value for their employees.

When they do that, it sits on the books of the company. You don’t get to deduct it. So there’s no deductibility to it. The nice part about it is you have control. So if that employee leaves, it’s all yours. It comes back to you. Maybe it didn’t grow, but it sat in a vehicle that was there for you. If you see that a-

Drew McLellan:

So I’m using after tax dollars to buy this vehicle. So I’m the business owner. I’m paying tax on this money that I’m then putting into an account that I, in essence, share with this employee. There are some rules around when he or she could access the money. Yeah?

Kevin Monaghan:

In an overall? Yes.

Drew McLellan:

Okay.

Kevin Monaghan:

There are some instances no, but that was a good generalization to say yes to. On the control side, really where you see this happening is super, super big premiums like the Jim Harbaugh example or you’ll see it in family on businesses where you’ve got a son coming into a digital agency. You don’t know if he’s going to stay. You don’t know if he’s going to be able to lead that organization, but you want to start positioning it. Plus maybe you have three other children outside the business so you want this policy to equalize it for the other children so they don’t think you’re leaving a million-dollar business to one child, and not to the other. That’s where-

Drew McLellan:

Your favorite kid, right?

Kevin Monaghan:

Right. On the other side, the taxes, this is where you’re actually putting it in that employee’s name. It’s nice because this is the executive bonus. You’re buying it. You’re putting it in, but he has access to the … He owns it. He has access to the cash value any time he wants and you get deducted in taxes but he can just use it to walk away.

So essentially, you’re paying him more.

Drew McLellan:

I must give him a bonus in another format?

Kevin Monaghan:

Correct. Now going back to what you said before, you can put a restricted bonus on it saying, “You have to work for me for 10 years,” and then that cashes work. So if you leave before that, the owner recoups everything.

The downside to that is when you make a future promise like that is that there’s heightened regulation around it, there’s risk requirements that you have to file so there’s a bit more tax and due diligence that you have to do on that end.

Drew McLellan:

If I have an employee that I want to put golden handcuffs on and I create this life insurance policy where I’m putting it in their name but I say, “You have to be with me for five years and then it’s all yours.” Who pay? Who and when is it a taxable event?

Kevin Monaghan:

Sure. In an executive bonus scenario where you’re deducting it and you’re putting it in his name, he owns the taxes on it. So if you are earning $100,000 a year as an employee and you put $50,000 into his name, he has to pay taxes on $150. So what they did was-

Drew McLellan:

Even though it’s going into an insurance product?

Kevin Monaghan:

Yeah. He’s going to pay them. So they came up with double bonus. Double bonus solves that problem. You’re paying the $50,000 plus there’s a formula. Call it circa $20,000 that you have to give him to pay the taxes on it depending on his tax bracket. And so you pay the taxes for him so he knows he’s got an after-tax benefit that comes net to him without any-

Drew McLellan:

Got it. Okay.

Kevin Monaghan:

Then there’s one more form that really kind of puts the golden handcuffs on employees and that’s between the two. You get a little bit of control and you get a little bit of the tax breaks. So where that comes in, let’s say … Maybe let me use an example. Let’s say you’ve got a media company where you’ve got somebody who is … You’re a 50-year-old business owner. You’ve got a 35-year-old in the business who is doing work so that you can spend more time on the lakes or more fun projects doing speeches or traveling or golfing, whatever you do.

You’ve got a guy that you know or you’re worried is going to leave to start his own firm because now he’s saying, “I’m doing all the work, why don’t I get all the reward?” And your media digital, some of these are very easy and low cost to start your own.

Drew McLellan:

Very low barrier of entry, absolutely.

Kevin Monaghan:

Right. Computer and Starbucks is all you need to get going. So what we do is we come in and we say, “Okay, let’s say that this employee is making $150,000 and you really want to keep them. I’m going to use round numbers and every projection needs its own illustration so I’m just speaking hypothetically here.

Let’s say that you said, “I’m going to give this guy another $100,000 a year into an insurance policy.” That’s going to give him huge life insurance benefits, the cash value is going to build inside of that and it’s going to be a real benefit to him as it builds cash value over time. Now, he still has to pay the taxes on it, so whether the leverage bonus or the 162 leverage bonus comes in is you then take $50,000 that he’s going to owe in taxes and you will loan it to him.

So when you loan it to him, you use the cash value as collateral so that if he walks away, you’re recouping your $50,000. So he owes you that money. Fast forward 10 years later, you’ve now put a million dollars into this policy. Let’s say the cash value is about a million dollars. It takes 10 plus years for that cash value really to have growth with.

Again, it’s boring but it’s stable if you use these with guarantees around it. So you know it’s going to be there and you have a vehicle now where about … Humor me … about $500,000 is in collateral and a million dollars is there. So 10 years later, you’ve got a 45 and a 65-year-old with a million dollars between them. Here’s where it gets flexible or so forth.

Now, you’ve got somebody who might want to retire. And you’ve got $500,000, you can take that $500,000, use it and go retire. Or here’s where the leverage buyout comes into play. What can a 45-year-old who’s running your company buy with a million dollars in his name? He could buy the agency.

So buyers who … You’re bringing another buyer to the table who’s already running it, or if you sell your agency and the company has that collateral on that employee, now, the person buying knows that they have a vehicle in place to-

Drew McLellan:

To keep that employee.

Kevin Monaghan:

Yeah. So you’re positioning them. And you’ve got a lot of options to work with this employee. If he does fabulous along the way, you can forgive the loan, pay the taxes, you can do things like that. You could also say, “I’ll forgive the loan if you buy the company,” you have to get lawyers involved in that transaction to find out and CPAs to find out how best to do that.

But you’ve set him up to do that and he knows that if you go back on your word, he knows exactly how much he’s walking away with and if he goes back on his word, you know how much you’re recouping.

Drew McLellan:

Yeah, makes sense.

Kevin Monaghan:

So it gives business owners confidence to move forward with something that’s not a promise, that’s got a known if they walk away and the golden handcuffs come in because inside of an insurance policy, unless you’re using very specific insurance that are designed to have a lot of the cash value there in the first year.

Typically speaking, you know you’ve got them for a few years because if they walk away, the collateral is going to be more than the cash value in the policy. So you can hold it to them where they have to come out of pocket-

Drew McLellan:

To pay that.

Kevin Monaghan:

… to walk away. You’ve got to make it worthwhile for him to agree to something like that but that’s where we come in to help facilitate between the two what’s a good working number.

Drew McLellan:

So let’s say after all of that, I decide, “You know what? I do have someone that I think I want to make a minority partner in my business,” despite everything we just said. So I’m going to sell them or give them or whatever shares of stock and I’m going to bring them in. So I know you guys have some strategies around the best practices for bringing a younger partner into the business and really infusing them in as an owner.

So what are some of the things that you recommend business owners think about when they’re the majority owner and they’re about to bring in a minority partner?

Kevin Monaghan:

Sure. the first thing I say is if you’re bringing them in over time, the best thing to do is to put something like we just talked about in place for two reasons. One, you’re working together and building up cash value so that now he can buy into it with money that he’s earned. You have a sense of how he’s going to perform.

If you’re bringing somebody in and you don’t know who they are or how they’re going to perform and to give them equity is a little dangerous. So you can put the strategy in place for the first couple of years to see how things play out. What you tell them is we’re using this to fund you, to put you in a position to buy into the company and this is a vehicle we might have the option to use.

So it gives you guys a trial run together and if you just gave them equity up front and the guy left, now, how do you get it back if you just had the structure in place? He knows what he’s walking away from and you get some back, so it’s more of a win-win. So we help them develop and say, “Hey, here’s how these things play out.”

We also suggest for minority partners, let’s say you have one of these packages in place. While compensation and strategies working together to give rewards and retention a go, the backend of this is that you’ve just funded the buy-sell agreement. If something happens and this guy goes out and he’s texting and driving and runs off the road and checks off the planet, now you don’t have to worry about his wife coming to you and saying, “I need my 10% equity and he’s my lawyer who I’ve …”

Drew McLellan:

And I’m your new business partner.

Kevin Monaghan:

Right. Or worse, you’re divorced. Your new business partner is now a child and you’ve got a lawyer saying, “If you mess up, we’re coming after you because you have a responsibility for the shareholders,” and the child can’t make those decisions.

So on the backend of it, worst case scenario, you have something like this in place. You’ve solved a lot of the problems that go along with it and typically, when there’s equity involved, we also talk about disability. And we usually look to wrap disability benefits around any of these as well because it’s no fun having a partner and paying a partner or a key employee that has a minority stake. It’s no fun paying them a salary when they can’t work anymore.

Drew McLellan:

Well, for a lot of agency owners, they have a partner or someone in mind, but the reality is that person is never going to be able to accumulate enough money on their own to buy the business. And so, either they’re going to have to go get a loan or hit up their parents or in many cases when it ends up being an agency world is I’ll give you a little bit down, but ultimately, I’m going to have to pay you out over time after you, the majority owner, had stepped away from the business. So the risk to the original owner is huge.

Kevin Monaghan:

Right. And that’s why it depends on the age. Obviously, if you’ve got a younger employee, you can put this in a place in time and put these things together. But if there’s a real intention to have this person buy you out and you’ve got a business or an agency that’s producing $600,000, $700,000 of profit a year, if you know that the benefit is going to come back to you and is ensuring not only your key guy but working to ensure you and your business and your retirement as well, people have the confidence to put hundreds of thousands of dollars into strategies. They just have to understand it and get behind and see how it plays out for everybody involved.

But that’s a lot of money that can accumulate for a buyout. And where you can get into it is you’re putting that employee in a position where now he’s got a lot of insurance. If you put away for a premium item, if he dies or becomes disabled, that money still is paid by the insurance company. If you really strategize and plan around this, you’re bringing somebody to a table where, let’s say, it grows to $2 million to buy you out but you need $5 million, you go to a banker now and you say, “Well, I already have millions of dollars of insurance if I die or become disabled, and I’ve been running this thing for years. Is it easier to get a loan in that scenario?

Drew McLellan:

Yeah, of course. Right.

Kevin Monaghan:

It’s just me. So it puts them in a position to be able to do more in a buyout scenario.

Drew McLellan:

Yeah, it makes sense.

Kevin Monaghan:

And you’re committing dollars behind your own buyout in some sense. What you’re doing might come back to you and put you in a stronger position anyway.

Drew McLellan:

Right. So if I’m now the majority owner and I’m putting money into one of those policies with the idea that eventually, I’m funding my own buyout, am I doing that with pre- or post-tax dollars?

Kevin Monaghan:

It depends. There’s options for both. That’s what our process explores.

Drew McLellan:

If I put it away with pre tax dollars, then at some point in time because we know Uncle Sam sooner or later is going to get his piece, then when the policy pays out or when we borrow against the policy and now I’m the seller, I’m paying income tax then on that income? Is that the way that works but in simple terms?

Kevin Monaghan:

You’re asking a complicated question. When we get in to these types of programs, our process is designed to start exploring what’s possible. When we look at what’s possible, then we need to bring in those key people to help execute it. Those key people are going to be your CPA who … Everybody’s got a different person that’s their go-to person. Sometimes, it’s their parents. Sometimes, it’s their lawyer or sometimes it’s their CPA.

We’re going to bring everybody to the table in that scenario where if we’re looking at how to maximize pre, post-buyout dollars, we’re going to need them involved and our strategies are going to … Our process is going to walk them through, is this going to be valuable? Who do we need to bring to the table? Who’s important in making the decision? What’s important to you and anybody else involved to get out of this?

When we bring those to the table, we’re going to have those people there and make sure that they’re just for that reason so we can go over how to optimize taxes and the legality of it with those professionals in the room as well.

Drew McLellan:

Let’s take a quick break and then we’ll come back and I’m going to talk about how to handle buyouts so that you and your partner can talk to each other after it’s all done. So let’s take a quick break.

I get that sometimes you just can’t get on a plane and spend a couple of days in a live workshop. And so hopefully, our online courses are a solution to that. Lots of video, hours and hours of video, a very dense detailed participant’s guide and all kinds of help along the way to make sure that you get the learning that you need and apply it immediately to your agency.

Right now, we’ve got two courses that are available. We have the Agency New Business Blueprint, and we have the AE Bootcamp. So feel free to check those out at agencymanagementinstitute.com/ondemandcourses. Okay, let’s get back to the show.

All right, we are back. My guest is Kevin Monaghan and we are talking about things like golden handcuffs and minority partnerships and how to fund those. Before the break, what I said was I wanted to talk about how to handle a partner buyout in a way that allows you to walk away with that relationship attached because certainly, sometimes, I’ve certainly seen agency partnerships where, as the majority partner or the founder perhaps is stepping away from the business and the new owner is buying in that no matter what their relationship was like on the front end, it’s a little rocky on the way out.

What are some best practices or what are some ways that if I’m thinking about structuring a deal, and I am now getting ready to get into that deal with my minority partner, how eventually over time is going to own my shop, how do I do that in a way that protects both of us in the relationship?

Kevin Monaghan:

Right. So, if we’re taking a look at more advanced planning and it’s really what are we going to exit, we dive a lot deeper into the business and the two partners’ personal side of things. And the reason is most business owners, when they think about a business, the threat or the walls go up or the tension comes because you feel like you have to be defensive to hold on to your stake. You feel that you have to, if I give this away …

The business was your income. It’s the only thing you know to protect in, what everybody wants is if I walk away, I want the income to keep coming in because that’s what I know and I’ve built it up, I helped.

Drew McLellan:

Or I want to sell it for a big chunk of money and then have a big chunk of money.

Kevin Monaghan:

Then I have a huge chunk of money but even then, the business was earning X percent and when I go out and I look at CD rates or other types of alternative income producing assets, I’m better off keeping the business.

So, you get into a lot of those where we have to dive into and our process gets more in-depth including meeting separately with the partners on what’s important to them personally. So, most business owners have to take the business and their personal life and have some sort of mesh where the business provides for the personal life but at the same time, you want to maximize your taxes, your ability to invest if you see fit. And you have to try to blend both.

So, when we break it down for business owners who are working together and one wants to buy the other out, you have to find out what’s important to each of them because if they know what the end result is, it’s easier for them to make decisions if they know how it all plays out.

Drew McLellan:

Give us an example of how that might typically, some of the concerns and how that might play out.

Kevin Monaghan:

Sure. Let’s say you’ve got a business owner who is 67 and is on his way out. It’s very difficult for him to give up control a lot of the times because he thinks, “This is mine. I’ve built the business.”

Drew McLellan:

Right. “This is my baby.”

Kevin Monaghan:

Right. And it also still providing their great lifestyle and their great income. And the biggest problem we see is more of an awareness of, “What would I do if I wasn’t doing the business?” And because you don’t know, you guard the business because that was all what you spent all your time on.

So, what we do is we usually start with the personal aspect, what do you want to have happened when you leave? And it may come that they just don’t want to leave and then it’s, well, what about the people who are working at the company then who think that they’re going to be taking over control and now you’re telling them you’re staying for-

Drew McLellan:

Right, you’re not getting out of your office.

Kevin Monaghan:

Right. So then, it backs into an awareness, and I want to bring this up. It backs into an awareness that the business owner has that he’s doing that and that the people who are working underneath him are going to realize that if they’re working and that he’s just going to keep owning, he’s probably going to lose them.

So, it becomes a tool to get them aware so that they can then turn around and compensate them as business owners or do something special for them to keep them there, or on the other side of the coin, they’d become aware that they want to do something else. We put the numbers behind it, what do they need to get so that they can start working with a number that means something to them with guarantees, with flexibility, with whatever they want as long as they know they’re getting exactly what they want, then we come to a number that they need to get to.

And it may be realistic, it may not be. A process defines that for them, but it comes to a number that they can feel confident behind so they know if they give away their life’s work or their legacy to somebody else that they know they’re getting everything they wanted. And the purpose of being a business owner is to have a great life so you can get everything you want on the personal side. We have to paint that picture for them because if they don’t or they’re guesstimating or they’re going by their gut instinct, they’re always going to want to maintain some sense of control or a huge number.

Drew McLellan:

Well, a lot of times, the math when you do the valuation, I never ever work with an agency owner who when I say, “What do you think your business is worth,” and then we do the valuation process that will work with somebody to do that, it’s never the same number. And by the way, the agency owner, their number is never lower than what the valuation comes out at.

So, part of it is I think being a realistic about what your business is worth, but part of it I do think you’re right, it’s important to have a plan for what you want to do next because otherwise, the old owner doesn’t get out and it’s pretty hard for the new owner to run the business while the founder is still in the building.

Kevin Monaghan:

Right. And where that happens is, and that’s where the realization comes in that says, “What do you want us to do from this point forth?” Because if you’re not now going to do something very special for them, they’re going to get real disgruntled that they are keeping working for you forever. And what if they leave? What does that look like for you now at 79 years old if your two top people, three top people, your management team starts leaving?

Drew McLellan:

Well, and what I’ve seen happen is that the owner to the founder, if you will, puts in play, “Look, here’s the buyout and here’s the scenario.” But even after the founder is the minority partner and they’re supposed to get out, they don’t.

Kevin Monaghan:

Never.

Drew McLellan:

So, technically, they don’t really own the lion share of the business anymore. But in terms of influence and sort of culture, they are the mama or the papa of that business. And so it’s super hard for the younger people who are now the majority owners to actually run the business.

Kevin Monaghan:

Yeah. And we see that all the time too, is the owner gives up majority share but has kept … Nothing can happen unless there’s unanimous decision amongst the owners and all of a sudden, their no is holding the company back.

Drew McLellan:

And so how do recommend your client structure that so that that doesn’t happen? Because here’s my observation is in the beginning of the process, the majority owner or the founder is A, anxious to set the clock and get someone to buy their business. And B, they think they’re going to be ready to leave. So, it doesn’t occur to them that there are going to be, their arms wrapped around their desk leg and somebody is going to have to drag them out of their office, but that’s what happens.

So, how do you structure it in a way that protects sort of the emotional side of it for the founder but it also protects the pragmatic side of it through the younger buyer who at some point in time wants the old man or the old woman out?

Kevin Monaghan:

Sometimes, you have to bring both sides to the table and tell them. And what that means is the owner has to say, “I don’t want to give up the controlling stake,” and then what are the negative consequences to that. And you get his answer and then you get the two youngers’ answer, and they need to hear it from each other.

So, you have to work together and if where we kind of see or come in or usually guide people is you have to tell that business owner, “How would you feel if you were running your business and somebody did that to you?” And it’s almost better to work for another five years if you want that controlling stake and do something very special for those other two people whether it’s positioning them to buy you out for more or putting more cash flow to them or what have you, to help them come to an awareness that they have to do something for the people if they’re going to stay longer than they want, going to stay on. You can communicate to people.

And a lot of people will still work very well if you have something in place to reward them for hard work. That is independent of you being a business owner or not. And that’s where the compensation packages come in and that’s where having those conversations with the business owner, finding out what they want.

If they’re going to have a controlling stake, put it right back to them and just say, “So, you’re not really selling the … You don’t really want to sell the company? So, what are we going to do for these people who thought they were going to get the company who are communicating that they’re going to get the company one day? Now, what do you special for them and how do you communicate to them what you’re going to do?” And they give an answer and we help work strategies around that.

But to your answer, it’s usually you don’t have to do anything ever. But the answer is usually if you’re going to stay longer than they’re expecting or you’re expecting, what can we do for them to encourage them to stay to reward them for performance whether you stay, go, or not and our compensation packages start putting promises around it that’s really money that they know that they get to take with them if that owner winds up going back on his word, “And I’m not leaving in five years anymore,” they know that they still get rewarded.

Drew McLellan:

Right. There are a lot of owners out there that either don’t have someone in play or the people that they have in place might someday be ownership material but maybe they’re not there yet. They’re too young, they’re too green, or maybe they have a skill set that’s super hard to hire. In a lot of agencies really great programmers or people with some digital chops, very hard to find. And as soon as you get them, somebody is poaching them because again they’re hard to find.

So, taking ownership off the table, I know one of the things that you talked about is there are sort of right ways and wrong ways to compensate employees. If ownership is not one of the things in the mix, what are some of the wrong ways that we compensate really valuable employees? And what are some of the ways we should think about that?

Kevin Monaghan:

Promises, ongoing promises are the worst way, I would say. But every way has its place and everything has a positive and a negative to it. In your two examples you just laid out, what happens if you don’t have that employee that’s coming up yet, that’s where you keep it on the books. Let’s say you’ve got, it’s a young son or a 25-year-old that you’ve trained them for two years and you put a lot of time and effort and you don’t want to start over because it’s annoying to train somebody up especially the smaller businesses where if he leaves, it means you’re doing his job now and you don’t want to do that job.

So, you can position it and keep it on the company books. If he does leave, it’s not his, he gets an extra benefit. You get to say a lot of times, “Hey, you’re going to get a big insurance value for your young family or for yourself. It’s not going to mean much now but it’s me putting a mechanism in place that’s going to start positioning us for you being important in this company.” So, at least it starts communicating that there’s something there and they get a little bit of a benefit.

Drew McLellan:

Hang on. So what you’re talking about is funding and insurance product …

Kevin Monaghan:

On the company books.

Drew McLellan:

Right, on the company books. So, basically, I own it as the owner. I’m paying tax on it and all that, but it is a promise to you in the future, right? If I’m 25 and I’m just getting married or maybe we’ve just had our first baby, whatever, help me understand because one of the things that your owners talk about is that, A, the younger generation isn’t as motivated by money, and B, the idea of having something that they get in 10 years or 20 years, that’s so far away and quite honestly, they don’t think they’re going to work for you that long anyway. So, how do you help them feel the value of that?

Kevin Monaghan:

That’s where you bring in the 162 leverage bonus, which is both. They get some. It’s in their name, so there’s ownership, who owns it is always an issue. In this case, the employee owns it. And there’s the cash value. The employee owns the cash value. He gets the statements. He gets to see that it’s growing there, but also the owner has collateral to take what he loaned to pay the taxes up, probably not a lot if it’s a young guy and you’re not putting a lot of money behind it. It might just be a little bit. And then there’s the beneficiary. They’re the beneficiary.

So, here’s a nice part for the family or the young family is that it may be that you’re buying them a $2 million life insurance policy where the cash value is growing in there. Depending on the type of insurance you’re using, it can have guarantees around the cash value that’s going to be there and guarantees around the death benefits. So, you’ve got something that’s not going to swing up and down in the markets or not be liquid like equity. Or I’ve seen people buy real estate together and all of a sudden, there’s a roof repair that needs fixing.

You’re not going to run into those problems. It’s pretty simple. And between the two of you, you know that if you leave … And you get that great programmer, you said … you got a great programmer that can do things and then he’s immediately getting poached, you can put money into here. It can be very little amount of money. It can be a lot of money. You put $50,000 in there and if he’s in the highest tax bracket, you’re loaning him 25 to pay the taxes on it-ish. And you have …

Two years later, he knows he’s walking away from $50,000. Five years later, he’s walking away from, I don’t get to the math on them, at the end of the day-

Drew McLellan:

More than $50,000.

Kevin Monaghan:

Right. He’s walking away from $125,000. If he’s that important, make him walk away for more money. $250,000, you’re going to think twice if somebody offers you $60,000 more per year and you’re walking away from $250,000. He’s got a vested interest to stay there. And in this day and age, so many people are getting poached. It’s so easy to start your own company these days and it’s exciting and cool.

But if you’ve got that break, people work for organization for three, four years. You know in the back of their head, one summer, they’re going to feel a little bit different. “I should do something else.” It’s going to get in their head. They’re going to google, what does it look like to start my own business? Gary V., Tim Ferriss, anybody, they’re going to get marketed. You guys know it in [inaudible 00:44:38]

Drew McLellan:

Right, and you’ll only have to work four hours a day.

Kevin Monaghan:

Right. You’re going to get targeted over and over. It’s going to be easy to say yes and walk away if you’re desiring change a little bit. Put a quarter million dollars in between that decision, you’re going to think twice.

Drew McLellan:

Yeah. In a lot of agencies, they have this thing where everybody gets … Whether I do the exact same job or not, I get a raise every year. Good or bad idea?

Kevin Monaghan:

It depends. There is no answer that you could say definitely either way. I’ve seen people who are at their jobs and they’re underpaid and they’re so happy and they’re not getting any raises. And I see people who are getting double digit raises every year and they’re still thinking of leaving.

Drew McLellan:

Right. So, what are some compensation models other than the insurance product that you recommend for your client beyond just … Because here’s the other problem in a small business, if you’re 10 or 12 or 15 employees, there’s only so much growth room in the company. Even if you’re one of the top employees, there’s only so much room between you and the owner of the business. So, there’s only so much more value that job can be worth.

Kevin Monaghan:

Where I specialize is in that key employee partnership arena. When it comes to the other employees or the other benefits you can get into, typically speaking, somebody on my team takes over as it relates to those types of benefits. My space is really in where we’ve been hitting on is that owner that’s got a key employee. He knows that he needs to do something because he’s put in three to five years and now he’s got his own centers of influence. He’s getting his own referrals. He’s handling the customers on his own. You put all that time into him. Now, he’s profitable but he’s also thinking, “I could do this on my own,” and you know it.

And a lot of times, the conversation we have goes something like this. “I have somebody they’re bringing in after costs and after their revenue, they’re bringing me an extra $350,000 a year just that employee, or a million dollars a year or a $120,000 every year that they work here.” So, these are things that we hear and they said, “How do I keep him here because that’s a lot of money to me.” And a lot of times, people are willing to give up part of that that’s not bound to a profit share or a revenue share. And they can, what’s called focusing on one employee, so discriminate against the other. So, some of the benefits you mentioned on the others, you have to do it to everybody.

That’s not going to be kind of where I come in. I want to help that one special person whether he’s a partner or an employee. It could be five people that are key to the organization and bigger companies, but that’s where I come in to really help understand how to do it. I have the conversation with the owner. “Tell me your story. Let me put around concept numbers so that you can get in there and see how this would work for you. I’m going to tell you right up front, if you like this, the next step is to have a conversation with another employee. It’s going to be completely different conversation. I’m not going to ask anything about compensation numbers. All I’m going to ask is what’s important to you going forward.”

And then I’m going to come back to the business owner and say, “You know what? Why we like these numbers, he doesn’t even care.”

Drew McLellan:

When you have those conversations with employees, given that a lot of younger employees aren’t as financially motivated as perhaps today’s business owners, what do you hear? What else matters to them besides money?

Kevin Monaghan:

They want all over from, “I want to be able to give somebody $10,000.” That was a weird one to me. If somebody is struggling and they need help with the payment because they’re behind on their mortgage, I want to help them.

Drew McLellan:

I want to have this liquid cash that I could give someone.

Kevin Monaghan:

Right. So they want to be in a position. What they really don’t like is promises. That’s the number one word I hear over and over having these is they promised they would do something for me. They promised they would get this in, if we do this, then this is going to happen.

So, where I see it is they really, and on the back end of it, where they really enjoy and appreciate it is they liked that there are some type of commitment going into their name or for them that benefits their family, so that’s why you can use other vehicles other than insurance. But when you compare them, the insurance comes out to be the one that has the most benefits for them.

Drew McLellan:

Yeah, it’s a great tool.

Kevin Monaghan:

So, we use that because for a young family, they know that they’re now being treated and getting benefits as if they were a business owner. They’re getting packages like Jim Harbaugh anymore.

Drew McLellan:

At the end of the day, are you find that they really do care more about money than they say they do? Or do they want other things, they want more time off? Do they want more freedom? What else do you hear them saying, “This is what would make me feel valued and make me stay”?

Kevin Monaghan:

Do you want to know what the biggest key is?

Drew McLellan:

Yeah.

Kevin Monaghan:

They like that their employer sent somebody in, me, to do something because we felt they were special. And then what I did, I listened to what was important to them. It’s different for everybody. I hear some key themes, but I got to tell you, sometimes, I go in expecting them to want to dominate the world, and they’re just, “I just really want my student loans gone.” So then I can go back to the owner and say, “Hey, we got to work on some type of plan that can help them get rid of these student loans.”

Drew McLellan:

It’s interesting. I read an article that was saying that student loan repayment is like the hot new benefit that companies are starting to explore because of this very reason. Is this something you’re hearing more often?

Kevin Monaghan:

Yeah. And we take that into consideration when we put together the final designs to go to the business owner. And we say, “Hey, based on what’s important to him, he was happy that we were there to listen. But this just fits into what he wants, and that could be …” I’ve had people want to be farmers in 15 years. They don’t even want to be there in the long, long term.

Hey, if he wants to be farmer, why don’t we put them in a great position to be a farmer? If he does stay, we’ve got a choice to keep compensating him. He might like it, he might want to go farm. But do you want an employee at your company who is thinking about being on a farm all day in 15 years, or do you want to help them get there as long as he is increasing your bottom line?

Drew McLellan:

One of the takeaways I think is to have the conversation, to ask the question. What is it that you want long term that would make you say, “This is a great place, I’m going to stay?”

Kevin Monaghan:

Yeah. And I’ve had people cry. I’ve had people jump in meetings. The employees get excited, so they just like that somebody, and that’s the key, somebody is listening, that they feel special. That’s what they want. And when you do this for them, and we’re talking about the younger employees but it happens with all ages.

Drew McLellan:

Of course, right. We’re getting close to the top of the hour, so I want to kind of come back to … To me, a lot of our conversation today has been about sort of an owner being willing to think longer term because it sounds like a lot of the recommendations you’re making take a while to build out, to explore, to fund. If I want to retire, I’m just going to make … I do not want to retire at this age. But if I wanted to retire at 65, at what age does it make sense for me to start thinking about some of these things, locking key employees in, looking for minority partners, all of that sort of strategy that we’ve been talking about in this conversation?

Kevin Monaghan:

Earlier the better. If you have more time to think it out, clarity is king, so talking it out. It doesn’t matter if it’s with me, if it’s with business coaches, if it’s with your CPA, if it’s with your attorney. Clarity is king. If you know where you’re going, it’s easier to get there. A lot of times, the reason that our strategies make a lot of sense is because it builds in flexibility so you don’t have to know where you’re going but you’re starting to commit to moving towards it. I’m a great first step in some aspects.

But it doesn’t necessarily have to be that you need time. You start pumping $4 million into something like this, it builds up pretty quick into what it could-

Drew McLellan:

Most agencies don’t end up with $4 million at the end of the year though, right? So, that’s part of it too, is the smaller your profit is at the end of the year, the less money you have to do these things, then probably the further out you need to start, right?

Kevin Monaghan:

Right, and you can, even with … We’ve done some that we’re just starting to position people with small term insurance policies that can convert into something like this. We’ve even seen agencies on low budget just saying, “Hey, I like these concepts and this guy is going to be a performer for me,” and we just put a $40 a month, a million term life insurance policy that can be converted into one of these things. You show him that and say, “Here’s what we’re doing for you now. We’re going to put an executive benefit in on you and your family is going to get a million dollar if something happens to you or named beneficiary. But here’s what it looks like if you can help me get the company and we can convert this. Here’s what’s possible.” That guy gets on fire, “Whoa, I can get a compensation package in my name that does this, this, this, this.”

Drew McLellan:

So, I guess it’s about intentionality really, right?

Kevin Monaghan:

Right.

Drew McLellan:

Sharing your intention. I think that’s the other thing. I think a lot of owners kind of keep all that really close to the vest and what you’re saying is you need to disclose and talk about this stuff earlier so that people know where your head and heart is at.

Kevin Monaghan:

Right. And everybody thinks they want ownership. By the time we get through our process with people, what people realize is, “Hey, I don’t need to be an owner if I’m going to be looking at these types of numbers long term.”

Drew McLellan:

Right. I want to be fairly compensated and I want to be rewarded. Well, I’m not sure a lot of our employees look at owning a business as a great perk because they see how hard the owners work and the sweat and the worry. So maybe that you’re right, you can build a compensation plan where they go, “Yeah, I don’t really want to own it. But I’ll help you build it.”

Kevin Monaghan:

But even that guy that could go out, you’ll know the characteristics in your key employee. If he’s out going and he is a go-getter, you know that he could be a risk. But when you show them numbers of what you can do and you say, “Hey, if you were here,” the reaction I always get is, “I can spin off and start my own company but maybe it takes me three years of investing hard work, rebranding getting this up and running to get it. But then I have all the hassle of owning the business, but the reason I was doing it was to become a millionaire over the next 30 years. If I can do that through this vehicle …”

Drew McLellan:

Without the risk.

Kevin Monaghan:

Right. “Then I get to the same destination and it’s a little bit easier. I’m happy with that.” And every business is going to be a little bit different too and that some are going to have guys who swing for the fences. They’re going to bring in one deal every two or three years that just crushed. It’s a huge influx because it messes havoc with your books-

Drew McLellan:

With taxes, right?

Kevin Monaghan:

Right. But how do you compensate that person versus his counterpart or the other salesman or the other owner or the other key employee if they’re hitting singles every day and they want to be compensated differently. You can put structures together that reward them keeping doing what they do best. And it looks different but there’s a good reason behind why.

Drew McLellan:

Yeah. This has been fascinating. Kevin, if folks want to track you down and learn more about your business, what’s the best way for them to find you?

Kevin Monaghan:

Sure. Easiest way through our process is if you related to something we talked about today or you’ve got that key employee or partnership that you want to learn and you said, “You know what? This sounds new to me. This sounds like I would benefit from talking,” easiest way to go through our process is to call 877-70-LEARN, or go to intuitivecompensation.com. Get on our schedule for 15 minutes where you will tell us your story. We’ll go and we’ll put concept numbers around and tell you if you’re a good fit for this and go from there managing your expectations on what you can expect. That’s the best way to start out.

Drew McLellan:

Awesome. We will include all of that in the show notes. Thank you so much for sharing your expertise and your experience. This is a topic that is really on a lot of agency owner’s mind. So, I know that they’re going to get a lot of value in hearing some of these ideas. So, thank you.

Kevin Monaghan:

It’s funny, I talked to a business coach the other day. And we were going over some of these concepts. And he said, “You know, I just went on a golf tournament for three days with three agency owners. And overwhelmingly, the talk was what are they doing to keep the key people in place.” He goes, “They wouldn’t shut up about it.” Some of them were giving them cars, some of them were flying them to different places which is all good, but at the end of the day, it doesn’t keep them from leaving because somebody else can just offer that too. Apparently, everybody is doing that.

Drew McLellan:

It is absolutely a challenge in our business right now, so you’re absolutely right. Thank you very much for your time. I appreciate it.

Kevin Monaghan:

You got it. Thanks, Drew.

Drew McLellan:

You bet. Hey guys, this wraps up another episode of Build a Better Agency. Come on back next week where I will have another guest to help you think about your business a little differently. In the meantime, you know how to track me down. You can go to agencymanagementinstitute.com or [email protected], and I will get right back to you. Otherwise, I will see you next week. Thanks.

All right, that wraps another episode of Build a Better Agency. I can’t tell you how much I love spending this time with you. Thanks so much for listening. Hey, speaking of thanks, another way we want to give thanks is we built a new tool that I would love you to check out. We’re calling it the Agency Health Assessment. And basically, you’re going to answer a series of questions, and based on those answers, the tool is going to tell you in which aspect of your business maybe you need to spend a little extra time and attention to sort of take your agency to the next level.

We’ve identified five key areas that really indicate an agency’s health and we’re going to help you figure out where you need to spend a little more time. To get that free assessment, all you have to do is text the word ASSESSMENT to 38470. Again, text the word ASSESSMENT to 38470 and we will send you a link so you can do that at your leisure and hopefully that will give you some new insights and some direction in terms of your time and attention in the agency.

In the meantime, as always, I’m around if I can be helpful, [email protected], and I will be back next week with another great guest and more things for you to ponder. Talk to you soon.

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