Podcast Episode 41

Family Business Series: Aligning the Math and Emotion in Financial Planning for Business

With Guest:
  • Mark Pletts of Waypoint Capital Advisors, Founder

Host, Jamie Duininck, is joined by Mark Pletts, a financial advisor who believes that financial planning in a family business, when done correctly, can positively impact generations to come. He has worked with Jamie and many other family businesses to navigate financial challenges and make decisions that are best for both the business and the family. In this episode, Jamie and Mark discuss how to align the math with the emotion when doing financial planning for your business.

Episode 41 | 35 min

Guest Bio

Mark Pletts, founder of Waypoint Capital Advisors, is passionate about family and believes that financial planning, when done correctly, can positively impact generations to come. He’s been in the financial services industry since the early 1980’s and has helped host, Jamie Duininck, navigate challenges and make decisions for his family business that are best for both the organization and the family. Mark and his partners started Waypoint Capital Advisors to support the multi-generational complexities of managing wealth. He helps family businesses of all sizes align the math and the emotion when doing financial planning. 

 

Jamie (00:02):

This is the Water Table.

Speaker 2 (00:05):

The chance to hear the agricultural side of these issues.

Jamie (00:09):

Place for people to go find information and education.

Speaker 3 (00:13):

Water management is just going to become even more critical into the future.

Jamie (00:19):

How misunderstood what we do is

Speaker 2 (00:22):

I would encourage people to open their minds and listen to this dialogue.

Jamie Duininck (00:32):
Welcome back to the Water Table Podcast. We have been doing a series here on family businesses and advisors to family businesses, and we’ve ha a lot of fun just talking to experts in their field and visiting about everything that family businesses and managers within businesses have to think about. Today I have the pleasure of visiting with Mark Platz, who is one of the founders of Waypoint Capital advisors. Waypoint is a multifamily office in Minneapolis, Minnesota, and they work with a number of families trying to harness and coordinate the families’ advisors in ways that allows them to think through and see the potential outcomes of their decisions. So welcome to the podcast, Mark.

Mark Pletts (01:22):
Thank you, Jamie.

Jamie Duininck (01:24):
It’s a pleasure to have you, and I think we can just kind of wade into this and talk about a lot of different things that small family businesses, large family businesses have to deal with. Our listener base here on the Water Table happens to be a lot of agricultural drainage contractors, farmers that maybe do their own drainage, or they hire a contractor, but are interested in water quality, water table management. And so they want to listen to the podcast to learn from. So a real variety of types of people will be listening, from people that are first generation business owners that maybe have a couple employees, to people that are established business, strong business, maybe 50 plus years in business with 20, 30 employees, to big farms or small farms that have a real keen interest in legacy and moving their business to the next generation and maybe have significant net worth, but a lot of capital tied up and things like land and assets like equipment and things.

So it’s maybe a little bit difficult for us to answer all of this. So I think the best way to do that is to just tap into a couple of questions and see where we can go from there. But Mark, if, as you’ve advised families of a lot of different levels, how would you start to think about that if you’re talking to a small business owner or manager of a small business with maybe five to 10 employees, and they’re thinking about moving that business from the generation they’re in, whether that’s first or second to the next generation, they’ve got younger family members working in the business and the patriarch and matriarch are getting ready to retire, and what are the things that they need to be thinking about? And how does somebody like Waypoint work with people like that?

Mark Pletts (03:33):
So I think a starting point would be to kind of go up to the 30,000 foot level and say, what transcends all businesses, small and large? What are the issues they need to be dealing with? Sometimes you get lost in the tactical and the very granular issues, but really, everything can be boiled down, in most family businesses, to two perspectives. One is the simple math. There’s math involved in transitioning a business. It’s got to work for all parties. And then there’s the other piece that many families don’t spend a lot of time with, which is more emotional. Which is how do these decisions affect family members in the business, out of the business from an emotional standpoint?

And then speaking to that other component that you referenced, which is what is that legacy? The legacy has usually much less to do with the math than it does with the effect on a community, the effect on, again, family members in or out of the business. So I think if you boil it down, there’s the math and there’s the emotion. Most advisors with family businesses spend a lot of time on the math and less on the emotion.

Jamie Duininck (04:46):
Yeah. Yeah. And that’s partially why I wanted to do this podcast was there are times in my career here at Prinsco where you build relationships with customers and customers end up talking to you about, they have no place to go to talk about these things. So they’ll visit with you about, “This is a situation I’m in.” I’ll just give an example. We’ll talk about it. One of the questions might be, “My son or daughter, or both, they seem to be ready to take over the business. They want me kind of to get out of the way, so to speak. And I’m just trying to understand if I have enough. Am I going to be able to live and cover all my costs after I exit the business?” And some of that is created because small business owners have the luxury of using the business to pay for their personal expenses. Because then that’s where the emotion comes in, is, how do you, as an advisor, wade into that kind of stuff and help people understand and get comfortable with how much they need to live?

Mark Pletts (05:56):
So if you think about this, you usually start with the math, but most small business owners are so consumed with working in the business that they don’t really think about working on the business. But when you start to transition, you have to coordinate the two. So we usually talk about a burn rate or just literally what cashflow is needed for a family member to live without that business underneath them, supporting them and creating financial support for them.

So what is the math? If someone needs $100,000 a year to live, or $200,000, how much of that is run through the business that potentially could go away if they exit the business? So that’s the math side of the equation. If you start there, there’s many ways to structure deals with family members so that maybe you can stay on board to the degree where some of the benefits, health insurance, things of that nature, are being paid continuously, being paid by the business. But there is ultimately, at some point, where they exit the business and this new financial engine is no longer the business. It’s actually maybe investing in the capital markets or owning farmland that generates revenue that they’re going to have to live off. And so it’s, again, math and the emotion. And the emotion piece is, no longer do they have that business and you call it maybe a valve that they can tweak to increase or decrease their income. Now they’re living outside of that.

Jamie Duininck (07:30):
So you talk about the math and the emotion, and from my perspective, and my perspective is somewhat limited, but like I said, I talk to customers and they approach me about their own situation, and oftentimes, it seems like the challenge is the communication and the communication by not having it, or by having it, probably both, can create or change that emotion level, but there’s complexities around a family business or a small business in which oftentimes there are multiple children that are involved in the next generation. And there’s a desire and a need to start transferring that business. But maybe some of those children aren’t involved in the business, maybe some of them are involved but aren’t as committed as others. Things like that. How do you guys, and where do you start as Waypoint advisors and someone that is advising, the head of that spear of advisors, how do you start that conversation with the first generation or the generation that is asking for the advice?

Mark Pletts (08:55):
So I think about this. This is where it gets really involved and a little more unpredictable. So we are moving away from the math. So the math is simple. The communication gets a little bit more murky. And so I’ll start where we usually start. There’s usually a bit business owner that’s running the business and maybe a spouse that’s somewhere at home, taking care, whether it’s a farm or a family, however they’re involved, but they’re not involved in the business. And usually we start there, trying to figure out what are those common messages that they want to deliver to their kids? And that’s not easy because I’ve only been married 33 years, but my wife and I don’t always agree on what we should tell the kids. And so you start there. And there’s usually some common threads to that, of what that communication might look like.

So by starting there and making sure that there’s some common verbiage, narrative to that. Then the next step is you look at your kids and determine where they all are in life. Some of them might be younger. Some of them might be married. Some of them all over the spectrum of life. And all of those communications might be a little bit different. But at the end of the day, that communication, although some of it’s very tender, needs to be done. And if it’s done with the proper heart and spirit of how the family was thinking about passing the business on, why they made these decisions, and also hopefully receiving some grace for on the family, that it’s not perfect, but that they did the best they could.

That communication goes a long way if it’s proactive, because the worst thing that can happen is there’s no communication. Someone passes away. A will is read. Trusts are uncovered. And then the family is learning for the first time without that active member providing their thought process to it. And it usually creates more problems than not taking it head on and trying to be proactive. So any communication, proactive, as much as it’s not thought out, not perfect, if it’s from the heart, it’s usually perfect.

Jamie Duininck (11:22):
Sure, sure. That’s good advice. And backing up a little bit, we talk about usually, typically, if a couple is married, it’s one of them that’s running the business and the other spouse is not in business. And talk to me about how you include that spouse in these discussions, because this is bigger than the business. This is about, how do we move beyond the business? How do we have enough for retirement? What do we want to do in our retirement? What does our desires for our children in the business? All of that. And sometimes it can be hard for the person in the business, the business owner, to know how to communicate with the spouse. What are some more ways you would suggest, or how is what you do involving that? How do you involve that spouse?

Mark Pletts(12:19):
So if you think about the communication aspect from the advisors that are working with this family, they have CPAs, they have attorneys, they have potentially a life insurance agent, property casualty agent, financial planner, investment person. There’s a lot of people in all of our lives trying to help us. And they all have really good intent. And all of them by themselves are probably experts in their field. So we, as far as our organization, and you reference it earlier in our introduction, what we’re trying to do is harness the expertise of all of those people. And what we’re doing is we’re taking all the legal documents that exist in the family’s lives and boiling them down to some simple displays. And now we can play those displays back to the family member that’s running the business and the family member that’s outside of the business in a way gives both parties, maybe call it demystification of some of the things they’ve never seen or understood before.

And by doing that, it allows that person that’s outside of the business a voice that they’ve never had before. So in the absence of working with someone like us, there’s usually someone in your world that you trust a little bit more than someone else. And it’s that person that can help you articulate what’s going on in your financial life to that non-financial or the spouse that’s not in the business. And that’s really important. And so really it’s bringing maybe a third party to the table, because it’s always difficult for us to communicate that to our spouses perfectly. We have these relationships, we have all the stuff that goes with just our families. And so trying to remove ourselves from that and have someone else step into that with us is important.

Jamie Duininck (14:15):
Sure, good. Yeah. I like how you phrased that. And that can seem so emotional, but it doesn’t have to be by just stepping into it and having those visual examples of, “Okay, this is really what it is.” Instead of everybody having a different opinion, it’s in front of you, what it actually is. I want to talk a little bit about trusts, and I think that’s such an interesting conversation. For me and my work at Prinsco, a lot of times I don’t so often deal directly with farmers, but when I do, farmers are in this world a lot because most farmers have a significant net worth because of their land holdings. And it’s kind of a moving target in what I hear from different people. Somewhat depends on where you live. If you live in Minnesota, there’s a little bit different tax problem than maybe if you live in South Dakota.

But also it’s a moving target from the standpoint of how our federal government has changed over time and the fear of it changing and becoming more restrictive from a tax standpoint. But talk me about trusts and what your firm would suggest, and just how you walk into that conversation with somebody that’s curious.

Mark Pletts(15:43):
Yeah. The trust discussion is an interesting one, because if you just start with the vehicle itself and you go to a family and say, “This is what this trust will do. This is what’ll accomplish.” Then all of a sudden you’re coming with a solution and trying to figure out the problem to fulfill the issue. It’s better to start with the problem. Are you trying to pass the farm or the business to the next generation? In the case of farmers, obviously with the run up in farmland, there’s huge balance sheets and not a cashflow commensurate with this huge balance sheet. And so it’s hard structurally to figure out how to get that to the next generation, because the values have gone up so significantly. So the trusts themselves can be done in a way to, again, protect the current generation, get the money to the next generation. But there’s a lot of planning outside of just creating a trust.

Because now individuals that are creating the trust, these grantors, don’t necessarily have access to the money in the way they did before. And so they have to think of their execution on a daily basis a little bit differently. And it’s not that onerous, but it is change. And it’s a change to the extent that if you’ve done something a certain way for 30 years and you’re going to change it for the next 10 or 20, you have to be prepared for that. So a lot of things can be done. You referenced the federal government and how much you can protect to pass on to the next generation. Those numbers are a moving target. They’re changing. They’re going to sunset again in 2026 to change, but that is not the reason by itself to create trusts, because you have to get comfortable beyond the government changing the laws that these trusts are, if done in a certain way could be around forever.

And they’re going to affect family members that you can see and not see, potentially. You might have kids. They might not have grandkids. But again, if done properly, these trusts could affect generations to come. So they have to really be thought through beyond just the math. And you’re going to have to say you’re going to save some taxes.

Jamie Duininck (18:07):
Sure, sure. I would guess that the idea, and correct me if I’m wrong here, but the idea of a trust in itself is pretty easy for people to understand and think, “Yep.” Or understand, “Yep, I probably need to do that.” But it’s more around the, shall we say, I don’t know if it’s the right way to say it, but the loss of control that is the challenge to actually execute on it. And if I’m right on that, how do you walk people through that?

Mark Pletts (18:45):
Yeah. You want to have as many outs as possible that that loss a control role mechanism. Basically the way to think about this is the more loss of control a granter has, the more tax effective it is, meaning the more it’s out of your reach, that a better tax advantage as from an estate planning perspective that trust will be. That said, there are provisions that you can put in that trust that give you, sort of in a worse case scenario, access to that trust. But again, it’s definitely an irrevocable decision, and many times is not thought out of in the context of, “This is going to be around for 10, 20, 30, maybe 50 years.” But with some of the run ups and values of property in particular, you are looking at something that could be around for a very long period of time. You do the best you can for planning, you can’t predict who your kids are going to be, who are going to marry, what your grandkids are going to look like. You just can’t do it. So you do the best you can.

Jamie Duininck (19:57):
Sure, sure. And I think that for many people, that still leaves them with a lot of questions, and that’s why it’s a challenging thing for people to decide to do.

Mark Pletts(20:12):
Yeah. That decision, when it’s put on your lap and someone shows you it, it might look really exciting, but then when you start to scratch and dig a little deeper and see all the nuances attached to it, it takes some time and some very thoughtful appreciation for the decision. And again, involving both parties, the person in the business and the person out of the business. It’s going to affect both of them. And then now you’re talking about what maybe the communication might look like to kids in the future and everyone’s always paranoid about, “Oh, I don’t want to tell my kids about how much money’s there.” And you don’t necessarily have to tell them the dollar value, but what’s important is to make sure they understand your personal values, and those personal values are really driving the decision. If it’s all an emphasis to mitigate or dodge taxes, I won’t say that doesn’t end well, it’s just not the perfect starting and ending point.

Jamie Duininck (21:13):
Sure, sure. I’m glad you mentioned that. Another thing that I think is kind of connected to trust is life insurance. I just turned 50, so in my working life, it seems like life insurance and how people perceive it and why they should have it has probably changed over the last 25 or so years. And during that time also things like term insurance have become so cheap. And in your years of having small kids and things like that, I know I owned a little term life insurance just as some protection that has now run out. But things like long term life insurance, and when I first got into the working world, having people trying to sell it to me around, “Overfund it, and it can be a place where you’ll have some value.” And then that changes and the tax laws change and it can get really confusing. And just want you to walk through how you guys think about life insurance and how you would suggest a small businesses, whether they’re a farm or a small contractor in our world, how they should be thinking about it.

Mark Pletts(22:39):
Yeah, we could spend hours on this one. So I’ll just try to summarize. So first of all, we don’t sell life insurance. So we don’t usually have a horse in the life insurance discussion. We do however believe in it. And it fulfills an excellent purpose for most families. The issue that sometimes small business owners run into is the life insurance agent shows up with a life insurance policy with a strategy, and saying, “This fulfills the problem.” But again, going back to that last comment about the trust, if you start with the problem and you say, “Okay, here are our options for solutions of one of which is maybe a life insurance policy.” That’s usually the best way to get to that end result of where a life insurance policy will work, but there’s a myriad of reasons you could want life insurance.

It could be, let’s say you have four kids and two kids are inside the business and two kids are outside the business. A life insurance contract could be purchased to fund a benefit for the two kids outside the business. All families struggle with what equal and fair is. Fair and equal. Is fair going to be equal? Life insurance can sometimes solve that item. It also can solve the issue of liquidity in an estate. If there’s an estate tax due, life insurance is often used to create liquidity so that in the event of death, there’s some liquid asset, IE the life insurance that’s coming into the estate, so that the trustees now can use that asset and not have to sell farmland or sell a business.

So there’s really a lot of good viable ways to use life insurance. I think life insurance gets a bad rap along the way. And again, we don’t sell it, but we totally believe in it for solving the right problem. So I wouldn’t say, I wouldn’t advise any of your listeners just shy away from it. Just make sure that it’s being put in place for the right reasons.

Jamie Duininck(24:57):
Well, you’ve said something a couple of times in a couple of different ways on a couple of the different topics today, Mark, that I caught note of. And correct me if I’m wrong, but it’s kind of be aware of an advisor that shows up with solutions, not really understanding your problem. Would that be correct?

Mark Pletts (25:18):
Yeah, that’s most definitely. If anyone walks away from anything, whether it’s an insurance person, a lawyer, attorney, financial planner or whoever it might be, I think many of them show up with an idea that’s attractive, and that opens the door. But the ones that are really good show up with no ideas and they’re just good listeners and they listen. And you know when you’re sitting in front of someone that’s a good listener. Those are the best advisors you can surround yourself with, because they don’t have an agenda. They don’t have a product.

Which sort of leads me to another discussion. I wrote an essay recently that’s going to be in a book published later on this year. And then title of the essay was, “If you tell me how someone compensated, I’ll tell you and can predict their behavior.” In the murky world of compensation and how we’re all compensated, if you can figure out quickly how the insurance person, the financial planner, the attorney, how anyone’s compensated, you can pretty much predict where they’re going to get and what they’re going to recommend. You can cut quickly to what you’re going to see from people if you know how they’re paid. And it’s okay to ask people. How are you paid? Tell me how you’re paid.

Jamie Duininck (26:43):
Yep. Yep. So you can understand, are they trying to sell me something because they’re making more money on it or because I really need it?

Mark Pletts (26:50):
For sure. Yeah.

Jamie Duininck (26:52):
Yep. Yep. And you answered that really well. I was going to ask you another question around understanding what the problem is before giving a solution. And I think for me, and you can correct me if I’m wrong, but some advice would just be to really be wise and in how you pick your advisors around who has your best interest in mind. And you set it well, you can tell somebody’s being a good listener. That’s a good start. But then, once you feel comfortable that you have the right person, then be vulnerable with them and tell them, because there are things that you might want to not share, family challenges within your family, but they’re really helpful if somebody’s going to help you transition your business, whether it’s the financial piece or whether it’s the peace of mind of life insurance or whatever that might be. I think that’s another step that we often in business don’t get to, is the vulnerability that can help the right advisor make the right decision.

Mark Pletts (28:09):
Yeah, it’s interesting. I think just as humans, we don’t want to ever show vulnerability. So in the places where you’re willing to share with those people those things that no one else knows, which are important, because you’re going to get better advice if those advisors know the whole picture. And all of us have issues that we don’t talk about, but that’s a person in your life that you want to keep close to you, because if you’re willing to go to those places, you’re probably going to get better advice because you’re willing to be vulnerable with them. I think also the other thing I would recommend is, in the medical profession, think about this. So 30 years ago you’re in a small town, you go to the doctor and you just take what they say unequivocally as this is what I need to do.

And now fast forward, I don’t care what town you’re in. Now you go to a doctor and all you’re thinking in your head is, “Maybe I should get a second opinion.” And by the way, the doctor knows that you might go get a second opinion, too. And they might even recommend it. No different in the financial world, whether it’s a CPA attorney, a financial planner, life insurance agent. It’s okay to go get a second opinion, and can now measure against that other opinion you get. It makes you a better steward or consumer of financial services products. And if you tell your advisor that maybe that’s been with you for a lot of years that you’re going to go get a second opinion, if you do it respectfully, how they handle that will tell you a lot about who they are. And if that’s a person that you’ve read properly or you’ve misread. Not so much the advice, but how they handle that, which is just, “I want to go get a second opinion of this. I think this all make sense. Would you be okay with that?”

Jamie Duininck (30:04):
Yep. Well, that’s really good advice. I’m glad I asked the question because I do think that it’s a good example or a good correlation between the medical profession and this, is people have gotten really comfortable over the last 20 years getting a second opinion on the medical side. But because we deal less with attorneys or with life insurance or stuff, we may be uncomfortable with that, because we just don’t know that world. And to hear this from you, I think, is really important, that it’s okay. Go and go and find out what your options are and find that person that you feel most comfortable with. Maybe it’s because of their style. Maybe it’s because of how they’re listening. That just makes you know they understand you and your business and your family needs more than the other guy does.

Mark Pletts (30:57):
Yeah. It’s interesting, too. I was just thinking of the simple math equation. Today I’m doing this from Fairmont, Minnesota and I’m at my in-law’s house. So I’m very sensitive to, in the 35 years, farmland. Farmland at $300, $400 an acre 35 years ago now at six, seven, $10,000 an acre. And so the net worths that have been created just from pure farming are incredible. So an advisor that’s advised a farmer that 35 years ago, they might have outgrown, because all of a sudden their net worth is no longer, three or $400 an acre it’s $10,000 an acre because there are advisors that are more accustomed to working with bigger numbers, bigger planning issues, things of that nature. But you’ve grown with that person in a town for a long time. So you’re comfortable with them. But at the same time, you might be limited into the advice you’re getting because they’re not accustomed to working with higher net worth people.

Jamie Duininck (32:01):
Yep, yep. And that’s a whole nother area that we could spend a bunch of time on, because it’s nothing against that person, but they don’t have the same tools in their toolbox as somebody that works with higher net worth people probably does. Because they’ve just been exposed to it and understand different avenues they can take that you wouldn’t have to take if you’re talking about somebody with a lower net worth.

Mark Pletts (32:31):
Correct.

Jamie Duininck (32:32):
Yeah. Interesting. Interesting. Well, Mark, it’s been a real pleasure to have you on the Water Table. I think we’ve covered a lot of points here. Anything else that you think our listeners should know about when they’re navigating the whole world of whether it’s transitioning their business or net worth issues, things like that, tax issues?

Mark Pletts(33:00):
Yeah. I think less specific to the issues themselves, but just sort of this discernment skill of how do you discern who are the right people to work with? And sometimes we, as business people can get clouded, we’re taking advice from certain people we trust, respect. I would just say that including your spouse in that decision is important. In most cases, my wife has a much better discernment skill than I do. And they might not have business acumen, but they know people. And so sometimes it’s just good to have another set of eyes. Not on the expertise, but on the people. And then to trust your gut on those people. So that has nothing to do with emotion or math, but there’s another piece to this, and that trust piece is really important. And sometimes you just need another set of eyes on the people you’re working with.

Jamie Duininck (34:01):
Yeah. Good. Good advice. And it also helps you, as spouses understand each other more when it comes to this issue, because when you have a third party in the room, you probably talk about things in a way that you may not talk about it otherwise. So just gives you a broader understanding of the things in front of you.

Mark Pletts (34:26):
Yeah. Yeah. That’s the only closing thought I would have

Jamie Duininck (34:29):
Mark, thank you very much for joining the Water Table Podcast, and we hope that all of these things we’ve talked about find our listeners in a way that, they can use these in the future. And if any of our listeners would ever want to get ahold of you, how would they do that?

Mark Pletts (34:47):
So our website is WaypointCapitalAdvisors.com. We’re located in Minneapolis. You can feel free to look me up on the website. You’ll find my email and my phone number and we’d look forward to any calls if it’s appropriate.

Jamie Duininck (35:02):
All right, Mark. Thank you so much for joining us today.

Mark Pletts (35:04):
Thank you, Jamie.

Jamie Duininck (35:11):
Thanks for joining us today on the Water Table. You can find us at WaterTable.ag, find us on Facebook, you can find us on Twitter, and you can also find the podcast on any of your favorite podcast platforms.