Dave: Well, my guest today is Paul Liberato, the president of BLP company. I've been really excited looking forward to having Paul on the podcast. Paul, welcome to the show.

Paul: Thanks, David. Appreciate it.

Dave: Yeah. I do this different ways, sometimes I just read somebody's bio and sometimes I like to just walk through it. I decided to take the second approach for the interview today. Partially I did this because I don't know your entire backstory and I've known you for nearly two decades. Why don't we start at the beginning? Are you a native Texan?

Paul: No. My father was a Navy fighter pilot. My two brothers and I... Actually, Frank was one of my brothers, he worked with me for a while. We'll talk about him a little bit later. He was born in Jacksonville, Florida along with my brother Mark, and then my sister and I were born in Pensacola, Florida, while my dad was out on the aircraft carriers just depending on which carrier he was on. One of the carrier groups was based out of Jacksonville and one out of Pensacola. Eventually he actually went out to San Diego, so we were out in California for a while too. But we moved to Texas when I was, I think, about five years old. He retired from the Navy and took a job in the aerospace industry. He was a safety flight specialist, an aeronautical engineer, but he built a safety features onto jet aircraft. Pretty smart Naval Academy graduate. He loved the Navy and left line. Anyway, we mostly grew up in Texas.

Dave: In what part? What part of Texas?

Paul: Arlington.

Dave: Sure.

Paul: Growing up, it's funny. Nobody ever heard of Arlington. But now the Texas stadium is there. Everybody knows about Arlington. But when we moved there in the early 60s, I think it was six or 8,000 people their total.

Dave: Oh, wow.

Paul: Yeah. It was a pretty small place.

Dave: I understand that when it came time for college, you were drawn West to the great plains of West Texas, huh?

Paul: Yeah. I've always been really serious about my academics. When my brother Mark went to Texas Tech and I saw how many pretty girls were there, I knew that was the place for me. When you're 17, that was the main reason. But now Texas is a great place. I loved going there. My youngest son went there. It's a wonderful school and there's really. When you're out in West Texas, there's really nothing else to do. If you go to UT, you got Austin and you've got all the beautiful hill country around you and M Town, the same thing. You go to Tech, you better like Tech because that's all there is out there. There's top plains and deserts. But I love it up there. My brother Franklin went there and my brother Mark went there and it's a great place to go to college.

Dave: That's great. And for those people not from Texas, Tech is in Lubbock, Tech's out in West Texas on the high plains. You graduated from Texas Tech, what was your degree in?

Paul: Actually I double majored in communications and history and I had a minor in economics.

Dave: Okay.

Paul: What I wanted to do was I wanted to be a TV sportscasters. I've always loved sports. My last few years, I had to put myself through college so I wasn't able to do an internship. Back in those days, and probably still, I don't know, but it was really difficult to get on anywhere if you didn't do an internship. But since I had to work full time as a bartender and a waiter, I didn't have time to do an internship. I added the economics part on the bottom. I thought maybe that would help me get a job. I graduated from 1982 and didn't really know what I wanted to do. So, I just applied around and I ended up going to work for a fortune 500 company called Deluxe. They printed checks for banks.

Dave: Oh, yeah.

Paul: Yeah. Great company, they called us little blue because we were a lot like IBM-

Dave: Which is big blue. Yeah.

Paul: Yeah. They were big blue, we were little blue. But it was a great company. I learned so much working for Deluxe. I worked for so many great people and it was just a first-class organization from top to bottom. Even then, I left there, Deluxe, I started working in '82, I left in '89. But a lot of the stuff that I still incorporate into my business and how I operate, I learned from Deluxe. That was just a wonderful experience.
I started with Deluxe in Dallas as a sales trainee. Then I had my first sales territory in Dallas. I was there for about a year or two and I got transferred to Seattle, Washington and took over the major cast in Seattle for a couple of years. That's where I got married and had my first child, a boy. Then I got promoted again into the management group in Los Angeles. Company's based in Minneapolis, but we had a regional headquarters in LA. I went down and joined the management group in LA. I was there for a couple of years.
Then they moved me to San Francisco where I was taking care of Bank of America and Wells Fargo for the company, which are our two largest customers. Then I got recruited to be a West coast marketing vice president for MasterCard. I've worked for MasterCard for a while. While during this, I was in communication with a family friend of ours from Corpus Christi. He was with a new company called Billy Pugh Company.

Dave: This would be Jimmy Storms?

Paul: Yeah. It sure was. It's Jimmy Storm. Mr. Storm was a friend of ours and he contacted me and said, "Hey, would you be interested in taking a look? A friend of mine is selling this company, he has got a great reputation. They did back to the products and I think I can help you put something together." I was 29 years old and flew to Corpus Christi and met Billy Pugh. He's a very interesting character, great story... There're tons of great stories about Billy Pugh, but he was definitely that old school off shore old guy.
He grew up with Red Dare and of course Mr. Storm, our guys Gus Glasscod. A lot of the pioneers in the offshore oil and gas business. Those guys were a different breed. I had a chance to meet Billy. We were able to put together a group of investors and I sold everything I had, retirement houses, everything to put my money in. I got there in the summer of '89 and we went live with our management group and taken over the company October 2nd of 1989. I just turned 30.

Dave: Wow. What do you think Mr. Storm saw in you, given that you didn't have an oil and gas background and given your relatively young age, still in your twenties? What do you think he saw in you that he thought you'd be the right guy for this?

Paul: It's a funny story, but there was actually a specific event.

Dave: Okay.

Paul: He had actually come out to California for a wildcatters convention and Carmel. We lived in a place called San Ramon, which is where Chevrons headquarters is, East of San Francisco, South of a Walnut Creek. Anyway, he came out to visit, he spent the night and I told him, "Well, I'll just drive you down to Carmel the next day." It was not that far. He hopped in the car and we were driving down. That was back in the days when we used Dictaphones, I don't know if you ever saw a Dictaphone or not-

Dave: Yap. Yap.

Paul: I was the only guy... This was 1988. I actually had to caller phone back then and that was a big deal. But it was one of those phones that was attached to the floor of your car. I'm dictating letters. Of course these days it's really not considered a good thing to be multitasking while you're driving.

Dave: Sure.

Paul: But I was dictating letters, talking on my cell phone, driving the car and talking to him all at the same time. We pulled up to Carmel and we pulled over and he said, "Well, that was the most amazing thing I've ever seen." I said, "What do you mean?" He said, "I was watching you do all these things all at the same time and you were doing them all pretty well." I said, "Well, I appreciate that." He said, "I'm just curious." He said, "Have you ever thought about running your own company? You just looked like the guy that would be good at that."
As a man, I think, "I think every young person, but like an opportunity to work for themselves and be an entrepreneur." He said, "Well, if I run into the right situation, I'll let you know." I said, "Well, that would be great." I really thought he was just being polite. For the people that had ever met Jimmy Storm, they'll tell you he was one of the kindest people you could ever meet. Highly successful guy, very well known, but also one of the kindest, most thoughtful people you ever meet even.
Anyway, I just thought he was doing Mr. Storm, just being a nice guy, I don't know. Maybe a few weeks later, three, four weeks later, he called up and he said, "Hey, remember we talked about that on the car." I said, "Tech. Hop on a plane, I want you to come take a look at something.
I flew down and Billy Pugh and he picked me up at the airport and we went out and ate barbecue and talked about the offshore oil and gas business, which I knew absolutely zero about. But it all worked out. It was one of those things that was really funny because a lot of people ask, "What made you think you would be a success and a business that you didn't know anything about?" I think like a lot of things. It was really common sense. I mean, how do you treat your customers? How do you treat your employees? Are you honest? Do you handle your finances conservatively? Do you do business and above board?
A lot of stuff that I learned from Deluxe. One of the beautiful things about it was my brother, Frank came to work with me. I'm not an operations guy. Frank is very much an operations guy and I knew I needed somebody to help me. So I've been there not quite a year and hired Frank on. One of the beautiful things about our relationship was that he felt the same way I did. Growing up in the same household, we had the same value system and we never... In all the years, I think Frank worked with me for 20. He's retired now, but probably 28 or nine years. I don't think we had more than really a half a dozen disagreements.

Dave: That's great.

Paul: Great relationship. Like I said, we were always thinking the same and that turned out to be a great situation for us.

Dave: That's great. Thank you for that background. I guess the company, Billy Pugh had founded the company about 30 years earlier than that, right? I think in the 50s?

Paul: Yeah. Yeah. In fact, I'm just about to pass him up. There's only been two presidents of Billy Pugh Company, Billy Pugh and me. He started in '57 and-

Dave: '89.

Paul: Yeah. 32 years. I started in 89 and 2021 will be 32 years. Yeah, just about caught up to him. But it's been amazing, how fast it's gone. I just can't believe that it's been that long. You can do the math on this, I've actually been president of Billy Pugh Company longer-

Dave: Longer than…

Dave: Yeah. Yeah. I was just going to say, at some point you're going to have to find you a sharp young 29 year old to sell this thing to, I suppose, huh?

Paul: Like Billy told me when I took over, he said a new broom always sweeps clean. I guess I was the new broom. Maybe that's what we need. We need a new broom around this place. We've still got... I tell you the funny part about our company, you'll get a kick out of this. We were having our normal Christmas party this year and I told everybody, I said, "I just turned 31 years. How many people have been here longer than me?" You couldn't believe how many hands went up.
We have so many people work for us for 30 plus years. We have one individual that worked for us for well over 50 years, Ramirez. Started when he was 18. He's 73. He's worked for us for 55 years. A lot of people that for us in their 30s. The good news is, we have a lot of wonderful tenured employees. The tough news is they're all like me, they're all getting older. We're trying to bring people in the best we can, to refresh them. They just continue to do a wonderful job and we're so blessed to have them.

Dave: No, that is great. What the heck is an X904. I was on your website and I saw that, but I couldn't really make heads or tails of it. What the heck is X904 and what does it do?

Paul: Well, it pays all the bills.

Dave: Okay.

Paul: It's an interesting story because when we took over the company, Billy Pugh... I have to back up just a little bit, so I can give you some perspective it gt going because there's a... The X904 actually has as a parent and that's called an X870. That parent was born in the 50s. Billy was working as a deck hand in Offshore Corpus Christi and working on a drilling rig called the Mr. Gus. He saw some guys getting transferred from the boat up to the drilling platform and they were using a cargo net, you can imagine. They took the four legs of the cargo net, set it down, and the guys would basically just hang on the best they could onto this cargo net and they pick them up and then they would untangle themselves, when they got up on deck and they dropped them down on the boat.
Billy was watching it and he came up to the superintendent, he said, "Man, it really looks like a dangerous thing to do. I think I've got an idea that will make it safer." That was before the days of stop work authority, when you can stop jobs. Basically they just told him to get back to work or find something to do. A few days later they had a horrific accident. I don't remember all the statistics, but I know at least a couple of people got killed and some injuries as well.

Dave: From the very same activity?

Paul: Exactly. Yeah. They were transfer some guys over and I think they dropped him on the deck. Anyway, it was a fatality accident. They went and they found Billy and said, "Okay, you were telling us the other day about this idea you had. Why don't you go out and show us what you got." Billy went home and he made the first personnel transfer device and he called it a X871. That became really the industry standard until about 2008 or 10. People use that all over the world. It's one of those kinds of things, David. It's like a Coca-Cola or Kleenex tissue or a Xerox copy. No matter what transfer device you use offshore, it's a Billy Pugh.

Dave: I see.

Paul: The name is synonymous with the activity that it's doing. Getting back to the X904-

Dave: Hey Paul, before you go there, you're saying that predecessor product was basically used for 50 years or 45 years?

Paul: Yeah.

Dave: 47 years. Did it have a patent or anything? What made it so durable?

Paul: Yes. The patent ran out I think in the 80s, Dave. But we were so well known and I just don't think those safety guys wanted to be the guys that said, "Hey, we can save 20% if we use this copy product." They knew that's the industry standard, they knew that we built from the best quality products and that we don't really have any... The accident rate that we had was so incredibly safe. We've never had a structure related action on one of our products so.

Dave: I see. There used to be a saying a few decades ago in the IT world that nobody got fired for buying IBM.

Paul: Right.

Dave: It sounds like that was the case of Billy Pugh. Nobody got fired for buying Billy Pugh products.

Paul: You know what, is funny you say that because I really do. I think that has come up before. I think I've been in meetings where somebody actually used that term and said, "You never get fired for buying Billy Pugh." That's funny. I'd forgotten about that actually. But I have heard that and they've used us in that context. But it was a good product. It worked for years. It was a very safe product. But as things move along with everything else, people want improvements and they want things that are better.
We got approached by one of the major drillers, which was Diamond Offshore and one of the major operators, BP approached us to say, "Look, there's some other things coming out of the market right now that have some features that are appealing to us. We really like working with Billy Pugh Company. We're going to like most of the things around the current product that we use. But we'd really like to see if you could develop something that would be similar to what we have, but to incorporate some of the safety features that might help to become a better product."
Frank and I immediately got to work on it. We spent a lot of time just talking to people. It was a two-pronged approach. We talked to people from all major drillers. We talked about major operators. We talked to crane operators. "What do you like? What do you not like? Do you want to stand up? Do you want to sit down? You want to face in? You want to face out? Do you want to have a seatbelt on?" It was lots and lots of options and hanging below the train and get transferred back and forth.
One of the things that we did as well, which we really found to be helpful is, we went back through all the accident data and tried to figure out, when accidents did occur and there's not a lot of them, but there was some, what was happening that was creating these problems when these people were getting hurt? Really, we came up with the three major areas, which was, people were either falling off... Like we had a guy years ago that had a heart attack while he was being transferred. He fell off and thank goodness he survived. But we've had people that... Well, the crane operator, let's say it's really heavy winds and the basket starts to swing well, we've had people that were the crane operators swung the basket into a hard point, like a leg of a rig or a leg of a hand rail and they're riding on the outside of this thing.
The third one, there was something going on about then in the industry called the drops program, where there was a real emphasis on things falling from overhead landing on people. We really didn't have any data that showed anybody had been hurt by something falling on them during a personnel transfer. But we knew that the potential was there because you've got all that rigging over your head. Those were the three things that we concentrated on. What we wanted to do, wanted to create a scenario where it was a similar as possible to the X871 because people loved the X871. The guys offshore never wanted to change. They just liked that product.
I just had a guy tell me from one of the rigs... I was talking to a guy from Australia a couple of days ago, and just told me, "You know I really like this one, but I really miss the old rope baskets because I just enjoyed riding those things." It was a great product, but we wanted to improve on it and we did find some areas where we could improve. We made it as close to possible. But we incorporated these additional safety features. What we did, the old 870 models, they were made out of rope on the perimeter so they had vertical ropes that were collapsible. The basket would come out on the deck, the guys would stand and hold on the ropes and a rattle the outside of the baskets.
Well, on this new one, it was very similar, but you would take a half step in and the ropes on the outside, even though they look like normal ropes, they're actually stainless steel wire rope encased in double braid nylon. You can imagine you're stepping about a half a step in, and then you have these tension ropes around you, there's a tensioning device in the center and it tightens those ropes up. If you swing into a hard object, would you just bounce off. Those ropes behind you keep you protected. You've got that working for you. Then we've got a grading, basically an expanded metal grading over the top of you to protect you from falling objects from above, which we didn't have on the X800 series.
The third thing was keeping people from falling out. That was the trickiest one by far. That was really, really difficult because you don't want to be overly restrained in a personnel transfer. What I mean by that is, if you're going from a ship up to a platform or vice versa, you really want to be able to step away and get to a safe place as soon as possible because sometimes, if you're six, eight, 10 foot feet, that deck is pitching around. You don't want to be struggling trying to unhook yourself from something that might be slide around the deck. So you want to be able to... The thing that I loved about that 800 series, they could just set it down and step away and walk away. What we came up with, was a quick release carabiner.
You can imagine, Dave, like when you jump out of an airplane and you pull the rip cord, well that's basically what this is. You don't have to do anything to manipulate. All you have to do is pull. It's a spring loaded 5,000 pound carabiner that attaches to the person that's riding the basket. When they sat down, just as they sat down, they're holding on to these ropes, they pull the carabiner, it pops loose and they step away. It might take them an extra... God. I don't know, maybe 10th of a second or whatever to get off. It was a good compromise. It was a funny thing. The Knotel Ford where the Ford comes from, that was the fourth prototype we built. We had a 901, a 902, a 903 and a 904.
The 904 was being tested on a rig called the Ocean Confidence. I can't remember whether they're operating it. It may have been the Gulf of Mexico. We were working with a guy named John Odd, who was the HSE manager back in those days with Diamond and he was critical. A bunch of guys helped us with in the industry, my gosh. But anyway, John was helping us and he let us test this thing on Ocean Confidence. We did 100 surveys and we asked the guys offshore to rate the basket, the X904 from a one to a five, five being excellent, four good and all that. Anyway, I don't know if you've spent much time offshore, but that's probably the toughest group of guys you're ever going to run into. Just physically tough and just tough period. They're a rough audience if you can... You know what I mean?

Dave: Sure.

Paul: That's just the culture out there. If you can make those guys happy, you've really done something. We got our surveys back and John called me and he said, "Well, we got 100 surveys. We want to document 100." I said, "How did we come out?" He said, "Well, you got 70 fives and 30 fours and nothing below a four." In terms of how they rated it. Then we gave them a section to write comments on. He said, " Paul, they just loved it." That's when we knew we had something and we went live with the program. Diamond was the first one to buy them for all of their fleet. After that, I think just about every major driller that I'm aware of has them now. We probably sell 90% of those overseas. Fun little side story, my brother, Frank came up to me... Frank was a huge part of the design of this. Let me get to this part of the story and I'll back up on the design part.

Dave: Sure.

Paul: Frank came and he said, "Okay. We got this new 904 and we're finally done." But he goes, "How many of these things do you think will sell?" I said, "I don't know. It'd be great if we could sell two a month."

Dave: Okay.

Paul: As it turns out, that's probably 70% of our business, trust me, it's a lot more than two a month. It was a paradigm change for the offshore guys. Think about it. They're used to paying say 15, $1,600 for an X800, maybe 2000. Now they're going to pay 18,000, 16,000, 20,000.

Dave: Oh, wow.

Paul: What we used to tell him is, "Paul, that's just so much more than what we're used to and it's okay. If we save one person, if we prevent one accident, how's that investment look to you now?" They said, "It looks pretty good."

Dave: Was there much resistance to the crew, to the 904 versus the 800 series? Or it was a pretty quick-

Paul: That's a great question. Yeah. The biggest part was that restraint system. We call it man positioning because it's really not a fall restraint. Basically, it's a man positioning system to hold a guy in place so that he doesn't go out of the basket. I was at a boil show in Lafayette and my phone rang and the guy said, "This is the HFC manager for the rig." I forgot which drilling contractor it was. "We're doing a test on the X904 and quite frankly, one of our guys won't get on it." I don't know how this guy got my number, but he did. He said, "Would you mind talking to him?" I said, "No, put him on." This guy was real Cajun, a word that people use offshore for people from Louisiana. It's not a derogatory term for people. We'll call them occasionally.

Dave: Okay.

Paul: This Cajun says, "Mr. Liberato, I'm not riding a no crab trap." I said, "What did you say?" He goes, "It looks like a crab trap to me." I said, "It's not." He said, "I liked the old ones. Why did you have to change?" I said, "Well, just try it. Just let them pick you up and try it. If you don't like it, you don't have to do it anymore." Because I knew he liked it. I said, "Just try it. If you have a problem, call me back." Anyway, I never heard back so I'm assuming everything went fine and they ended up buying the product. But that was the funniest thing. That very, very heavy Cajun accent told me he didn't want to ride in a crab trap.

Dave: How long did it take? Was it like six months or a year before the guys who initially didn't like it because of the restraint that they warmed up to the idea or-

Paul: No. Honestly, for a big change as it was we had very little resistance. We did a lot of surveys even after we went live with the product, we still had to get these other companies on board. I just kept the same surveys that I used when we were developing it. We got so many positive comments, so many positive comments and it was just... The X904 is the best thing in the world for what it's designed to do. It just is. The pushback was unbelievable in terms of how minimal it was. That's what I was going to get at a second ago.
The reason why is, is that we've been asked a million times, my brother and I, "How did you guys come up with this?" That was really something. We kind of did, we kind of didn't. What we did is, we're just good listeners. We spent two years researching and developing this thing. Two years. We talked to literally, probably 1000 people and that was hundreds and hundreds, I bet it was 1000 people. I would have luncheons for the drilling contractors and we just talk. Bring the crane operators in and bring the rig hands in and bring the roundabouts, roughnecks and just say, "What do you like? What do you not like? What do you want?"
We learned so much from that. We started building the prototypes, that really helped because we take those and we would test them and then they would come back and say, "I didn't like this. I didn't like this." Basically, we did design the thing, but we literally had 1000 people helping us. I think that's why the pushback was so minimal, because we didn't rush to get it to market. We really spent a lot of time making sure that it was exactly what was needed for the application that it was going to be used for.

Dave: Okay. Well, it's a novel idea to ask your customer what they want and then give it to them as opposed to just building something and then try to convince them to buy it. Okay. What year did that come out?

Paul: Probably about 2008, maybe six or eight. I have to go back and look. It's been around a while. But it makes up obviously the majority of our business model and it's just been a wonderful product. One of the beautiful things about Billy Pugh Company and I can't take credit for this, it was like that when I got there, is that because we have the reputation that we have in the industry that we serve, people approach us on a regular basis with they have a problem. Whether they had a potential accident or they did have an accident, or they just need something that works a little bit better.
We'll get a phone call and we'll be approached by either a driller or an operator boat company and say, "Look we had this happen. Do you think you guys could have maybe a product based solution that might prevent this from happening or just create a safer situation for us?" We had something funny happened years ago. We were fortunate we had a few things like this come up where we just backed into something really good. When I took over the company, Billy told me, he said, "Paul, they will never attach a tagline to a personnel basket." A tagline, if you're familiar with the term, it's just something that you attach to any a load below a crane, and it helps you just guide it in.
It's like a rope hanging off the bottom and then you got say a big basket full of something and then you've got a person down on the deck, whether it's the deck or platform or even on land. The rope will come down, then they'll grab the rope and they'll guide you down to the proper area that they want it. Well, Billy told me, he said, "Don't ever attach one of those to a personnel basket." I said, "Why not?" He said, "Well, because that's where a lot of the actions happen and we don't want to be associated with that." I thought, "Okay." After Frank got there, he and I got talking about it and we were like, "That doesn't make any sense to us because if they're going to attach a rope to it anyway, then we've got a potential hazard out there. So let's try to figure something out that'll work better."
We came up with this, it's called a tangle resistant tagline. Basically what it does is, is that it, the way that it's designed, it won't wrap around anything and it won't catch on anything. Those were the two major concerns is that, as your load comes down, that rope would wrap around like a hand rail or anything then you've got a real problem on your hands. Or if it would catch you in a pinch point where... What happens when people have a rope is right at the bottom, they tie knot in it. Now that we've got a knot at the end of it, it's running across the deck and that knot hangs into something and then you've got a problem there with a crane operator. He may not see it. Then next thing you know, he's got a tremendous amount of tension on that load and it can create a real problem
So, we created this tangle resistant tagline. Well, what the funny part was, when we built it, we just built it to attach to personnel matters. There was a fellow that worked for Noble Drilling, their HSE manager years ago. He said, "Paul..." He's still a close friend of mine, by the way anyway. He said, "Why not use that on every load you have? Not just personnel baskets." We were looking at the trees and not the forest. It went from us selling a few hundred of these things to thousands and thousands of them because people were attaching them to every load, whether it had a personnel basket or anything that they were carrying. We started out with this thinking this is going to be a really a small product and ended up being one of the best things that we were selling in terms of volume. It was really pretty amazing. Like I said, we certainly didn't anticipate that.

Dave: That is a great story. By the way, what makes it tangle resistant?

Paul: What we do, I'll try to describe it the best I can, where it makes sense. But we'll take a regular three saran ropes, just like you see it anywhere, we stretch it out where it becomes very tight and then we take another rope, smaller diameter, and we wrap it extremely tight, where there... Imagine that rope, that three strand rope that you got tight and it's making a circle, it's going in circles. We would attach it to an electric motor and maybe we would take another rope and we would wrap that rope on their horizontally. Like you were putting a line on a fishing reel, basically, okay?

Dave: Yap. Yap.

Paul: We run that thing with those coils right next to each other, super tight all the way down, the whole length of that rope. Then we terminate at the end where we have something called service, which is a term that we use for rope or there's no knot where it terminates at the end, it's served. There's no place at the bottom. If there's anything sticking out or lumpy that can catch. Then we dip it in a hardener and a UV protector and an urethane. Basically, if you can imagine this, now so you've got this rope, a center rope with this other rope attached to the outside of it, wrapped around the outside of it so when it strikes something, the tighter the diameter gets, the more of those horizontal ropes resist turning on each other, if that makes sense.

Dave: I see. Yeah.

Paul: The inside diameter is basically going to keep that rope from wrapping on anything. It just physically won't do it.

Dave: I see.

Paul: The rope that's wrapped around it, the tighter you pull on it to try to make it a circle, the more it fights you to making that circle. In terms of the... That's the tangle resistant part, and then the snag resistant part is the fact that we dip it and then we serve it. There's really no way for somebody to tie a knot on the end of it or for the anything sticking out that could catch on something. The two major areas that are a problem are again, rapping and snagging and the rope won't do either one of them.

Dave: Got you. So it's the best of both worlds, because it sounds like it's rigid enough. I'm guessing there's also a little more rigidness too, than a regular rope, right?

Paul: Yeah. It's got a little bit more weight to it as well, which is nice because if you're working offshore in any windy area, if you can imagine what a small diameter rope looks like, it looks like a snake whipping around there. This thing doesn't do that. It's pretty stable. You don't want to make them too heavy, but a little bit heavy and a little bit step is a wonderful thing when you're working with high winds like that.

Dave: Yeah. I can imagine.

Paul: Yeah. Like I said, it's almost comical that particular product, because we really didn't... That was something that was just going to be a little specialty product for our personnel and that turned out to be something that we just we really had a lot of success with.

Dave: But it sounds like the genesis of it was like the X904 that you had a customer who had a problem who sought your help. Rather than just blowing them of, you were committed to serving them and trying to help them. You were rewarded unexpectedly with this larger market for it. Does that about summarize it?

Paul: Yeah, it does. I think part of the advantage that my brother and I had going into it since we didn't know anything. Again, we knew enough to where we feel is that we could run the business on a day-to-day basis, just do the right thing. But because we're always learning, we're always listening and we were always using the people in the industry to help us, and they were very willing to help us. My brother used to say, Frank, "Our learning curve is pretty much vertical." It was.
But we went from 1989 not knowing much of anything to the last several years being considered an industry expert. But we had the hands on education and the opportunity to work with just about every operator and contractor I can think of. The great thing about offshore oil and gas is amongst other things is, that people are always willing to help each other. It's not one of those things where people keep their secrets close to the vaster. One driller has an advantage because they're a little bit safer.... No, they don't want that. They want everybody to be safe.
They want to share information to just make a better industry in general. I just think that's unusual. I don't know how many other industries would like that, but they really do. They meet, they take care of each other, they share information. That's been a real bonus for us too, because we'll be working a lot of times with a product, with a variety of companies and they're all very open and to helping us and providing resources because when we develop new product and we've got to go off shore... I remember years ago when we were doing the 904, I don't think this would happen now, because this was many years ago.
But BP actually gave me a helicopter and flew me around all over the Gulf. One day I had my own helicopter. I could go check on and see how everything was working with the new 904 route them out on their platforms. When I showed up to the shore base, the pilot was in there drinking coffee. I said, "When do we leave?" He said, "Whenever you want to." I said, "Well, where's everybody else?" He said, "Just me and you today, bud." That's pretty cool. Yeah, I don't those are... We still have those days, but it was sure a lot of fun and I had a blast. They fly around the Gulf of Mexico, in my old helicopter.

Dave: Sure.

Paul: It was great.

Dave: The 31 years, 32 years now that you've been at the company, is it just all been smooth sailing, just one great success story after another, or did you guys have some challenges?

Paul: Well, when you're in oil and gas, especially in offshore oil and gas it's a bumpy ride.

Dave: Because of the cycle called nature.

Paul: Yeah. It's been tough. This last really starting by last April, has been the most difficult time in our whole company's history. We've managed to get through it. We managed to stay financially strong through it, but we thought we had been through some tough downturns, but I've talked to a lot of guys that are old enough to have been around during the downturn in the 80s, the early mid 80s and they said this was much worse. This one was much worse. To give you an idea, I talked to somebody the other day and they were telling me that in the Gulf of Mexico, there's like two or three drilling ready for work. Now. Back in the early 90s, it would be 100, 120.

Dave: Wow.

Paul: It's just been extremely tough. It's been a double-edged sword right now, too, because not only with the commodity prices down with being an oil and gas, but with COVID. People weren't able to even do regular maintenance, plug in abandonment stuff, pipeline stuff, just up keeping their equipment. It's really difficult. It's been tough. We're starting to see a little bit of a crack in the ice in terms of activity. We're probably busier now than we'd been. Well, I know we are since COVID started, but it's been tough.
We went through some downturns in the early 90s. We've probably been through three or four. Thank goodness we've been able to weather all of them. That's probably been the single largest challenge for us, is just... It's frustrating sometimes when we really feel like we do a good job and we build wonderful products. We take a ton of pride in what we do. But it doesn't matter if people aren't working offshore, they're not drilling wells and producing wells and working on ships. We don't have any need to do it. Doesn't matter what a great job we do or what great products we manufacture, nobody's using them, they don't need them.
That's probably been... It's most certainly has been the most frustrating parts. The wonderful part about it though, is that the core group of employees that we have has stayed with us. Like I said, we're so fortunate to have them. They've stuck with us throughout all of this. It hasn't been easy on anybody, to me or them. Again, like I said, we managed to get through it pretty much unscathed, I'd say. We started to see a little bit of increase in activity, so we're thankful for that.

Dave: Yeah. I've got a question. Warren Buffel, once asked how he was able to be successful in spite of the fact that he was not in New York and he asserted that he was successful because he wasn't in New York, he had more time to think, and there was just less going on. It just struck me, a similar thing that is it been an advantage or a disadvantage all in all being in Corpus versus say being in Houston?

Paul: I think it's probably been a little bit of both. What I mean by that is, from a customer access obviously Corpus Christi is not the center point of the world for offshore oil and gas. It's been a little bit of a disadvantage. I know from in 1996... I actually moved to Houston and just to get closer to our customers and then Frank pretty much took care of everything that was going on at the factory. But I think from that standpoint, there would have been some real benefits to being local and to be able to not only just to have that local accessibility, but also to be able to show the customers what we do.
We love having people come into our factory. That's one of the best things, because I think once they see how well organized and clean and what great attitudes our employees have and how much pride we take, I think it makes them feel better about the relationship. But the advantage to be in Corpus Christi, I believe is we just have such an amazing workforce down there. It's just culturally, you don't have the movement that you have in big cities.
The people down there, they get a good job with employers that take care of them and they just stay. They're happy and it's a small town. Corpus isn't a relatively big city, but it has really a small town attitude. I just don't know that we could have operated with the quality employee on a consistent basis anywhere else other than Corpus Christi. It's a wonderful place to operate a business, especially a business like ours. If I had to do it all over again, I wouldn't change a thing. I would definitely stay in Corpus Christi.

Dave: Okay. How did it end up in Corpus? Is that just where Billy Pugh lived?

Paul: Yeah. Billy was from there. Strangely enough, that drilling rig, the Mr. Gus was working I think off of right there. Strangely enough, that's where the whole personnel transfer device industry started was in Corpus Christi, just coincidentally and Billy was from there. He started up on a little place up on the Lhead, if you know much about Corpus, right there on the water. Then we moved over to a little factory right on Water Street that used to be the postal center where they brought in all the bulk mail. About 10 years ago, Frank and I went over and bought some land over by the airport. We built a purpose-built facility over there. We have three buildings right there about two miles from the airport specifically for building Billy Pugh products. That's been a real nice change for us. It's a nice complex.

Dave: Okay. As we're around in the home stretch of the interview, how do you decide what to do in house and what to outsource? For example, I know that the wire rope you use, or at least some of it, I think you actually procure that from another customer of ours.

Paul: Yeah. We work with a couple of companies there locally. One is called Kennedy Wire Rope, and one is called Industrial Fabricators. When you talk about a classic sales situation, I think both of them are classic sales situations. As the salesperson, that's where you want to be in the middle of. What I mean by that is that those two companies have literally integrated themselves into our production process. We literally can't do without them. They're such an important part of our business and such an important partner. Kennedy Wire Rope for the testing that we do... We have to do a lot of testing on our products. We're a little company down there in Corpus Christi, but we're ABS type improved, we're ISO-9,000 approved.
We have people coming in and auditing us on a regular basis. Whether it's someone from overseas that maybe has an order going to India or Malaysia, or Indonesia, they may want to come in and send them outside inspector in. We have to do a lot of testing. Kennedy provides that testing for us, they provide quality products for us. When we have something that is a special need or a special new products, what we need someone to work with us to design terms of working loads, they're like a sister company to us. Industrial Fab, the same thing. We do a lot of our own welding, but some of the welding that we do as much more technical on our products.
As of for instance, the aluminum welding X904 is very technical. The quality standards have to be absolutely 100%. We actually subcontracted our welding on some of that more difficult stuff to them, because that's what they do. We're a manufacturer assembler, whereas they are strictly a company that does that type of work. The quality that they give us is incredible. Those are really the two main companies that we subcontract to. Obviously we do all the assembly in-house, but the component parts, we're really tied at the hip with both of those companies and they do an incredible job for us.

Dave: Yeah. That's always interesting because you contrast that with like Elon Musk at Tesla, where he's trying to vertically integrate as much as he can. Henry Ford, that was his whole thing was to try to be as vertically integrated. But I know that starting 20 years ago, or so there was a new theory that evolved focus on what you do best and outsource the rest. It's sounds like you subscribed to that second mindset of-

Dave: Really well.

Paul: Yeah. If we had the expertise that those guys have, and we wanted to invest that money, then we probably would vertically integrate. But because they're right there, they provide such good service and quality. From an investment standpoint, it's just much more economical for us to work with those guys and have them subcontract those component parts. No, they don't do any finished parts for us, but they do such a wonderful job on the component parts. They're right in the middle of our QA-QC program. It's been a great relationship.

Dave: Okay. I know you outsource some other specialty services. I know we've worked on some different tax projects for you guys. How do you decide on when to do that stuff in house, or have your CPA firm do it or outsource it to someone like us?

Paul: I do want to go public. We've been working with you guys on our IC disc program. I don't know, Dave, how many years you and I talked about it, but I know we used to meet up at OTC and you'd tell me about this IC disc this program. I think something changed in the law or something that made it... I don't remember all that stuff, but that made it more relative to a company like ours. Was it a law change or something? What changed we got going on this? Was it just made making the decision or was it something that actually happened?

Dave: I think what it was, there was a predecessor program that went away in 2006. That program was really easy and the disc, there was way more complexity to it. I think that when you were comparing the disc to the old program, it just seemed so complex that I think it just created some resistance. I think that's just what it was. It was just you guys had a lot of other stuff going on and on the surface, it just seems so complicated, but-

Paul: Well, you should've been more aggressive with us because once we got going, we saved a tremendous amount of money. Being a small US-based company that exports most of our equipment, to not take advantage of that would not have made any sense. Like I said, it was a very, very successful program. In terms of sourcing other stuff, it just depends. We have a CPA firm that we worked with for many years and they do a great job.
Like you said earlier, we bring in people that are experts in their field and finding the very best one that makes it fit with us and then utilizing the products and services. We really believe in the relationship part of it as well. Once we develop relationships, we try to keep them for a long time. And just about, well, everybody, whether it's you or our CPA, which is Austin Adamson or Kennedy Wire Rope, we've done business with all those people for many, many, many years. They just provide great products and services. Like I said, the relationship is a big part of that.

Dave: I know for me it's a lot more fun doing business that way, where you're not just beating up... I've always looked at it as, I view our suppliers is just important as our customers as far as those relationships, because you need both to be successful. I can appreciate that. Well, can you believe that we're almost an hour in?

Paul: Well, you told me I was going to go fast. I did. I've got notes here. I didn't get to half of this stuff.

Dave: I know. We may have to have you on for around two then. I guess. Well, I appreciate you taking time to be on the podcast. Was there anything that I didn't ask you that you wish I'd asked you?

Paul: Just quickly, we're real proud of the fact that we... This goes back before I got there, but it's still attached to Billy Pugh Company and we designed the rescue system for the Apollo missions. If you watch any of those old Apollo movies, I think the ones Tom Hanks and all those guys were in, when the capsule dropped into the ocean, they actually dropped the Billy Pugh Company helicopter rescue basket down there to pick up the astronauts. The one that was used for the Apollo Moon missions is in the Smithsonian.

Dave: Is it really?

Paul: Down in Corpus Christi, yeah. But we've got our own little display, a purpose-built display by the Smithsonian that has our... It's called an X872SF helicopter rescue device. We're really proud of that. The fact that our companies in the offshore oil and gas hall of fame and Galveston week. Probably if you go down there and you're going to see a drilling rig, you walk in the front door and first thing you see is the Billy Pugh Company X904 right in the front door.

Dave: You mentioned that.

Paul: Yeah. We've developed a lot of other products maybe not as financially successful as the X904, but certainly things that have created a safer work environment for the offshore oil and gas business. Like I said, we just feel real blessed to have the relationships that we do and the trust of the industry. It's been a great 31 years coming up on 32 years and hopefully we'll have 32 more good ones.

Dave: Well, I hope so. Well, Paul, just on a more personal note, I just really wanted to thank you for giving us the opportunity to help you all for the last 15 years or so. Also, just want to thank you for your friendship. You've been become really one of my favorite people, so I just want to thank you for that.

Paul: Well thanks Dave. The feeling's mutual and I appreciate you having me be a part of your podcast, means a lot. Thank you.

Dave: All right. Well with that, we will wrap up. Paul, I hope you have a great afternoon.

Paul: Great. You do the same. Thanks, Dave. Take care.

Dave: All right, bye.

Dave: There we have it. Another great episode. Thanks for listening in. If you want to continue the conversation, go to ic-discshow.com. That's I-C-D-I-S-C S-H-O-W.com. We have additional information on the podcast, archived episodes, as well as a button to be a guest. If you'd like to be a guest, go select that and fill out the information and we'd love to have you on the show. That's it. We'll be back next time with another episode of the IC Disc Show.

Dave: Hey Randy.

Randy: Hey David, how are you?

Dave: I am great. And how are you today?

Randy: I'm doing very well.

Dave: Good, good. Well, thank you for being on the podcast.

Randy: You bet. Honored to do it.

Dave: Let's get started then. So my guest today is Randy Reimer. Randy is a CPA, and he's the founder of a local Houston CPA firm called Reimer McGinnis and Associates. Randy lives in Houston and is married to Kimberly, and they have two daughters and several grandchildren. Randy, welcome to the show.

Randy: Glad to be here. Thank you for that nice introduction. We've been married for 40 years, two daughters and two granddaughters, which is just, lots and lots of girls, lots of ladies. in my family tree.

Dave: And I think Kimberly is your high school sweetheart…

Randy: Junior high school sweetheart. I remember the day when she walked into the lunch room in seventh grade and hard to believe all these years later. Yes.

Dave: That is great. Wow.

Well that, I don't know how you can have been married 40 years because Kimberly looks like she's 39. So I don't know.

Randy: Yes, she does. Looks a lot younger than I do.

Dave: But I'm not real good at math, so maybe I'm not very good at the math there.

Randy: Yeah, exactly.

Dave: So now are you from Houston originally or did you grow up somewhere else?

Randy: Actually, I'm born and raised in beautiful Beaumont, Texas. Southeast Texas. I was born and raised there. It's really kind of interesting as you run around in Houston, there's a ton of people here that are from Beaumont. I'm always amazed when someone finds out I'm from Beaumont within a couple of acquaintances, we figure out we know some similar people that are from Beaumont. So a great place to help people, a great place to be from.

Dave: So do you think, is that why there's so many folks in Houston just because the economic opportunities were better or?

Randy: Yes, absolutely. Yeah. I think that's the real key is that the economic opportunities are so much greater here. Obviously a much bigger town, a lot more to do. Beaumont is still a great town. My mom's still there and I go see her regularly and it's still a great city. But growing up, it was, it couldn't have been more the perfect middle-class America. It was just a great place to grow up and back in the day. So it was great. But yeah, the opportunities that Houston provides is truly, almost immeasurable. I tell people all the time, especially some startup clients that are coming to Houston or are new to Houston. It's like if you're in Houston, Texas, and you've got a great product or a great service and you just do a good job, you can start a business here and grow it here.

It's a great city for people that are truly entrepreneurial that want to succeed and have a plan and just take care of clients. It's amazing. The opportunities that Houston provides so much more so than Beaumont. Discovering and Beaumont, you needed to have the right last name, the right heritage was important. And I literally grew up on the other side of the tracks, so I didn't have some of those same opportunities, but that was a great place to be from, I still love Beaumont. Got to do with my roots.

Dave: Sure. And Beaumont's like an hour and a half from Houston.

Randy: Yeah, hour and a half, 15. Hour and a half. Yeah. Not too far, of course. Famous for really starting the oil boom, and kind of ironically Beaumont should have been Houston. With the oil boom that happened there. In fact, a lot of the Beaumont companies, if you go back and read some of the history of the oil and gas companies, they started in Beaumont but eventually brought their office to Houston because Houston was just a little more progressive and building out downtown and being more business-friendly than Beaumont seemed to be. So kind of interesting how that worked out.

Dave: Because that was where Spindletop was, right?

Randy: Exactly. That's where Spindletop happened, the biggest oil fines of all time. And there was lots of more sort of mini Spindletops around Spindletop. So that's where Exxon Amble Oil and a lot of the oil companies. Getty had a big office there back in the day. So it burst a lot of big businesses.

Dave: That is great. And your comment about the opportunity in Houston. I agree with completely. You may remember back in the eighties, there used to be a joke that anybody in Houston with a cell phone and a leased Mercedes could be a real estate developer.

Randy: Absolutely, yeah.

Dave: And I really think that encapsulates what Houston is all about. It's the most welcoming place I've ever lived, even though small towns kind of have a reputation as being more friendly, I've found the opposite to be true. I find that the small towns tend to be kind of clique-ish and closed. But the thing about Houston is virtually nobody's a native. So everybody's an immigrant here. And everybody remembers when they were an immigrant. In fact, if you're probably lived here 10 or 12 years, you probably have lived here longer than half the people, maybe 15 years. Right.

Randy: Absolutely. Yeah. It's funny because most people that are not Houstonians don't realize how diverse our city is. I mean, it's funny. We just hired a young lady, who actually is from West Africa and just a brilliant sharp young lady. And she was telling us the story where we were visiting with her about how she chose coming to Houston and coming to Texas. And she actually commented that she truly believed that people over in Houston and in Texas were, everybody rode a horse. Everybody, it was just like you'd seen on TV that it was this Western culture. And she's like, "Oh my gosh, I got to Houston. And it's like, there are no horses."

And everybody here is so friendly and there are people from every, every country you can imagine and all the different languages that are spoken. And it's just like yeah, we have an amazingly diverse city. And I think that's another piece of what helps the entrepreneurial ship, if you will. And businesses here is that, they're just, like I say, we're all kind of all in it together. And there's no collect. There's no organization. You must be a part of, to have success. And it's pretty cool.

Dave: Well, you were talking about the horses and it dawned on me. There is one day a year that there are horses on the street rodeo parade that Houston has one of the largest livestock show in rodeos in the world, I believe. And right before it kicks off, there's a trail ride that comes down Memorial drive. So what would be funny is if one of those people who had that image of Houston, imagine if they were picked up from the airport and they were just driving right down on that day and they show up and they have to wait for traffic to pass. Couldn't you just see those people taking now. Yeah. That makes sense. Yeah, that makes sense. So it makes sense that there's a few cars make sense there are some cars too, but here's the horses I was expecting, but here are the horses I was expecting.

But then these poor people are going to be disappointed because they're not going to see any horses for another year on the streets. So did you go come straight to Houston from Beaumont? Or did you detour?

Randy: I did a detour. I made it, I went to college, not far North of Houston in a little town called Huntsville, famous for a prison and a university. Sam Houston State University is where I went to college. It's kind of interesting. My parents both went to college there, graduated from there. They were both school teachers. And so I had this, it wasn't like I had to go there, but things just kind of worked out. I was, I was fortunate enough to be a baseball player and actually played baseball for Sam Houston, and had a really good baseball program as well as a really good accounting program. So things worked out nicely. My wife and I both went to school there, both graduated from Sam Houston with accounting degrees.

Dave: That is great. And you're the second guest I've had on the show who played college baseball. The other is my former client, Johnny Ryan, Alexander Ryan. And he played baseball for two-lane I believe, and he actually had a, he was given an offer for a major league contract or a professional contract, not major but professional. But he had already accepted his job in Houston. And so he declined. And so I'm sure you did the same thing, right? I'm sure you had plenty of offers. It's not the life for a married man.

Randy: That's right, exactly right. Well, it's really interesting. Of course, I think every baseball player's dream is to play professionally and I'm actually, my father was a ballplayer and played in the minor leagues. Never made it to the big leagues, but it was always a dream. And I actually was hopeful that I would get drafted, but did not and did have an offer to go to a training camp, but I already had enough players or friends that had been drafted or played. And they had already told me the stories of just how many incredibly great ballplayers there were trying for very few spots. And some of their advice was if you're going to got a job and you can make a whole lot more money and you might as well just go do that. And so I never did make that move and went straight to work and I'm glad I did. It worked out great. I still love baseball, still a big fan. Houston Astros season ticket holder for many years, and still love the game still. It's still the best game out there in my opinion.

Dave: Yes. I agree. So you graduated with your accounting degree and is that when you came to Houston?

Randy: Yeah, shortly thereafter, I actually started, my career was kind of interesting. I was going to graduate school at one point. My wife was working for a small accounting firm in Conroe and was driving back and forth from Huntsville to Conroe for a while. And then I got an offer to go to work for a larger firm that was in Conroe. And so I actually came. We moved from Huntsville, moved to Conroe, Texas, which is just North of Houston. And I worked for that firm. It was actually an interesting practice. They had about 100 total people, but they were spread out in small offices like Conroe and Cleveland, Texas, a small town and Tomball, Texas, and Huntsville.

They actually had an office in Huntsville where I went to college. But I worked out of their Conroe office, which was their larger office. And it was a great place to start because they get you exposed to everything, audit tax accounting. We got to do it all for the first couple of years before we sort of specialized. So it was a great opportunity for me. And there's a great town where I bought my first house and we had our first child. So it was a good, small town place to be. So we enjoyed Conroe, Texas, and it was a good start to my accounting career as well.

Dave: So yeah. So what then brought you to Houston? Did you get an office in Houston town?

Randy: Well, interestingly enough, my wife had left the CPA firm and gone to work for Conroe School District, Conroe Independent School District. And it was the controller there and she had met some consultants that were working with the school district from KPMG, which believe it or not, it was called Pete Marwick back then. I got there when it was still called Pete Marwick and they found out about me and I met them and they made me an offer to come move to downtown Houston and worked for what is now KPMG. So I made that move, and really spent most of my time there working, more in consulting in the operation or a division, they call it operations management, where we spend a lot of time looking at organizations and helping them become more efficient, look at the way their systems and processes and procedures were working and give them suggestions for improving them.

A lot of times we were sort of the hired guns as well, where we would come in. And a lot of times some of these organizations looking to streamline their operations, trim some people, trim some costs. And so we were kind of the guys that came in and handed them a plan that said, "okay, we recommend you change your organization chart and you restructure your company this way." And so that did that for three years.

Dave: You were the bad guys.

Randy: We were the bad guys. We were the bad guys.

Dave: Which is good because you don't have to work with the remaining people going forward to see…

Randy: Exactly, right. We like to say we were kind of the hired guns to swoop in and spend a month or two studying the organization and gathering all kinds of data and then come back and deliver our report and run. That was pretty common occurrence for us.

Dave: Sure. Yeah. Before they tried to hang you.

Randy: Yes, exactly. Tried to grab us where we left town. Yeah. I mean, we worked for some great organizations and I worked with a super bunch of people that were just very bright very smart. But of course, as you would imagine, as you've known all the stories of the big firms. I mean, I was in a different city every month and I had two young children and was never home. And while I loved the work, it was just not good for family life and not good for how to raise my kids and how to be a good husband and father. And so I had the opportunity presented to me by a friend that I had worked with previously at my first firm, who had found the elderly gentlemen who was looking for an exit strategy for his CPA firm. And so he convinced me to leave KPMG and join up with him and go acquire work for this gentleman and then acquire his practice. And so that's what I did.

Dave: Okay. And then did you, so let me kind of connect the dots. How long ago then did you form Reimer McGinnis?

Randy: Reimer McGinnis formed in 2006. December of 2006 is when we formed Reimer McGinnis. The previous firm I had purchased around 1991. And we grew that firm, a little bit. And then we kind of got to a spot where we felt like we had sort of hit the ceiling and we'd been approached by another larger firm in town, about merging with them a few times. And we kept saying no, and they kept coming after us. And we finally said, yes. And so we merged with them in 1997. And that firm was called Nolan Larrison. My firm was Larrison Stevens and Reimer. And then we merged with Nolan Associates and became Nolan Larrison back in 1997. And that was a good move that firm grew substantially. I think by the time I left in Oh six. We were about 75, 80 people. So it was a nice size, local CPA firm.

Dave: Okay. And what prompted you to want to leave and start your own firm? Did you see kind of a space or niche in the market you wanted to?

Randy: Yeah, we really did. One of the reasons we left is just, we really, and we'd we tell our folks this today is we wanted to sort of create a different CPA firm. We wanted to create a firm that that was much more employee-centric, much more about our people, had a culture that was just very more like a family and more fun. In fact, one of the core values of our firm now is fun. I mean, we actually love to have a good time and love to hear laughter coming down the halls. And we're... COVID of course has changed a few things here, but we spent a lot of time in our, we have a large kitchen in our office. We purchased our own building years ago and we've got a nice big kitchen and lots of space to spread out.

We have an outdoor covered patio where we like to hang out. And so we really use our space to spend time with our people. And so we really, we really had this desire to create a culture and affirm it was just different. And we really wanted to be small. The firm where we were was a great firm, great people, but the direction it was going was not the direction we wanted to go. So Tom McGinnis and I left that firm in '06 and started Reimer McGinniss and Associates with two other people, who were both at that same firm. One of one of which had worked for Tom for 20 plus years at his prior firm. So we started this thing up with just foUr folks.

Dave: And then it sounds like you succeeded, but you also failed, right? Because you're not really a small firm anymore, are you? How many people are you up to?

Randy: Yeah, we are up to 26 people now. So within 15 years, we've grown pretty substantially from four to 26. We kind of expected we would grow once we started the firm, but we truly had no idea that we would get this big and have this many people. And just like I say, it was kind of somewhat of a surprise to us because it wasn't really our intent to grow. It was really just our intent to serve our clients and continue building long lasting relationships with them. And somebody has asked me before, how did you do this? One of my answers is that the old line, again being a baseball player from know field of dreams was, if you build it, they will come.

And I feel that's sort of what we did is we, Tom and I, and we love to tell the story that when we started this firm, we literally sat at my kitchen table. And we sat down and got a piece of paper out. And we wrote down the clients that we knew would come with us when we started our new firm. Because we had been serving them for a long time and put down our pencil to the paper and had the budget together. And literally our first year revenues were within 2% of what we had targeted. But I guess yeah, aint that crazy? I mean, I guess we're pretty good accountants too.

Dave: Well, I guess the lesson there is for my listeners, if you're trying to forecast something accurately, get Tom and Randy involved.

Randy: Get us to help you. Exactly. Yeah. We were pretty good. We were pretty astonished when we sat down and looked at the end of the year that we had literally almost had exactly what we expected we would hit. So yeah, it was pretty crazy, but yeah, since then our revenues have quadrupled and our staff has more than quadrupled. So it's been a wild kind of crazy ride along the way. And so, but what we felt like is just, we sort of tell people that hey, we're really just servants. We are truly just here to serve other people. We happen to do it with accounting CPA services, but that's kind of who we are. And it was kind of interesting. We were at one of our retreats here last year or so we kind of went around the room, talking about jobs people had, and we were pretty surprised how many people had jobs in the service industry. Restaurants and hotels and retail where they had actually served the public.

We sort of accidentally picked people that come to work for us, that had that same sort of servant mentality. And I believe that's what's been the key for our firm as we've found those types of people and hired those types of people. And they serve the clients just like Tom and I always have, and they've told their friends and they have grown and our firm has just sort of had this organic growth over this period of time. It's just been kind of fun to watch.

Dave: Yeah. It is. And it's been fun for me to watch too, because I mean, just from a full disclosure perspective. So we started subletting. My firm started subletting space at your offices, long time ago, and that's still where our formal offices are. And you all have been the only accountants that our firm has ever had. So that's been 11 years, you guys have served us. And then it took me, let's see, you guys have served us for 11, 12 years this year, but it took a few years to convince me to let go of doing the 10-40 myself though. And I'll tell the story for the listener. So I would, because I'm a CPA by training and I just felt like I had turbo tax and I'm like, I can just, I can do this myself. And it felt like it kind of kept me grounded, but then it got to be for whatever reason, and my wife has her own business.

My wife has several businesses and we just, our situation kept getting more complicated. And then it got to where I would have to go to your offices every year and sat down with my laptop and TurboTax and your team to answer like the 110 questions I had. And then you all just started saying to me, "Dave, it would actually be easier if you just let us do it." And then I think what, what never did it is, because I think Liz told me that first, and then you finally said, "Look, Dave, if we actually charge you for all the time we spend helping you do your return. If we actually charge you for that, it might be more than it would cost if you just had us do it."

And of course being the accountant, once I heard that, then it was all better. And I think that was three years ago. And you guys do a great job. So a question, I'm kind of jumping ahead here, but so at some point you and Tom are going to retire. Are you going to do like that other firm where you're just going to find some stranger to buy the firm?

Randy: No, we are not. Our plan is to not do that. We really wanted to create a legacy firm. And we have already, we've brought in. We just announced, I don't know if you saw the announcement just went out. I think this week that we've just brought in another partner into the firm, a young man named Mike Hewitt who actually started with us as an intern. And again, kind of goes back to the people we've hired over the years. His father worked with one of my good friends at BP in their accounting department. And this young man, Michael Hewitt started with us as an intern. We've had, I think six people or seven people at the time and he's been with us now over 10 years. We've watched him grow, become a CPA, take on client management, business development and training of our people.

And just has done an incredible job. So we're very excited about Mike and we have another partner we brought in, I think three years ago named Max Dunlap, Max was from Deloitte. And so we think we're in a pretty good position for the next generation. Our goal is that Tom will retire a little before me and then I'll retire, but we think we've created this organization that hopefully will continue after we're gone or after we're retired. So we did not intend to sell to the highest bidder as a lot of firms our size, we do get phone calls, pretty frequently. People that are looking to merge us in or acquire our practice. And while we've talked to a few, we just have never felt like that was the direction our firm should go. And so we're pretty committed to being independent legacy practice as certainly our goal currently we've told our new partners, "Hey, the day comes when we're going and you guys think that is the best move for the firm, then that'll be your decision." But we're committed to headed forward and continuing to grow this practice as much as we can.

Dave: Well, as a client selfishly, I'm glad that's your strategy because I mean, it seemed certainly from a client's perspective, it seems like a better future. Then you'd be enrolled up into some bigger firm or just sold off. And I've also got to think it's better for the employees too, to have that continuity and stay at the same location. And yeah. And I think that's a Testament to you and Tom really living that servant leadership approach, because if you looked at what would give you and Tom, the biggest bump in your bank account, the soonest problems selling it to an outside buyer, but it sounds like that's not your approach.

Randy: Yeah. Tom and I. I think one of the beauties, our firm is it's just been Tom and I's relationship. Our values are all the things about us personally are so aligned. It's pretty remarkable that we both are both work hard. We both do the right thing. We both have great families. I mean, just everything. Our personalities are so similar in terms of our core values, but we're very different in terms of the way we practice and who we are. Tom loves nothing more than to sink his teeth into a big, hairy tax return. I mean, that gives him great joy. He really enjoys doing that and ticking and tying and looking at everything and that's that I don't get my choice there.

Dave: Wait, hold on. All these years, I've had the wrong partner with our tax returns. Oh no. Oh, well it seems like it's worked out. Okay. So anyway, go ahead.

Randy: Not saying I don't do it, I'm just it doesn't bring me joy.

I'm much more enjoyed discussing the return with you and talking about potential strategies and things we could do to save you some taxes or whatever that might be, that sort of thing. So I think that's been one of the cool things about our firm and our relationship is we both recognize that we have different skills and different strengths. And we let each other do what we do best. There's never been any animosity or, every now and then he'll tell me, "Reimer, you need to be in the office. You've been out doing too many meetings and going to networking events or other types of things where you've been out of the office too much, you need to be in the office." That's about the strongest criticism I think I've heard from him in 15 years. So it's been a good environment.

Dave: Yeah. That is great. Yeah. Tom's, I enjoy Tom as well. You guys are great team. So let's talk a bit, let's kind of backtrack then to the firm. So what are some of the things that you all have chosen to focus on to develop some, I guess kind of some niche expertise or who are you really set up to serve best? Why don't we start with that? Who do you want to be a hero to, who's that ideal client for you?

Randy: Our ideal client has always been the entrepreneur who is very involved in his business, whose goal is to create something, maybe it's to grow it. Maybe it's to make it big and sell it later, but they really don't have somebody internally in their organization who's really got high level tax, financial, even maybe management skills that they're really knows how to help them get to the next level and plan for that. And so that's our bread and butter is that entrepreneurial business owner who started their own business and kind of comes out of the, I know you've read the book long ago called the E-Myth. So many of our clients come out of that sort of situation where they were really good electricians, and now they have a company that does electrical contracting and they don't know how to run that business.

And so we find a lot of our clients like that, that have been in the corporate world or work for somebody else. We have one of our favorite client groups is in the oil and gas area. That's manufacturing. And I love to tell the story because they literally started with the guy started in his garage. I mean, you hear that story, that he literally started in his garage and now they have about 15 companies. And I think at their peak, oil has an impact. Price of oil has an impact on our business, but at one point, the combined revenue of all his entities was over half a billion dollars. And literally he started with one company. I was introduced to him by another client's accountant.

She was doing this stuff part-time and he had started growing so much that he needed additional help. And so we've kind of been with that group, all the way through. And so with that kind of client that we can start small with and help them grow. And building that we went from doing just tax work and a little accounting work to doing reviewed financial statements, and they acquired some companies. We help them with due diligence work and actually how to roll them into their company. And so not all of our clients of course do that. But that's sort of the guys we're looking for is that, I'm going to say it starts in the million to 10 million range, and some of them grow from there, some stay there. And we're happy at either spot, but that's kind of our bread and butter.

And over the years, we've sort of narrowed down our... We kind of have clients in almost every area, but sort of our niche areas have really become manufacturing, and we kind of thought oil and gas type clients in the manufacturing space. Then we have a good concentration of clients in the real estate area, really kind of real estate and construction. And then Tom McGinnis has been working in the healthcare space his whole career. And so he has got, we have a lot, he's got a lot of doctor and doctor group type clients, and then the other area we've always been involved in is nonprofits. We've always had again, part of that servant attitude we have here, we've always enjoyed being part of a nonprofit organization. So we've over the years picked up quite a few clients in the nonprofit space. So we do a lot of nonprofit tax work, nonprofit audit work as well. So those are sort of our forks sort of niche areas, if you will.

Dave: Okay. Well, that's helpful. I didn't realize that about the doctor groups or the non-profit. I knew about manufacturing oil and gas and the real estate. So you talked about this one company, that you'd helped. And when I worked at Arthur Anderson, I learned a lesson. The first thing they taught us was if you ever mention a client by name, you can never mention any details. And if you ever mentioned any details about a client, you can never mention their names. So your big client where we can't tell, talk about who their name is now, but is there another client that we could go the opposite direction, who you would not mind if you mentioned that you were a client and maybe some examples of things you've done or has any come to mind that they would love to get some free PR on a worldwide listening audience?

Randy: Yeah. There's a couple. I mean, the one that sort of comes to mind right now, is a company here in town that's called Facilities Electric. It was really interesting how I became involved with them. I had been doing the 10-40 for a gentleman here named David Durette who was, I went to church together, was good friend. And he started having me do his tax return and just to 10-40, nothing exotic. And then he called me one day and he said, "Hey, Randy, I've been offered an opportunity to come to work for this guy. His name is David Hatton. And do you know him?" And I didn't really know him, but I was, I knew some people that did. So I sort of checked on him and found out that he was an upstanding guy.

And so kind of long story short, my friend David joined the other David, and they basically began an electrical contracting company. And my friend David Durette actually had been working for one of the largest electrical contractors here in town. And the beauty of that I guess, relationship in that business relationship is I was involved with them from the very beginning when they set up the company and began doing work and they had a couple of clients already. But the beauty of that story is that Mr. Hatton, who was really the capital behind it and the guy who was putting the thing together, I helped him put an agreement together that would give the other David ownership interest over a period of time when certain milestones were hit. And again, this was goodness gracious.

This was 15 plus years ago now, and now that company has grown in an amazing way, they have multiple companies they've acquired a building. And so I look back at that relationship and that's been one of those that, and they just do fantastic work. They do work with a lot of the large contractors here in town. They've got a HPAC division now and a lighting division. And anyway, so they're a great example of some of the things we're where we've really been an integral part of all that they have done over the years and helping them structure their growth. They've had people run at them to buy them, and we've been involved in some of those discussions, but they're still very independent and doing their own thing. And it's been fun to watch them grow, kind of as we've watched our CPA firm grow, but that's one really good story.

Dave: That's a great one. Do you have another sort of interesting client story? I mean, I've loved working with entrepreneurs, that's who our clients are too, and they're just, I feel so honored to be able to serve these entrepreneurs. You have another story that you can talk about?

Randy: I do, I will. I'll mention one more. We have a client. I don't think they would mind if I mentioned their name. The company is called World Cinema, and what's really interesting about them is they are one of the largest providers of in-room hotel, TV service in the country. If you've been in a hotel, odds are you didn't know this, but behind the scenes, they were providing all the programming in the hotel industry. And I love to tell this story because of this gentleman who owns this company, he has been a client of mine. His firm has been a client of ours. He was a client of Mr. Larrison whose firm I purchased back in 1991. So I've been doing his work since I got there in 1989. And here's the cool part of the story for them.

The owner's name is a man named Chet Dixon. And Chet's a Rice educated engineer. And he saw way ahead of schedule way ahead of everybody else, this desire for TV in the hotel room. And so he had the idea that he could put a VCR in the reception lobby of a hotel. He would wire the entire hotel with cable and in the hotel would tell their people staying there, "Hey, we're going to put in this movie at six and this movie at eight, and this movie at 10."

Dave: Are you serious?

Randy: I'm dead serious. Turn your TV to this channel because prior to that, all you could get in a hotel room was the standard pre-cable programming. Yeah. So he began that whole idea of selling movies into the hotel rooms by literally using VCRs.

And obviously that company now has grown to be substantial, well over 100 million in sales, they operate in every state in the country. Just great company, great people. And of course now they're as high tech as you can possibly be. In fact, it's almost a challenge for them to keep up because the technology is forever changing. They went from obviously analog to digital, to internet-based and Netflix and streaming. And so the last 10 years has been a real constant technology battle for them. But we have been involved with them for a long time from when they were small to as they've grown. And we've done, we do work for the owner. We do work for obviously the company, a couple of other spinoffs they've had over the years that they've had us do tax work for, and we do an audit for them as well. And so it's been, that's been a great relationship I've had over the years has just been one of my favorite clients where my favorite relationship that I've ever had in this business.

Dave: Oh, I can imagine why. So with that in mind, so let's imagine that somebody listening is just about to start a new business. They're just about to embark on entrepreneurship. And they're kind of not quite where to know where to start. They want to not make the 20 most common mistakes people make. So without giving specific legal or accounting advice, let's put that little disclaimer in. But in general, what are some of the, I guess the lessons that you have seen your clients learn or pitfalls to avoid? So what are some things that come to mind?

Randy: I guess the thing that is sort of the thread that I see with all of these clients is they all had a vision. They all had... You hear that probably talked about too much in the business world, but I think about all these entrepreneurs that I've worked for, that started in their garage, that started by running cable through a hotel room with a VCR. I mean, they truly saw something that no one else saw. And I think most importantly probably saw the ability they had within themselves, to make something happen. So it's that, it's really sort of that drive, that desire to go and bring that vision to reality. I mean, I still think that's probably the most important piece as you're starting a business is you've really got to have that vision in your head. And you've really got to have that drive that says, I can get this done.

And then the obvious other one is that we've seen mistakes. I've seen these many of these mistakes is that lack of capital. And then that lack of having the right team around them. Those are probably the next two most important things. And even if you're on your own, you still need good teammates from the CPA side, the legal side, the strategic suppliers or vendors that are going to help you do what you do. Maybe it's your web company or whoever that may be, but you've just got to find the right people that can support you. We've seen clients over the years that have had great businesses, but they unfortunately partnered with the wrong supplier or the wrong service provider in some way, and end up all of a sudden heading one direction and then dropping off the map.

And so I think having the right team around you is critical and then absolutely enough capital to get you to where you're going. To get where you're trying to get to, because too often I see companies just can't hang on. They don't have enough capital. And it seems to happen a lot with those that are coming out of maybe the corporate world, trying to start something and have some capital, but not enough capital and just can't hang on because those clients that we've seen over the years that have really thrived they've been able to survive the downturns and then come out of those downturns and like hyper turbocharged coming out of those downturns because they've been able to survive it. And they've learned from it and become lean as a result and really accomplish more with less. So those are probably some of the real keys that I see.

Dave: So to recap, having a clear vision and making sure that you've got that you're adequately capitalized.

Randy: It's usually important. And the right team, like I said, the right people with you. Let's just again, look at my situation here with Tom. You know what I couldn't, I literally could not have had a better partner. I mean this, and that's just, and then the people, the two people that started with us, I mean just two great human beings that worked hard that shared our values. I mean, you've got a team like that. You can do a lot.

Dave: Let's give them, let's call them out. Was Liz one of them?

Randy: Sure. Yeah. Liz Jackson is one of them, Liz Jackson worked for Tom at his previous practice. I mean, they've worked together for 30 years. And Liz is probably one of the best accountants I've ever worked with. And she did not have an accounting degree. And she sometimes would kind of be down on herself and say, "Oh, I really don't have a degree, but," and she could work circles around most of my degree accountants. So I used to tell her all the time, I said, "I want a whole firm full of Liz Jacksons. I want as many Liz Jacksons as I can get." Great lady, great worker, and believe it or not, Liz has retired. Liz, we didn't think she really would.

She told us she was going to start slowing down. And we really thought because she loved work. She loved what she did. And I think she had really got a lot of value out of her work and made it made her feel good that she was part of our team. But once she got home and wasn't coming in every day, she's like, I'm kind of liking this retired stuff and we've tried to pull her back in a couple of times.

She's like, "No. I'm enjoying what I'm doing right now. So if you guys really need me, I'll think about it, but if you don't, I'm good." So Liz was a key part of that and the other person was Merle as in like Merle Haggard. Merle has been, Merle's worked with me at the old firm was one of my key people at the old practice prior to so remember McGinnis. Merle was just one of those great accountants, a guy who's just loves what he does. He's a older guy. Merle told us a few years ago he was going to retire, but he is still here. Still going full speed. And what's really great about Merle is, to meet Merle. And you know Merle. To some people, he comes across as sort of this curmudgeon-

Dave: Kind of gruff.

Randy: Kind of gruff. Gruff is a good word, but the best thing about Merle is our young accountants here love him.

And so it is not uncommon to see Merle sitting at the desk of one of our entry-level brand new staff accountants here, and he's showing them how to do something. And it's like, you just don't expect it. And so he's got this big heart. He may appear a little crusty, but he's really got a big heart and loves being around here. And I think that's why he can't retire. I think he really just loves being a part of this group and having a place to go where we give him a lot of freedom to do what he likes to do. And he's just been, those two people have been a huge part of our success have helped us build the foundation for us to grow this firm. There's no doubt about it.

Dave: Yeah. And you're right. I've I know both of them, I've worked with both of them and you're right. I really miss Liz. And I'm so glad that that Merle is still there. In fact, I even I don't know if you know this, but selfishly, because I don't want Merle to retire. I'm always feeling like I'm doing what I can to keep him around.

I'll come in with kind of an easy question. I'll say, "Merle, I've researched this online. I've like talked to everybody. There's like nobody on earth that knows the answer to this tax question. I mean, I'm out of options. Can you help me?" He's like, "Well, that's the easiest thing to do." I mean, he just, he quotes the code section off the top of it. He says, "This is all you have to do." And so I do that. And then what's the other thing I tried to do, I just be appreciative, right. And then the other one is, I'll also just kind of sometimes challenge him and say, I'll just say something like "Merle you're, it's like time for you to retire. I mean, why are you still here? Don't you..."

Kind of a little reverse psychology that I think because of the crustiness, just to spite, he maybe stays around, but yeah. Merle is also a reminder. I've been a longtime member of strategic coach. That's Dan Seven's company. One of Dan's theories is that, so Dan is 76 and he plans he's like just starting a new 25 year business plan. Well, he doesn't plan to ever retire because in his mind the word retire means to be taken out of service and he doesn't want to be taken out of service. And one of the great things about your firm is that in traditional corporate America, it's a binary thing. You're either fully employed or you're retired. And it always struck me that there's kind of a balance in there that's better really for everybody, but the individual, the clients, and even society. And it's, cause I know like Deb, she's still working with you. All right. Yes. She sort of semi retired right. Living in Arkansas.

Randy: Yes. I mean she is living in Arkansas. She built a house in the country and it was a family plot of property. She's from the Arkansas area originally. And always had a dream of, of building a house in the woods, so to speak, but she wanted to keep working. And so Deb was one of our partner level people here and it was just great and we hated to see her not be here physically. But she's still working full-time for us, completely 100% remotely from her little place in the woods in Arkansas. She'll send us pictures every now and then a bear's off of her back porch. So yeah, she's in the near Eureka Springs, Arkansas, and it's just, we're very fortunate that we can work remotely in our industry.

Obviously we've proven that here with the pandemic here lately, that you can work from anywhere and Deb certainly is not really not missed the beat. We've missed seeing her physically, but we see her on our teams, staff meetings every week and she's still helping us a great bit.

Dave: And I think that's great. And I think that could even be the game plan for other people, because she's already working from home, so she's already set up there. She's already has her dream house. And in theory, it's like she shouldn't ever retire from that. She should just scale back to whatever she wants to do. And yeah. Yeah. Because I think when I think what was it when social security was enacted? I think like the life expectancy was like 61 years old. So it was a classic Ponzi scheme where they really thought they wouldn't have to really pay out to hardly anybody. And then with life expectancy increase in people's health. Yeah, the whole a 65 just seems kind of archaic.

Randy: Kind of silly now. Right? Yeah. I think you're exactly right. We've always been concerned over here from just a space problem. We own our own facility over here and have had to acquire another small building next to us. And there are times we used to worry about not having enough physical space and for the most part, that fear is sort of gone. Now we are very worried about needing more physical space, so.

Dave: You're right. I hadn't thought about that.

Randy: Yeah. So it's one of the beauties of remote working and technology has completely changed our industry. I love to tell the story here that I firmly believe that the day's coming when I don't know, 80% of the population can drop their tax docents into the feeder of the copy machine and run it through the copier. And the output will be a completed tax return that scanning technology and just technology in general is this may made tax 10 40 tax reps so easy for most people. They're always going to be the folks that have more complicated returns that are going to need help. And certainly those that just, they want to outsource a period. They don't want to spend the time and effort learning or dealing with it.

But we're certainly been pivoting our practice in the last several years to be much more of that advisor to our clients, not just a tax preparer, not just a compliance oriented to where we're really trying to help the client move their business forward and have systems in place and processes in place to help them run and manage their business. And so that's been a big turn that we've been going through in the last several years with, especially as we bring in new clients. That hey, we want this type of relationship. We want to be, we'll do your tax return, but we really want to help you go forward as opposed to looking backwards. It's been very well received by a lot of our new clients and to some degree, a lot more fun for us as well to do that type of work, opposed to just tax returns.

Dave: Yeah, that's really smart because it's clear that 10 forties, if they're not already, they're going to be a commodity. Yep. Yeah. That makes sense. Well, geez. We're now rounding the last churn is we're wrapping up the podcast here. So two kind of remaining questions. The first one is what are some of the biggest misconceptions people have about the accounting profession?

Randy: Probably the biggest misconception, is still that if you're good at math, you're a good accountant. I think that's been something you've heard for years. Oh, you're good at math. Well, you should work in the accounting world. Well, I mean, while math is important and certainly we deal with a lot of numbers, it's not nearly as important as for example, understanding accounting in general. We love to tell our young ones here that we would like them to be involved with the actual keeping of the books and understanding double entry accounting. Because if you understand that in our world, you're a better auditor, you're a better tax preparer, you're better at helping your client put together financial statements. So the fact that you have to be good at math is probably one of those. And then the other one certainly is that the old misconception of what was the joke. The difference between an accountant and an actuary, an actuary actually looks at your shoes instead of their accountant looks at your shoes, their own shoes.

Dave: Yeah, because they're a little more outgoing than the actuary.

Randy: They're a little more outgoing. So they look at your shoes versus their own shoes. Yeah. Actuary looks at their own shoes. There's this common misconception that the stereotypical accountant who doesn't have a personality would much rather just be holed up in their office, amid stacks of books and spreadsheets. And most people don't remember the green columnar pads and that's the conception of most accountants. Whereas I kind of just, if I was to look at my calendar, for example, I mean, I'm meeting this afternoon with a client of ours who owns a lot of oil and gas Wells, and he owns a lot of real estate. And the whole purpose of our meeting this afternoon is to say, okay, what can we do to minimize tax? We're literally half an hour and a half on our calendar, look at his tax situation and say, what can we do?

What are some ideas? And he's got all kinds of personal components of kids and wife and charitable ideas and all these different things. And so the work that we do, and the work that really provides the most value to our clients is way beyond the preparation of a tax return. And so I think those are probably two of the most biggest misconceptions.

Dave: Well, that's good. And so it sounds like your ideal client is that entrepreneur like five 25 million in revenue kind of range, or maybe even a little bit smaller if they're getting started.

Randy: Yeah, they could be smaller.

Dave: Yeah. And then for team members, do you all hire like for specific needs or are you kind of always on the lookout for really special people?

Randy: We are always on the lookout for people, but we tend to hire as we are getting, the workload grows. As people are getting, becoming overwhelmed, we'll look up and go, we probably need another tax preparer. Or we've made a conscious decision to increase our audit and grow our audit practice. So we now have two full time auditors with an audit partner who we have some others that will jump into the audit side and work. So we have definitely hired to fit some needs, but we are always looking. We just hired a young lady here not long ago, we were not looking, and she contacted us. It was kind of interesting. She really had a lot of initiative and a lot of drive.

And we just, we were impressed with her resume and her aggressiveness, if you will. And so let's talk to her. I mean, we're not really looking for anybody, but let's talk to her. And she came in here and just kind of knocked our socks off. And in fact, we usually have a process here where we have a lot of people interview every candidate we bring in and a couple of my mid-level folks had interviewed her. And when she was here, they came off to my office and said, Randy, you need to meet this young lady. You need to come down here and meet her. So we hired her, and she's working out really, really well.

So I would say that we're always on the lookout for talent, because we definitely are learning it is hard to find talent in what we do. Especially from our size. A lot of the accountants and CPAs that come out of the big firms, but they don't want to stay in public accounting. Even though we have a much better work-life balance and a much better culture than a lot of those big firms that when they come out, they just have this idea that they don't want to stay in public accounting. And so they hit the industry. So finding people that want to work in our space has become exceedingly difficult in the last several years. So we find someone who's interested who sort of fits our personality profile. And if we got a spot for them, we'll hire them.

Dave: Okay. Well, that's good to know. So as we wrap up, are there any questions I didn't ask you that you wish I had?

Randy: I don't think so. I mean, I think we've covered everything. I guess one of the things that has been our big plus for us, and I don't know if we've visited about this much, is we did implement the EOS model in our firm, about five years ago. Entrepreneurial operating system, a book called Traction by Gino Wickman, who's also a big Dan Sullivan fan strategic coach. And I think that's where he got his start, but we implemented that in our firm about five years ago. And that's been, I think that's been a big key in helping us really sort of crystallize our values, our focus, our targets, our niches, all those things that system requires has been a huge help for us.

And so we were already a very transparent firm in terms of we shared with our people here, how we were doing and how profitable we were and the bonus pool and those sorts of things we've been very transparent, and EOS sort of just helps you with that even more. Everybody knows our goals. They know we have a scorecard that everybody in the firm gets to see every week as to how we're doing towards making progress. And so that's been a huge plus I think in our organization. I have a leadership team that meets every week. Anyway, that's been one of the things that has really been a plus.

Dave: Oh, okay. Well, that is great to know. Yeah, I'm a fan of that work. And we have also utilized the EOS ourselves. So it will get, well, thank you for pointing that out. Well, Randy, this has been really enjoyable for me, and I really just want to tell you how much I appreciate our friendship through the years and how much I appreciate just the great work you and your firm do. And I feel very appreciative to do business with you all.

Randy: Well, thank you, David. We appreciate it as well. It's been a great relationship knowing you all these years and we look forward to many more.

Dave: Great. Well, that sounds great. So with that, we'll wrap it up and I hope you have a great afternoon, Randy.

Randy: Thank you very much. You too. You take care.

Dave: All right. You too.

David S: Hello, this is David Spray, and welcome to another episode of the podcast. My guest today is Dave Kane. Dave co-founded 21st Century Programming back in 1999, and currently serves as the president. 21st Century Programming is a leading provider of custom software solutions for the recycling and waste industries, and I'm happy to have Dave on the show today. Dave, welcome to the podcast.

Dave K: Thank you, David. It's a pleasure to be here.

David S: Great. Well, I really appreciate you being on the show. I've wanted to have you on for really a while, since I first met you at an ISRI convention. Jeez, I bet it's been about 10 years ago. We share a significant number of clients, and I really appreciate all that you've done for those shared clients to make the IC-DISC really as easy and nonintrusive for them, including the fact that you've been willing to even tweak some of your software to be able to help our mutual clients, so thank you.

Dave K: Well, David, thank you for having me on the podcast. We have developed a really good relationship with your team, and, through the conversations that we've had, I really appreciate all of the guidance and information that you've given me, that's really allowed us and our programming team to ensure that our clients, our mutual clients, are able to use the IC-DISC system to be able to get the most out of it. I've got to tell you, when you first really explained to me what's going on with this IC-DISC and how it can save our customers money, I was nothing but excited, and I really am going to let all of our customers know about it, and really try and push it, because it's such a great cost savings for them, and it provides such great benefits.

David S: Yeah. I agree completely. Why don't we kind of get into some background. Where did you grow up? Where are you from?

Dave K: I'm from southern California. Born there, native there, went to high school there, college there, and lived there for the first 50 years of my life.

David S: Wow, a native Californian. That's a rarity, isn't it? From what I understand.

Dave K: You know, I guess so, but now it's coming the opposite and everybody's leaving California and heading in the other direction.

David S: Sure, sure. In accounting inventory there's a term called FIFO, first in, first out. That would make sense, the folks that have been there the longest are the first ones to leave, such as folks like yourself. So you grew up in southern California. Did you end up going to college in California, then?

Dave K: Yeah, I was a southern California person every which way. I even went to UCLA and really enjoyed that experience. I was an English major, and people look at that and say, "That's kind of a strange major," but I'll tell you, it was one of the best things I ever did. I was always really good with math, always really good with computers. I get science, I get physics, I get calculus. I understand all that, and my ability to explain what goes on or what my thoughts are, I wasn't so good at. So, by being an English major, it really gave me the ability to express myself and to be able to listen to people and understand what it is that they're trying to say and read between the lines. I've got to tell you, it's one of the best things I ever did.

David S: Wow, that is one of the most Ben Franklin-ish stories I've ever heard. Most people that have your natural aptitude in math and science and logical thinking and programming, you would typically expect them to go get a computer science degree, to kind of focus on their strengths, but your willingness to focus on kind of your weaknesses is just really, really interesting. While you were going through the program, did you ever have any second thoughts like you wished you were hanging out with the other computer folks?

Dave K: No, because at the time, I was doing internships in the film business, and learned a lot about how the film business goes. At the time, I was thinking that maybe I wanted to be a writer, and my dad wanted me to be a doctor, like all dads want. I tried to find that balance, and while I was in college, trying to learn to write, I found that the film business just wasn't for me. It was a who you know, backstabbing, political business, and I'm just not that kind of person. It just wasn't for me.

David S: Okay. I can appreciate that. So you graduate, I think, in 1993, if my facts are correct?

Dave K: Yep.

David S: So you graduated, and I guess, maybe the day you got your diploma, you just maybe had this epiphany from above that you need to get into the recycling business. Is that what happened?

Dave K: Nope, not at all. In fact, it's the opposite.

David S: Okay, what happened?

Dave K: My dad had bought his recycling company when I was about six years old. It was in downtown Los Angeles. Basically, he would take me down there on the weekends, and I'd go there every summer, work in the business, and my first job is I was the can sorter. He would take me and through me into a 4x6 full of aluminum cans with a magnet, and he'd give me a nickel for every steel can that I pulled out of the aluminum cans.

David S: Oh wow.

Dave K: Yeah, so that was my first job in the scrap business, and I-

David S: I bet you smelled, I'm sorry. I don't mean to interrupt. I bet your mother must have really appreciated how you smelled having been in a box with beer cans all day.

Dave K: Well, I don't know the answer to that one, but I can tell you, as a little kid, there's nothing more fun than that. Jumping into those cans and swimming around in them, and doing all that nasty, yucky stuff was great.

David S: That is awesome. So you started as a can sorter, and you said you were six when your dad bought the business?

Dave K: Yeah. He had it for about-

David S: I'm just curious, how did he get into it? Had he been an employee for somebody else in the scrap business?

Dave K: No. When he moved to Los Angeles, he went through different odds and ends jobs, and ended up working at a surplus type of store. One of the guys that would come and buy the scrap metal from the surplus store, he became friends with. He goes to my dad one day and says, "There's this company that's in downtown, they're having some issues." I don't want to go into what the issues were, because it's a long story, but the guy needed to sell his business. So he and my dad got together. They pooled their money, partnered up, and they bought the business from the guy.

David S: Wow. Wow, that is a great story. It's always interesting, because everybody's got a little different story of how they got into the scrap business. That's a great one. Go ahead.

Dave K: It's a fantastic business and I really enjoy it. One of the things that I really like about my job is how diverse the business is, how every place we go to is slightly different. The little kid in me still loves watching shredders chew up cars, copper choppers, everything. I enjoy the physical nature of the business.

David S: I can appreciate that. So you started right away as a can sorter, I guess. Right after he bought it.

Dave K: Yep.

David S: And then did you just continue to work part-time there, like all through high school?

Dave K: Yep, all the way through high school, all the way through college. Yes, I did other jobs and odds and ends, but the scrap yard was always there. I'd always spend my summers down there. I'm probably one of the few computer programmers that you're ever going to meet that can sort copper by sight, sort aluminum by sight, sort your stainless by sight, drive your forklift, load your containers, dump your roll offs, and haggle over prices at the scale with your retail customers.

David S: I bet you're right. I bet you are right on that. When you graduated from college, did you consider joining the business full-time, or what did you do then when you graduated?

Dave K: That's exactly what I did. I had actually joined the business more full-time when I was still in school. What happened was I did what a lot of kids do, I took a year off between sophomore and junior year, spent eight months in the film business seeing if I liked it. Hated it, and said to my parents, "Hey, I want to not do this. I want to go back to school, finish my degree." They didn't believe me, and they thought, for sure, when I was going to take the year off, that I was never going back, but I did, and I had the scrap business to work at while I was paying my way through college.

David S: Okay, so then when you actually graduated, did you join full-time, or did you do something else before?

Dave K: Yeah, at that point I joined full-time and worked in the business for a couple of years, until about 1995, '96. Somewhere around there. At that point, my dad sold the business. It was on an upswing. Yeah, it was on an upswing, and he thought it was time for him to get out and retire and move on to greener pastures. Unfortunately, that kind of left me and my brother in a little bit of a lurch, but things happen, and you grow up, and you deal with it.

David S: Sure.

Dave K: Exactly. So my brother went to work for a very large processor in the recycling business in LA called Alpert & Alpert, and he was a buyer for them and I went to work for a, gosh, a high-temperature alloy specialty company, and learned all about the nickel, cobalt, titanium business and the industrial accounts business from these guys, to continue my education, I guess, in the recycling business, but it was also, needed something to do after my dad sold the company. So I went to work for somebody who my dad had been friends with for many years and they brought me on and I worked for them for a few years.

David S: Okay. So this is where the story gets interesting, because, if I'm doing my math here, this was '95, '96, but you started 21st Century Programming with your brother in 1999, so what happened that gave you this epiphany that you needed to create a software business specifically for recycling?

Dave K: So I'm working for this company, and my brother's working for Alpert & Alpert, and I'm not happy. I was thinking I was going to end up working for my dad's business and eventually owning that, and that was going to be my life path. That didn't work out that way, so I wasn't the most thrilled working for somebody else.

David S: Understood.

Dave K: My brother says to me, "You know, Dave," and this is '96, '98ish, time period, and this is right when the dot-com stuff is going crazy. Everyone's saying, "Oh, you've got to dot this, dot-com that." All the world's gone crazy before the first bubble burst. So my brother says to me, "You know, Dave, I see you're not happy doing what you're doing, and you've always been really good with computers." My parents got me my first computer when I was 12. I took to that thing like a fish to water and I don't know what it is, but I speak computer. I can make the dumb little box do just about anything I want it to.

David S: Okay.

Dave K: My brother says, "Why are you wasting your time in the scrap business? The programming business, or the dot-com business, is where it's at." I agreed, quit my job that I was not having fun with. I actually quit my job in the recycling business, and I go back to school, I take a few programming classes, get an understanding of it, and get a job working for a programming company, a fairly large one doing medical billing systems. It was a complex thing and I was part of a very large team, you know, working on things. So me and my brother, we'd get together and we'd have a few beers, and we'd be talking, the world and stuff like that, and he'd be saying to me, "Dave my job is to go around to these scrap yards and try and buy their material, and I'll tell you that they have these horrible computer systems out there." And I'd be like, "George, you've got to see the stuff that I'm working on. I've got all this technology, all these cool things that I can do and blah blah blah."
We eventually said maybe we should put our heads together and do it. So we bought a giant whiteboard, a big, 10 foot by 6 foot whiteboard, and set that up in our apartment that we were sharing at the time. Starting whiteboarding out what the program was going to be, and started putting together a prototype, and I would work on that at night, when I had time. Eventually put together the basis for the program that we're using today. I went and I took that basis, oh, go ahead.

David S: I was just going to ask you, what's the name of that program?

Dave K: We call it the Recycling Operations Manager.

David S: Also known as ROM.

Dave K: Correct.

David S: Okay, so you have this kind of prototype built, and you were doing a side hustle before side hustles were even the thing in vogue, it sounds like.

Dave K: Call it what you want, I call it you gotta work hard to get what you want. I was not happy working for other people. It didn't suit me well. The program and system that I was working on, I had an epiphany one day, this company, huge company, thousands of employees. And they go and they pile everybody onto buses and take them down to this place in San Diego where they rent out this huge convention hall, and the CEO of the company gets up there and he says, "Our number one mission is to unlock shareholder value."

David S: Boy, that gets you excited, doesn't it, as an employee?

Dave K: I know. I'm like, "What the heck does that mean?" The guy gives this whole speech about the future, blah blah blah blah blah, and nowhere in there does he mention make a good product. Do customer support. Be good to people. It's all about how can we manipulate the stock value of this company so that me as the CEO can make a killing?

David S: Gotcha.

Dave K: I went, "Okay, this is not the job for me."

David S: Yeah, I'm guessing that didn't resonate with your somewhat idealistic mid-20s self.

Dave K: Brain.

David S: Yeah, who had some resistance to being employed to begin with. Yeah, I can see where that, okay, so you have this epiphany at the convention center in San Diego, and then what happens?

Dave K: So I'm putting together this program, and I get it to a point where it's usable and gets all the concepts that we have at the time, which, at the time, was really revolutionary. At the time, nobody was using touchscreens. This was 1998. Nobody was using barcodes to do anything. There was a lot of technology out there that people just weren't taking advantage of in the recycling business, so I put together a touchscreen-based system, using barcodes for tagging stuff, using barcodes for scanning at the ATMs and at the cashiers and things like that, and I go to a guy that was a friend of my dad's that I'd known since I was six years old, and I lug in my giant computer with my big, 19 inch CRT, and I plop it down on the guy's desk, and I do a little demo for him. Half an hour later, he says to me, "Dave, I've been looking for software for years. This is the best thing I've ever seen. How much do you want?"

David S: Oh wow.

Dave K: Yeah. So I'm like, "I don't know." I say, "$10,000?" The guy says, "Okay, no problem." He reaches into his desk, he pulls out one of those old fashioned checkbooks, writes out a $10,000 check. Hits it with, remember those machines that go "cha-chunk" and it stamps the amount in there, and hands me the check, and says, "When can you install it?" I said, "I'm going to need a little time to finish it up, but no problem." And the next day, I went into my job and I quit.

David S: Awesome.

Dave K: And I've been doing this ever since.

David S: When did your brother, then, did he end up quitting to join you full-time?

Dave K: Yeah, so what happened was after I got the first sale, got the thing in, my brother went to his boss and said, "Hey, my younger brother is doing this thing here where he's selling it. Is it okay if, when I go to buy somebody's scrap metal, if I mention it to him? It doesn't compete with what we're doing, it's in no way, shape, or form, a conflict of interest." And they said, "Sure, George. You've been a great employee, we love you. Go for it."

David S: Oops. That was mistake one. That was mistake one his employer made, didn't he?

Dave K: Yep. And so George went and got, within a couple of months, we had four more customers. It got to a point where it was more than I could handle by myself, so he went to his boss and said, "You know, it's growing," and he left. They basically said, "Hey George, good luck, and if you ever want to come back, you're always welcome. We wish you the best of luck, but know that you have this as a fallback."

David S: Translation: if this cockamamie idea, this software tool is not going to work, we'll see you in six months, perhaps.

Dave K: Yeah, maybe, but they were very gracious and very nice people. Very good people there.

David S: Yeah, I've had a chance to meet some of the folks there, really great organization.

Dave K: Yes. So we started working on this thing, and soon after that we got more customers and more customers and more customers and now today, I haven't counted lately, but I'd say we're somewhere in the 300 to 400 range in terms of number of facilities that use our system.

David S: That is awesome. How did you and your brother kind of divide up the work? Did you do the programming and he did he sales?

Dave K: Yeah, that's exactly how we broke it up. I type 100 words a minute, I get the computer. I can sit there and make the thing do what I want it to do, so he took the training and sales side of it while I dealt with all the technical issues.

David S: That is awesome. And then, so let me just kind of finish up that story. I'd kind of like to come, just the company history, and then I'll come back. How long did you and your brother, were you teamed up together in the company? Is he still there?

Dave K: No, I bought him out in 2015, after 15 years of doing the business, and he just had gotten tired. He wanted variety and needed a change for his own sanity, I don't know. It was always my baby and always the thing that I really enjoy, and I'm the one that put the most heart into it, not to say that he didn't put heart and effort into it, please don't get me wrong. But after doing something for 15 years, human beings can use a little bit of a break, and a change of pace, and a little bit of difference. That was what it was. I could see he was burned out, and I love him dearly and I want the best for him, so I gave him a very gracious buyout, took really good care of him.

David S: That is, that's a great story. Sometimes doing business with family doesn't have such a happy ending, but that's one of the great things about the recycling business. I look at all of our clients. They're family businesses, and they manage to make the family dynamics work, so I guess you had a good kind of industry role model for making family relationships work in business.

Dave K: Family is important.

David S: Yep. Okay, so that kind of brings us up to the current. You went from that first client writing you a check on the spot to now having three to four hundred clients. Let's kind of talk, exactly what does this ROM tool do?

Dave K: Our software can be viewed as an all-encompassing tool that runs the recycling business. It handles everything-

David S: So is that kind of like an ERP? I'm sorry, I don't mean to talk over you.

Dave K: No no, it's exactly like an ERP system. The only difference is that we're not a true accounting program, and the reason why we went down that path was because we said we couldn't write a better accounting program than QuickBooks, and QuickBooks couldn't write a better recycling program than we could, so why bother trying?

David S: That makes sense.

Dave K: Yeah, but there's a lot of nuances to how accounting and the recycling business works. So what we do is we go into a business, we understand what it is that they're doing, and then we go and we tailor our system to meet them, not necessarily 100% match, because it's not a 100% custom program for them, but to take our template and our base and tweak it, modify it, adjust it, so that it is able to handle the business requirements that our customers have.

David S: Okay.

Dave K: Yeah, and so over the course of 20 years, we've seen every type of business out there, just about. We have customers that are huge enterprises with multiple locations handling hundreds of thousands of tons of ferrous a month, and we have customers that are unique specialty metal places that only handle one type of metal, and process that in a very close to the vest, customized way to maximize the profit that they get out of the singular item. So we've developed a, we've been able to customize and tweak and adapt and create this incredibly flexible product that we can go into just about any recycling business today, have a few tweaks here and there and a few, turn this on, turn that off, flip this switch, process it like that type of configuration and be able to handle just about anything that people throw at us.

David S: That really is interesting. By the way, for the listeners, ERP, I believe that stands for Enterprise Resource Planning software.

Dave K: Or program.

David S: This is like SAP and Oracle. Program, okay. That kind of takes me to my next question: why wouldn't these large scrap companies just go buy something like Oracle or SAP or your smaller clients buy just some smaller ERP tool that's more generic? Why is the created specifically for scrap so important? Because I'm sure these other companies would say, "Hey, we work in any industry. We can make it work." I'm sure they probably tell their clients, "Oh yeah, you can run SAP or Oracle to run your scrap yard, no problem." But what's the problem with that approach, and why do you think there's a need for a specific scrap software tool?

Dave K: I would say that, so there's multiple things you brought up there. First, just to kind of address the SAP question. Gosh, I want to say 10 years ago, Waste Management attempted to install SAP and get it working for their business, and they ended up turning around and suing SAP for over $100 million, because they couldn't get it to do what Waste Management does. That's because recycling is different. It is not like your standard business. The first most common way that I could phrase it is that it's like a reverse retail operation. Every other business-

David S: Reverse retail.

Dave K: Yeah, reverse retail.

David S: What does that mean?

Dave K: Every other business on the face of this planet, you walk into that business with money and you leave with goods. In the recycling business, everybody walks in with goods, and they leave with money.

David S: Ahh, okay. Reverse retail. Gotcha. Okay. That makes sense.

Dave K: Yeah. And then, beyond that, you start to talk about how inventory is managed in a recycling business. It is one crazy difficult concept that companies like SAP are just never going to get. How is it that you buy copper number one and you end up selling copper number one? Or you will have discrepancies, if you're a wire chopper, you bought all this insulated wire, and you're selling copper chops. It's not a consistent manufacturing process. Yes, you buy insulated wire. Yes, you put it into the copper chopper. Yes, chops come out. But the results are different every time. The percentages are different, the time it takes to process it is different, the outcome of the material you get is different, how you pay your supplier for that material is different every time. Whether you're paying them straight for the material, paying them based off of recovery, paying them a formula against the ComEx based off of recovery, there's just a tremendous level of nuances that they do.
And then they take all this metal that they buy, and they run it through many different types of equipment, whether it's the guy sorting brasses and taking plumbing scrap and turning it into yellow and red, or whether it is buying contaminated aluminum and having the guy sitting there with the shear, chopping off the little steel screws that are in the end of your window frames, or pulling the screens out of the middle of the frames. So there's a lot of-

David S: When you say contaminated, you don't mean environmental contamination. You're meaning, it's got a different type embedded in there that you need to separate.

Dave K: Yeah, sorry. I'm using industry terms. Contaminated aluminum is a term used for aluminum that has metal or steel or other types of things on it besides aluminum.

David S: Gotcha. Just so you know, about half of our audience are in the scrap metal business and the other half are any number of other things, so I'm guessing that this episode will be mostly people in the scrap business, but I'm going to encourage folks not in the scrap business to listen to it because it's really such a fascinating industry, so I'm going to periodically kind of try to balance translating some stuff for the non-scrap people, so thank you for letting me digress on the contamination. Isn't there a term that describes that process when you buy insulated copper wire for 20 cents and you end up selling number two copper for $3? Is that what they call "upgrading"?

Dave K: It's called making money.

David S: Okay. All right, gotcha. Okay, so back to what makes the recycling business so unique.

Dave K: Yeah. Along with the complexity that inventory comes with, there is also a lot of nuances for the accounting side of it. What happens is the market will go up and the market will go down, and when the market is down, like we've seen, for example, in the last year, or in what we've seen happen with China and their restriction of importing paper into China and different metals into China, the value of the commodities that recyclers handle drop dramatically. There comes a point where the value that you can get for the recycling material that you handle is less than the cost for you to truck it and haul it and pick it up from somebody and process it.
So, at that point, people start to charge for it, and so then what happens is you get into this really complex accounting where you are receiving material into your inventory, adding it to your inventory, but you're charging the customer. So you have to be able to balance that incoming with the fact that it's no longer a payable and now it's a receivable, and how do you balance that transaction in a way that's easy for the users to do and doesn't require 50 different steps?

David S: Wow, I never thought about that. I've been to probably 100 scrap yards over the last decade, but I never thought about that aspect of it, where, yeah, sometimes they're paying the customer for it, and sometimes the customer are paying them. I knew that happened, but I didn't think that it's for the same commodity, that that can shift from time to time. That's really interesting. I can see where that is difficult, from an accounting perspective.

Dave K: So our system, we built that in, and have it where it handles that in a very slick, easy fashion for people. Another one that happens with accounting and accounting packages that people don't quite get is the payment discrepancies. One of the things that happens in the recycling business is what you sell and invoice your customer for is not necessarily what you get paid, and there's a lot of different changes to that. You may get paid less money, you may get paid more money, and that's based off of the fact that no two scales weigh the same. If you take a truck and that truck weighs 75,000 on your scale, you can drive it down the street and it's going to weight 74,960 down the street. They're going to pay you based off of the 960 versus the 1000, because that's what their scale said it was.
It goes both ways. It goes up and it goes down. Well, when it goes up, an accounting program, you have to make a whole 'nother invoice to handle that change in the fact that it was more than what you originally invoiced it for, and then you have to apply cash to both of them, and it's just a whole bunch of paperwork that needs to be handled in order to do it correctly. Our system, you just say, "Great, I got overpaid," and take care of it, and that takes care of your gross margin reporting and everything, because when you get down to the gross margin and you have to have two invoices, one for $10,000 and one for $8.40, your gross margin calculations start to get a little awkward.

David S: Yeah, I can imagine. I know you'd mentioned the original strategy was to not try and reinvent the wheel with accounting module. Is that still the philosophy of you're just trying to integrate with other accounting systems, and, if so, which ones of the popular ones do you integrate with?

Dave K: Yes, it's still true. Our system is not going to be something that you would use for paying your electric bill or doing fixed assets. That's just not our wheelhouse. But the nuances that go into calculating your profit is exactly what we do. So then, by taking those nuances, we bundle them up into nice, digestible journal entries into the accounting package, and then you get the true information and you get the ability to have the flexibility that our system provides. When you say what packages do we work with, I want to say just about all of them. Across our customer base, we see QuickBooks is the most common, then Peachtree, then Great Plains or Dynamics, I think it was bought by Microsoft. We do have many customers using MAS and BusinessWorks. The whole gambit. That's because we try and be flexible.
We don't want to go in to a new customer or a new location and say, "Hey, you've got to change," we tell them you've got to change a lot of things, and we bring a lot of change with us, but accountants, they like to have their things that they're used to looking at and a way that they're used to looking at the world, and accountants look at things very different than operations guys. So we make all the operations guys happy, handle their difficulties and things that they work with on a daily basis, and then we summarize it and roll it all up and make it accountant friendly.

David S: That really makes a lot of sense. Yeah, that makes a lot of sense. Since this podcast is called the IC-DISC show, I guess I should probably talk about IC-DISC. You've made kind of a great point that I want to just make a quick aside to, that one of the reasons, there's two reasons that scrap metal or recycling is our number one client sector. One is that it's a very fragmented industry that works with us and the other is that, well I meant, of course, a lot of scrap is exported, so that's the second. But the third, and the most important, is when you do the IC-DISC calculation, there's what we call the easy way and the hard way. The easy way, you just group all your transactions together, you look at your total revenues and then you do an apportionment of the company profits, you come up with the export profit, the export revenues, and there's a simple formula you apply, bam, you're done. It's called the standard calculation. IC-DISC tax return is 10 pages long.
But there's another way to do the calculation that's a more advanced calculation, also known as transaction by transaction. In that calculation, you end up doing a gross profit calculation for each individual line item of each individual invoice. At that line item level, we get to cherry pick one of 18 different methodologies to calculate the IC-DISC, what's called the commission amount for that transaction, and then you get to add it up. Well, across all industries, the benefit of doing the advanced calculation is about two to two and a half times greater, but in the scrap metal business, it's like three, sometimes 10 times greater. We just did a calculation, just literally yesterday, for ScrapCom on the East Coast, $50 million in export revenue. The standard calc was about $200,000. The transaction by transaction was $2.3 million. It had an 11X increase.

Dave K: Wow.

David S: Yeah, it's amazing. Part of the reason it works so well in the scrap business is the number one thing that drives the benefit of the transaction by transaction is gross margin percentage variability. In a typical manufacturing operation, their gross margin percentage range is usually pretty narrow. On this type of product, because of competitive stuff and everything else, their gross margin is 50 to 55%. In the scrap business, because you've got fluctuating prices that they're paying when they buy the product, and fluctuating prices when they sell it, they go all the way from huge gross profit percentages to losing money on the same transaction, depending on what time of year it happened.
For example, if copper is $2 and they, or say they bought some copper for $2, and they sell it when copper is selling for $3, big profit, but if copper really does a nosedive and they don't want to hold onto it and they sell it for $1.80, they actually lost money on that. It's that very ability that makes the scrap industry so valuable for the transaction by transaction, but there's a catch, and you know what the catch is, and that catch is that we need to know the gross profit for each transaction and you know as well as I do that many scrap yards, because of the upgrading and the fact that you buy one thing and you sell something else, most scrap companies can't tell you with the push of a button what their gross profit was on any individual transaction. Is that right? You actually would know this better than me. Is that an accurate statement that the average scrap company would make?

Dave K: I would say that for any scrap company not using our software that's probably an accurate statement.

David S: Okay, fair enough.

Dave K: A scrap company using our software, that is available. That's where working with you guys has been very advantageous, I think, for our mutual customers. That is that, once you explain to me the varied ways in which you can calculate the profit and the different data points that go into those calculations, I was able to get that stuff out of our system in a very powerful manner. Once I understood the nature of the data you were looking for, it was a simple, not simple, it was a medium task to go through, create a process for extracting that data, and then formatting it and giving it to you in a way that makes your ability to maximize their profit easiest possible way.

David S: Yeah. That has really been a fun project that we've really started on sometime ago. I think it's really kind of come to fruition, just, I think, in the last few months, hasn't it? From what I understand, you're just really starting to kind of roll it out now. Is that accurate?

Dave K: Yeah, that's true. We've been working on it for a little while, and we just wanted to circle back, now that it's tax time, and see what we could do to give our customers this advantage and make it so that their future taxes are far more pleasant.

David S: Sure, sure. Why don't we just drill into a specific client example? I'm kind of bouncing around. I'm going to come back to a couple other questions I had, but I believe one of the first clients that you tested this on was a client we share in Texas. Is that right? Was this one of the first kind of clients that you tested this new tool on?

Dave K: Yeah.

David S: What was the, how did that help them? What was their response to it? Were they open to the idea? Just kind of talk about that.

Dave K: Okay. This customer in Texas is a fairly good-sized operation with multiple locations. They do a very sizable revenue. I don't think it's appropriate for me to throw numbers around, but they do a very good amount of revenue, and they do a lot of transactions, as any large facility or multiple facility organization will do. They were spending days putting together the information. They'd go through, they'd pull some of our reports, and then try and put it together in a way that made sense for you, David, to be able to input into your systems. It was a very laborious process and once you and I got done, or once you got done helping my understanding of it all, I was able to put together a small application that they use now, and the time that used to take them days to put together now takes them just a couple of hours.
They've been able to go through and take the 1000+ transactions that they did in the year and quickly categorize them as export or domestic, and then have the system take each individual one of those and calculate, I don't want to say we do all 18 of the different ways in which you calculate the process, but calculate at least, not 15, but I think it's like 12 different cost factors for you to be able to use in your system. It's just a matter of put together this crazy data extract, once we have the information of what's export and domestic.

David S: Yeah, that is awesome. I've got to tell you, I was excited when you were doing this, just from the client side. I was excited about that. But then when I discovered that you actually then configured it uniquely so that it plugged straight into our system, the fact that you did that extra effort, I really appreciate, because you not only helped the client, but you helped us, which ultimately helps the client, because we can turn the work around quicker. Once they get us everything, they're usually at the end of the process. The corporate return is done, they're just waiting for that final IC-DISC number. So you doing that is going to help us turn that work around in maybe half the time that it would normally take, so I appreciate you going to that extra step.

Dave K: Well, I'm glad to save you some time, but ultimately I want to save my customers the time.

David S: Sure.

Dave K: Putting together all this data can be a timely, time-consuming process. If you want to do just the standard method and not maximize your return on this, well, then it doesn't take you much time. But if you want to have an elevenfold increase in the benefit, then it's a no-brainer to do this. Then, for our existing clients, we're looking at this as really just an add-on to our system, and we're not charging them anything extra for it. Our desire is to make this data extraction easy for them and help make them money.

David S: That's great. Because the tool was specifically written for our software, it doesn't really work very well, my understanding is, if they're not using our software. So for clients that we share already, which are a sizable amount, that's great. It just kind of plugs right in. I don't know if I've mentioned this to you, because this has been evolving, but for your clients who have an IC-DISC that are not customers of ours, we are willing, because they're already a customer of yours, to do an assessment to where they can produce that data or you could help them produce it. We can run it through our system and we can give them an assessment and kind of what our findings are. The idea there is that a lot of these clients you have, that have an IC-DISC, are really only capturing a fraction of the value, and people are inherently skeptical. So this gives us a chance to actually calculate to the penny what they're looking at. So that's something we're doing specifically for your customers.
Obviously we're trying to ultimately, hoping that we can take over the management of their IC-DISC, which is why we're doing this for free. But just as an aside, in case clients ask you about this, what you will find is most of your clients, the IC-DISC work is being done by their general CPA firm, and oftentimes they're the only IC-DISC client that the CPA firm has. It's something the CPA is not thrilled about doing the work, because it's so specialized and they don't really have that specialization, but they don't want to refer it to one of their competitors, so oftentimes the CPA firm is stuck. We find that, frequently, if the client is using the CPA firm to do the DISC work and they have us take over that, we find it's a win-win for everybody. The client typically triples or more their tax savings. The CPA gets out of doing the work they didn't really want to do. We pick up a new client. I give you kind of some of that backstory as you're talking to clients. That's why we're really excited about even working with folks who are not currently a client and why it's really not causing any problems for their setup, because their CPA probably didn't want to do it anyway. But go ahead, I'm rambling on.

Dave K: No, what I was going to say, David, is that what you provide is really a best of breed service. You're not there to replace their CPA< if I understand correctly. You're there to make their CPA's job easier.

David S: Exactly right, yeah.

Dave K: Through this specialty, you can go in and you can provide them a benefit that they may not be aware of, and maximize that benefit in a way that somebody who's a general practitioner isn't able to do. You go to the doctor, sure they can tell you there's a problem with something. "Oh, you've got a problem with your heart." Okay, great. Then you go to the specialist, and the specialist is the one that gives you the detailed understanding and diagnosis, and that's kind of like you. You're the specialized doctor for this IC-DISC.

David S: You know, that's a great way to summarize it. We have about the same number of clients as you do, about three to four hundred. Whereas all of yours are in the scrap industry, only some of ours are in the scrap industry, and even though scrap is the biggest industry count, it's still, a significant number of clients are not in the scrap business. So one of the things that makes us interesting or different is that, to the best of my knowledge, we probably manage more IC-DISCs than any other firm in the country, and we're also the only firm that does only IC-DISC, and that's just like you do only scrap business, we do only IC-DISC. We think that narrow specialization sets us up to better serve our clients and make the necessary investments, because we've got our own technology and intellectual property that we've developed over decades, just like you do.
Okay, yeah. That's really interesting, some of the collaboration possibilities that may yield. I want to jump back to a couple other things in regards to what makes the recycling business unique. It also seems like the scrap business, it's got its own language too, and being able to speak the same language as them is important. Can you talk a bit more about that?

Dave K: Yes. There's actually multiple layers to that, and what we do with businesses. So yes, understanding the scrap business is critical for what we do. The ability to know that when somebody's talking about moving cans around, that that is not actually aluminum cans, but they're talking about rolloff bins, or other type of transactions. We go and we understand that, but when we go into a business, what we do is we provide a common language for everybody in the business.
For example, a lot of people us the word "invoice." What is an invoice? Is an invoice something you pay, or is an invoice something you get paid from? When your supplier, or even the word "customer." What is a customer? In the scrap business, a customer is usually the person that they buy from, and the customer is also somebody they sell to. How do you know who you're really talking about when you just use the word "customer" and "invoice"?
We come in and we say, "No, no, no, no, no. You have suppliers and you have customers. And then you have purchases and settlements, and then you have invoices." By getting everybody to use the exact terms for what it is that they're trying to say to each other, we find that they're then able to communicate so much better and so much more efficiently and someone's saying, "Hey, did you get that invoice?" What does that mean? Now they know, "Did you get that invoice" means that you were supposed to send an invoice to somebody so that you could get paid. Not did you get that invoice from your supplier so that you can pay them?
So we do a lot of specifying how they use our system and how the terms that they use play into the system, so that once they get that, they can then do things so much faster and more efficiently.

David S: Okay. Yeah, I think the bottom line takeaway is your tool is a product developed by a scrap guy for scrap guys, really is the bottom line.

Dave K: Exactly. When you talk about our competition, we came at it from a completely different angle than our competition did. We're scrap guys. We grew up in the business, so when we started to tackle the issues and problems that people have in the recycling business, we looked at it from the operations side. You're running your business, you do these things daily. You have to have this information to run your business. That's why we call it the operations manager program.

David S: Right, right.

Dave K: Our competition comes in and they say, "But we're accountants. We made an accounting program that also does recycling." And it never works. It's a completely different way of looking at the world. Accountants look at the world in a very specialized way, and recyclers look at the world in a very specialized way, and if you try and put an accounting program into a recycling business, it's a square peg in a round hole. It just never works out right, and we end up always replacing people that said, "Oh, we thought we could just do it with QuickBooks." Nah, QuickBooks is a great program, but without our layer on top of it, it's not going to make sense and it's not going to handle what you do.

David S: Yeah, that makes perfect sense. In fact, speaking of that, I'd like us to maybe talk about a client success story that comes to mind. It doesn't even have to be IC-DISC-related. But, before you do, I want to just mention that I had a guest on the podcast, oh, about a year ago. I was looking at some of our records, and I think they're clients of yours. Do you know Charlie Roe with Gateway Recycling?

Dave K: Oh yes, I know Charlie very well. Gateway Recycling in North Carolina is a fantastic business.

David S: Yeah, he sold it a few years ago, and he was kind enough to be on the podcast, because not every scrap client is really comfortable talking about some of their tax strategies, and IC-DISC is a tax strategy. But, because he had sold the company, he was much more willing to be really open about that. For anybody listening to this, if you just go to some of the other episodes, I think it was about episode 11 or 12. It's not that hard to find, but if you want to hear more from a client's perspective, reach out to them.
How about, I know you've probably got a bunch of different customer success stories. Why don't you pick one, and one where you're at liberty to use the name of the client. Maybe somebody who you've used in advertising materials for stuff, and either talking about maybe problems they had with another vendor, how long it takes to close. Just trying to keep up with a bunch of paperwork. Does one example come to mind that you could talk about?

Dave K: You know, I have a million examples, but I guess I'll just randomly pick one. We recently set up, last year, a company called American Recycling in Modesto, California. They were kind of an interesting project. What happened was they had bought one of our competitor software, and our competitor comes in there and they have this slick looking, I don't even know how to phrase it other than this slick looking thing. It's all dressed up with the fancy this, fancy that looking stuff. And it does nothing. It has math problems, inventory problems, all these things, but the guy who sells it is one of the slickest salesmen you've ever met. One of those guys who can sell ice cream to Eskimos in the middle of winter, and they promised them the world. One of the things that we hear all the time is people always say, "Our system does everything that 21st Century Programs does."

David S: Okay.

Dave K: It's true, and that's because we've been out there for such a long time. We're well-known within the industry, and we have an incredibly flexible, powerful program. But our program has been around for 20 years, so it looks a little bit dated. Big deal. It may look dated, but you know what? It is the workhorse, and it will do everything that you need it to do and it's guaranteed to do it all, because it's been doing it all for so long.
Well, these guys thought that the new slick looking thing with the slick salesman would do them better, so they went and they bought that package. They had a nightmare experience where, for a year, they tried to get the program in, and they could never get the data to come out correctly. They ended up having to hire more people into their business instead of getting rid of people, which is what a software system should do. I get this call from the owner, and it just was really a sad call for me, because he just was in need of help in a bad way, and that these guys just did him wrong in so many ways, just treated him poorly and kept promising and never kept a single promise.

David S: Wow.

Dave K: Yeah. He's like, "Dave, you've got to help me out." Within a month, we basically stopped the presses on a bunch of other things that we were doing and got in there and got this guy straightened out, and now, a year later, he moved out of Modesto and is running his business from his new home in a completely different state, thankful that he was able to let go of people and monitor and manage his whole business remotely now, and have confidence that the numbers he's getting are correct, and that he's got a partner. Earlier in the podcast we talked a little bit about family, and for me, family is an important thing. I look at all my customers as part of our family, and when I hear somebody's having a bad experience or something like that, it really gets to me and I want to try and make sure that they're taken care of. Even though this guy was wronged by somebody else, we still really tried to do everything we could to make his experience professional, quick, easy, and painless.
One of the things that he said to me was the previous vendor would say statements like, "I have bigger customers" or "So and so does it like this. Why don't you do it like that?" My response to that was it doesn't matter. You're my most important customer. If I'm on the phone with you, you're the most important one, because getting customers is really hard, and keeping customers is really important, and making sure that they're happy and their needs are met, it's something that we really try and go above and beyond.
You may have a software system now, sorry, little sales pitch.

David S: Sure.

Dave K: A software system now, but it's never too late to change the road you're on.

David S: Okay. I also want to just make sure I'm clear on something and our listeners are. The scrap industry has an annual convention every year, usually in April, frequently in Las Vegas. The acronym is ISRI. I forget what it stands for.

Dave K: Institute of Scrap Recycling Industries. As an FYI, I've been a member of ISRI actually longer than it's been called that. When my dad was in the business, it was called ISIS.

David S: Oh yeah.

Dave K: And before that it was the VFW. So I was a member of ISIS, which is a horrible thing to say in today's terrorist world, but back when it was the Institute of Steel and Iron something or another.

David S: That's awesome. I want to really kind of point out, the convention in 2020 was canceled because of COVID, but I remember, when I was there in '19, I was just walking around the convention hall, and it seems like every year there's a new scrap software company that pops up. I was just talking to this company because for me, my fiduciary duty is to my client, so I'm always trying to be knowledgeable of what's going on.
I talked to the software company and they were brand new, new to the scrap business, but their approach was, "Hey, we've kind of leapfrogged the old technology." Everything was cloud-based, and you can access everything on your phone or a tablet. On the surface, that sounds pretty cool. But then there was a client that happened to walk by, and I was showing it to him. He's like, "Okay, okay." And then we left, and I'm like, "Hey, that software is kind of cool. What do you think?" He goes, "You know, it reminds me of," and I forget the brand. He goes, "I've got this brand of equipment," and I forget if it was Caterpillar or SENNEBOGEN, that he said, "We just have used forever. It's reliable, it works. Every year somebody's got some newfangled, high tech system, and it just doesn't work. Give me the old reliable orange or yellow iron that I know works, that's got interoperability, and I don't care that it's not the fanciest looking thing." That comment made me think that kind of, maybe, it sort of describes your software in a way, doesn't it?

Dave K: Yeah. We are reliable, we've got a strong foundation. We're like the pyramid. We've been around a long time, and we're going to be around for a long time. There's no pushing the pyramid over. It's there, it's solid, and it does what you want it to do.

David S: Gotcha. I appreciate it. Well wow, we have really covered a lot, and I cannot believe that we're already an hour into this. I guess it's time for us to bring this fun episode to a close. Just a few wrap up questions. One is: are there any questions I didn't ask you that you wish I had asked you? That you just feel like needs to be commented on?

Dave K: No. You know, it's kind of funny. You're talking to me as if this is information about me, and I look at it as really it's information about what we can do for people. At some level, yeah, it's nice to talk about me and that, but that's not who I am. What I'm about is helping our customers and helping the people that we serve, and that if anybody listening to this can get one thing out of it, it is that through this IC-DISC you can save a ton of money. I don't like paying taxes to the government, I think it's too big, and all those other issues, so if I can help people save money and get this tax credit going, then that's what I want the most out of this podcast.

David S: Awesome. Well, I really appreciate that. If somebody is listening to this and they're interested in learning more about your company and how you can be of help to them, or your product, what should they do next?

Dave K: Either give us a call or check out our website, but we're going to be redoing the website soon.

David S: That's okay.

Dave K: But they can give me a call, they can send me an email.

David S: What's the phone number? Yeah, what's the phone number they should call you?

Dave K: Yeah. It's 21st Century Programming, and it's 562-981-1030. We've always got people there to take calls. We're on both the East Coast and the West Coast. We've been doing this a long time and happy to help anybody we can.

David S: And then your website is?

Dave K: It's www.e21cp.com. So it's e21cp.com.

David S: Got you. And then your email address you were about to mention, if they want to just reach out for the man in charge.

Dave K: Yeah. Just dave@e21cp.com.

David S: That is very easy. What does the "E" stand for? I know what the 21st Century Programming-

Dave K: It stands for 20 years ago everything was e-this, i-that.

David S: Oh, I see. eCommerce, it was all about eCommerce.

Dave K: Someone had the 21cp domain before me, so there was nothing I could do about it. That was the only thing, because we also have the domain 21stcenturyprogramming.com. That's just a lot to type.

David S: Sure, sure. No, it is. I like how short it is. Well, Dave, thank you again for making time to be on the show. I really thought I knew a lot about your company, but I must say I learned so many things, and it's just been a treat to kind of hear your philosophy and where you came from, and how you approached it as a business as one scrap guy helping other scrap guys, so thank you so much for being on the show.

Dave K: And thank you for having me, David.

David S: All right, you have a great day.

Dave: Hey, Ron. How are you today?

Ron: Hey, David. Doing great, man. How are you?

Dave: I’m doing good. Well, we are live. Thank you for joining me on the IC-DISC Show.

Ron: Absolutely. Thanks for having me.

Dave: So the last few of these I’ve read the bio of the guest. I’ll be honest, that’s not my favorite way to do it. Since I don’t have a bio for you handy, let’s do it the way I like to do it. So let me introduce you, and then I’ll ask you some questions about your background. Then we’ll bring this up to speed. Thank you for being on the show. Ron Hallmark has been a long-time resource of our firm. He’s with a firm that specializes in property and casualty insurance for the scrap metal business. Ron has worked with many of our clients through the years and has done a great job. So we’ll just get right into your background. First of all, tell us who you’re with and what you guys do.

Ron: Sure, David. Again, it’s Ron Hallmark, and I am a property and casualty insurance agent with Hibbs-Hallmark & Co. We’re an insurance company out of Texas. We work all over the country. Specifically, I specialize with scrap metal dealers providing risk management services, insurance policies, different types of services to that industry, the name of our program is Recycle-Pro Insurance, and been doing it about, gosh, 25 years now.

Dave: That’s excellent. I believe you’re a native Texan?

Ron: Yeah, I am. We’re actually, gosh, I think I’m fourth generation. My son and daughter are fifth generation Texans, so, yeah, proud of that, obviously, as most Texans are.

Dave: Awesome. Yeah, I fortunately am a naturalized Texan. I got here as quick as I could. I believe we both went to the same college, the University of Texas in Austin, is that right?

Ron: Hook ’em Horns. Sure did.

Dave: Yeah.

Ron: See, what’s surprising is, or at least in the southwest part of the United States, a lot of our customers went there as well.

Dave: Yeah, the tentacles run deep. What is it about the scrap industry that interests you so much that you’d choose to specialize in this industry over others?

Ron: David, I know you can attest to this. It just gets in your blood. It’s just such a unique industry, as anyone associated with it knows, and more importantly just such unique individuals that belong in it, to the owners of the companies and so forth, and, as you know, people of such great energy and drive and just kind of bigger than life. Yeah, just a great group of people. It’s the industry itself and the people of the industry that excite me the most about it and draw me to it the most.

Ron: One of the things I think is the neatest part of it is the multi-generational aspect of the scrap industry. I’m sure you can attest to, third, fourth, fifth-generation families own a lot of these companies that make up our customers. I mean what a blessing to get to know some of the older gentlemen that a lot of them have passed away since, but when I first started 25 years ago, got to know them, visit with them at their offices, and now I’m seeing their grandsons and daughters and great-granddaughters and great-grandsons operating the businesses now. Being a big family person myself, that’s just something else that draws me to it. Of course, the new blood coming into the industry as well, highly educated young people. It’s exciting times.

Dave: Yeah, I would agree. That’s one of the things I enjoy. Although we’re not 100% focused on the scrap metal business, it’s our largest industry sector. Yeah, that multi-generational aspect is really neat as you can stay with the same company for multiple generations, and after a while you start to feel like you’re part of their family as well.

Ron: It’s sad to see some sell out to larger companies. I know that’s part of the process. Even for people like us it’s kind of a loss when that happens because you hate to see it go.

Dave: So all your decades of experience in the scrap business and your focus on the scrap business, how do you think that benefits your customers?

Ron: Well, I think in a lot of ways, again, it just gets back to the unique aspect of the scrap industry and the unique risks that they all face. I wrote my first scrap account, I was trying to think of this the other day, around 26 years ago, and I’ve never looked back, just been hooked since. It’s so complex and so unique. One of the things is we’ve developed exclusive insurance markets. Because what happens is around the country a lot of scrap dealers just use their local agent in town, who are great agents and have great services, but they don’t truly understand the scrap industry. They don’t have that intimate knowledge of the industry. That’s really important because of, like we talked about, the unique risks that are facing their industry, and you have to have specific insurance coverages for that. Over time, over the 25, 26 years we’ve been real instrumental in developing some of these coverages that are unique to that industry, that really cover the risks that your traditional policy and agents are not able to. That’s been a big part of it.

Ron: The other part of it we’ve seen, too, is you buy insurance to cover claims, and it’s not unusual for an insurance company to try to deny a claim, sometimes rightfully so and sometimes not. But having that experience and understanding of the industry allows us to be that advocate for our customers to fight those cases. It’s very common that we’re able to get claims that are initially denied overturned and paid. Again, it’s because of that unique knowledge of the industry and how it works behind the scenes that we’re able to use that and be their advocate.

Dave: I’ve heard firsthand stories of our clients that you have served them in that advocacy role. What types of products and services specifically do you provide to the scrap industry?

Ron: As you mentioned earlier, on the outset obviously, the first part of the answer would be property casualty insurance policies. That would be general liability, worker’s comp, property, equipment, auto, commercial auto, umbrella, and pollution. We’re going down the list of insurance policies. Again, our job is to determine the needs of our customers with them, find the right policies to fit their needs, design them in a way that covers those needs.

Ron: But then beyond that, too, what makes us different, sets us aside, I believe anyway, is all the other services we offer. We really look at it from a holistic approach. We’re not there just to sell insurance. We’re there to protect them, yes, through insurance policies and risk management, but also we do things that help them get employee safety programs set up, fleet safety programs set up, all different types of risk management services we provide them. If they do, let’s say, some demo work and contract work, we review contracts. We analyze their work comp experience modifier, which very few agents do. A lot of times we’re able to find mistakes in that and actually get it corrected and sometimes get refunds for our customers.

Dave: So it’s a lot.

Ron: We look at the big picture, and we’re problem solvers. We try to help them anyway we can even if we don’t benefit from it.

Dave: No, that makes sense. You kind of touched on some things you do that are above and beyond in terms of safety programs and contract review. I think that dovetails into my next question of, what are some of the exposures or risks that are unique to the scrap industry that your background helps you better advise your clients on?

Ron: We kind of alluded to that earlier. One of my very customers 25 years ago or so, I remember very vividly when we visited with him he was complaining to me, and I say customer, he was a prospect of that time, but I was listening to him. He was explaining what his frustrations had been, and he tried to communicate that to his current agent at the time for years. He said, “Ron, I’m a non-ferrous dealer. The insurance industry charges a rate multiplied by my gross sales.” He felt it was unfair, and I agreed with him, that his counterpart who’s a ferrous dealer, his revenues are much lower compared to the non-ferrous guy just because of the price..

Dave: On a per pound-

Ron: Yeah, for process.

Dave: On a per pound basis, yeah.

Ron: So he’s looking at the non-ferrous guys and he knows he’s being charged the same rate that the ferrous guy is, but the non-ferrous guy has much higher revenues. Both of them might not do any difference in tonnage or profits, yet the non-ferrous guy’s getting penalized because the insurance system is set up to charge by your gross sales.

Dave: By revenues, yeah.

Ron: So I went to an underwriter at that time and was able to convince them of the situation, explained it to him, educated him on the situation, and we actually got a credit applied to his rates to bring it back more in line with what the ferrous dealer would be. So from there we piggybacked on that over the years, and we looked for opportunities and developed markets that would based on your liability instead of on gross revenue, they’d base it on, say, number of employees or tonnage or payroll or some-

Dave: I see.

Ron: … exposure other than sales. That’s been a real big plus over the years.

Dave: When you say you developed markets for products, tell me what that means exactly?

Ron: Well, it started off years ago markets would come to us, and we would help educate them, and we would work with them to design endorsements and different additions to their policies to cover some of these unique needs of our customers. A couple things we hadn’t mentioned, another would be the risk of a scrap metal dealer unknowingly purchasing stolen material, and that’s a big claim we see quite a bit these days. What can happen with that is the insured will sell it off, will shred it, bale it, they’ll change the form in some way where the rightful owner comes back, he cannot return that to the rightful owner in the same form it was in before. Then at that time then they’re legally liable for the value of that material that they purchased that was stolen. That’s been something that was not traditionally covered by insurance, and over the years-

Dave: I see.

Ron: … we’ve helped develop endorsements with insurance companies that address that, that do cover that. Another would be impaired properties coverage. That’s where a scrap yard, they sell metal to a mill, and it’s supposed to meet certain specs or chemistry. If it doesn’t meet that, it can actually cause what we call a bad melt or a loss of heat at the mill. That’s a financial loss to the mill that they turn around and charge that back against our scrap customers. Again, that’s a coverage that we helped develop over the years. There’s only a handful of companies that have it available. One of the greatest things, to be honest with you Dave, is just this experience and everything, you know how it is the business where insurance companies know we know what we’re talking about, we know the industry, and so they come to us and want to develop programs with us. They want to give us exclusive rights to programs, etc. So all that comes back to help our customers in just better pricing and better coverage. So those, they’re just benefits.

Dave: That makes sense. The world is becoming more and more specialized, isn’t it?

Ron: It is in so many industries, but, yeah, definitely in this one. The savings in price, I hate to… Price is one of the things that always catches the attention of, of course, customers and prospective customers. It’s not unusual at all, believe it or not, to walk in and actually say people cut their insurance in half, premiums in half.

Dave: Wow.

Ron: Sometimes that’s surprising to people, but it really just all gets back to being with the right insurance company, having access to that right specialized insurance company, and it really can make that dramatic difference on pricing. Then we quickly want to not focus so much on the price but get more into the coverage. Because it doesn’t matter how much you save, if you have uncovered risk or uncovered claims, excuse me, of $100,000 that isn’t covered because you didn’t have the right kind of policy, well, there’s no amount of savings that really justifies that.

Dave: No, that’s helpful. Well, my favorite part of doing these podcasts are getting into the real life stories. Could you give some examples of companies you’ve helped? Obviously, you’re going to do this anonymously, but just to give us a sense of the type of company and what the issue or opportunity was, and what you were able to do to help them.

Ron: Let’s see. I think one of the first ones that jump out in my mind is we talked earlier about being an advocate in a claim situation when an insurance company initially denies the claim. We had one customer that sold some material to a mill, and the mill came back and charged them for a loss of heat. Their reasoning for it was that there was too much lead, too great of a percentage of lead in the chemistry or mix of metal that they sold the mill. So the insurance company, pointing to the exclusional policy for total lead exclusion, denied the claim. Well, understanding the industry and understanding insurance, of course, we understood that the reason for that exclusion typically is for a contamination issue. This was not a claim of contamination for the mill. This was a claim of too greater percentage of lead, not a question that lead was in there but there was just too much of it. It could have been too little of lead as well. So we were able to bring that to attention and educate the claims department of this insurance carrier and get that overturned and paid.

Dave: Oh, okay.

Ron: So that’s one example. Let’s see. Another one I love is I have fun with this because anytime we save people a lot of money and problem solve for people that’s what this is all about, and we have fun with it. We had one customer or actually a prospect, we started working with them, and we started looking at his work comp, his experience modifier, and we just noticed some things didn’t look right on it. So we sent it to one of our consultants. They reviewed it and sure enough found out that there was a mistake on their experience modifier.

Ron: For those who don’t know, experience modifier is a modifier that is added to your work comp policy that either increases or decreases your premium, so if there is a modifier that is a debit modifier, like a 1.2, that’d be a 20% increase of your premium based on that modifier. That was a situation similar to what they had. They were being charged about 20% or 30% more because of this incorrect modifier. So we got it corrected, and not only got it corrected for the future, but we also got him a refund for about $30,000-

Dave: Oh, wow.

Ron: … because they go retroactive and correct it back two or three years. So that was fun to actually see that refund come to them. Again, that’s something we don’t benefit off of other than bringing these value-added services to our customer. I don’t mean to toot your horn or I do mean to toot your horn, but to give you another idea of services we bring to the table and how we look at the holistic picture of our customers is we have a customer on the East Coast, again, we may not name but you know who it is. We start talking to them, and having met you at conventions and gotten to know you I knew what you offered. Sure enough he looked at me with a glazed look, wasn’t real familiar what I was talking about, and I had you call him. I think you ended up getting him a six-figure return, refund.

Dave: A refund, yeah, yeah.

Ron: Yeah, so that was fun. Again, that’s not something… you don’t pay us. We make nothing off of it monetarily. But it’s good to see our customers benefit from that. So we bring a lot of type of things like that.

Dave: Well, and you talked about that specific client, and there have been others too, but that specific one, the most fun for me, and I don’t know if you even know this, but that client was so happy with us. He was really just gushing his appreciation. I said, “No, no, no. I mean we just did the work. Ron did the hard part. Ron’s the guy-

Ron: Well, I appreciate that.

Dave: … you should be thanking.” Every year we try to do that. When they express their pleasure with the result, we always say, “Now, remember who it was that originally connected us, and remember, don’t hassle him just because your rates might have gone up this year through no fault of his.” That’s always fun to be able to help a client with another service.

Ron: Here, Dave, you just mentioned something about rates going up. I’d be remiss not to hit on that. We’re the advocate of our customers, and I think you know me well enough to know that. But the other thing about being experienced and having access to some of the markets is we represent our customers. We do not represent the insurance companies. So we hitch our wagon to our customers. The point of that is insurance will always be going up or down depending on what’s going on in the industry and in our economy. But we do not want to rest on one company, and so every year we aggressively market our customers’ insurance so they don’t have to. In other words, we’re not just going to ride one company year after year and let that premium creep up. We’re going to hold each company accountable. We’re going to force the pricing to be as low as possible, always looking for the best price. That’s something that a lot of agents don’t do simply because they don’t have the choices of insurance markets, they don’t have access to the insurance markets that we do. But we do, and that’s our responsible to make sure we honor that and get the best pricing for our customers.

Dave: I’m glad you mentioned that. I hadn’t really thought about that aspect of it, but that makes sense that it takes more work on your end but-

Ron: Oh, quite a bit more.

Dave: … it’s the best thing for your customer in the long run, what’s best for your customer, and so coming back to you in terms of greater loyalty and retention, right?

Ron: Well, my integrity is very important to me. I don’t want a customer to ever think that I was not giving my 100% to protect their premiums, give them the best coverage. If I just sat and did market and just rested with one insurance company, then they would have to question their integrity. I never want that to happen.

Dave: About some other examples?

Ron: Let’s see.

Dave: Either where you’ve saved somebody a bunch of money or got them a lot better coverage or maybe both.

Ron: Really, Dave, I can’t tell you how many times we walk into a situation with a new prospect where we just slashed their pricing, and that’s the first thing that jumps out to them. That’s just the nature of the business. The thing we’re so proud of is that we’re not only able to do but to greatly increase their coverage. A lot of customers don’t really appreciate that until they have a claim. When that unique and unusual claim is covered because of the specialized insurance we placed on it, that’s when I think they notice it and can really appreciate it. But until then, it’s basically the price savings.

Ron: But I can’t tell you how many, going back to the conversion, how many of those claims we’ve had where, again, typically most insurance policies don’t cover it. Ours do. We had one in north Texas where someone purchased a truck, a trailer actually, a truck tractor trailer and did not know it was stolen. They crushed it, shredded it, whatever they did to it. Then the rightful owner came in and said, “That’s our trailer. There was $900,000 worth of electronic equipment in the back of it.” Of course, our customer said, “Look, we did buy the trailer. There was nothing in the back of it.”

Ron: It’s just those kind of nightmare situations that can pop up. Luckily, we did have coverage for them that took care of them in the situation. We had another customer, a similar situation, where they were buying from industrial accounts, and they had customer’s employee who they knew, they’d seen him many time there’s in a uniform, was bringing equipment to them and did not know it was stolen. Trusted the guy. They had been buying from this customer forever, and come to find out that it was stolen equipment to the tune of about $120,000.

Dave: Oh, wow.

Ron: Luckily there was coverage there for it, conversion coverage took care of that where, again, most policies would not, and they would just be $120,000 out of the customer’s pocket without that coverage.

Dave: Wow. That’s-

Ron: You can kind of tell I have fun with that. I mean it’s kind of cool to see the coverage that we put in place come to fruition really help the customers out.

Dave: That’s good. You’d kind of touched earlier on that sometimes customers may not really understand what you do or just misconceptions they’ll have. What are some of the biggest misconceptions that you’ve seen that now would be a great time for you to correct those misunderstandings?

Ron: I think probably the greatest misconception, and I understand it, in all of our businesses, we’re just moving so fast and it’s just such a crazy world we’re in, and I probably even do it to some extent with my homeowners insurance, which I shouldn’t because I know better, but I think the biggest misconception is that it’s a commodity. That it’s just something they buy because they have to have it, a bank requires them to have it, whatever it might be, and they don’t fully appreciate and understand the benefit it’s bringing to them. It’s certainly not a commodity whatsoever. I mean the very survivability, if that’s a word, of a business can rest on whether you have the correct insurance in place.

Ron: Again, we see claims… We’ve had a situation where an employee was crushed and killed on a scrap yard. I think that ran into a couple million dollars. Well, if he had not had the right insurance, could his business have survived? I’ve had other businesses where a tornado took the business out. Again, if they didn’t have the correct kind of insurance, could they have recovered that, or would the loss of income been so great that it would have put them under?

Ron: It’s very critical and very important and it’s just so important for customers to actually, first of all, trust and understand that we’re on their side, and we’re not trying to make money. We are there to help, be their advocate, help them identify what the risks are, be a consultant, and then address those risks. We’ll put together the plans that will cover those risks, protect their businesses, and then it’s up to them on doing a cost/benefit analysis of what they want to insure and what they don’t want to insure. Everyone takes a certain amount of self-risk, and we understand that. Again, our job is to help them understand what those risks are and find ways to cover if they want to. But probably the biggest thing is being a commodity.

Dave: If somebody’s looking for a new insurance broker and they’re in the scrap industry, what are some of the questions you’d suggest that they ask the broker they’re talking to or that they’re interviewing?

Ron: That’s a great question. Probably two main things just jump out to me. First of all, what experience do they have with the scrap industry? Maybe question them on certain details of the industry and judge their knowledge of industry would probably be number one because having that base knowledge can be very important in a lot of ways. Because they’ve got to talk to underwriters. They’ve got the insured to an underwriter or to claims people, to a variety of individuals on the other end, and they’ve got to understand the industry to do that. The second question I’d ask is, what other scrap customers do they have? Do they just have one customer, or do they not have any? Again, that will tell a lot about their experience, not only knowing the industry but what access they may have to specialized insurance markets. All that’s going to benefit the customer. But definitely find out who else they insure that’s in the scrap industry and then just pick their brain and what their knowledge is of the industry.

Dave: Because it seems like there’s two paths somebody could go down. One is they could pick somebody in their local town who has a geographic focus but does not have an industry. So they have the benefit of that person being five minutes away, and they see them around town and at the golf course and church or synagogue. But the flip side of that is that means they’re probably dealing with more of a generalist, right?

Ron: That’s correct, absolutely.

Dave: Whereas using someone like you, it’s a different approach. You’ve got clients all over the country, so you’re not down the street. They won’t run into you socially. But what you bring, though, is this specialized expertise. Obviously, there’s a lot of your customers that have decided that that’s the path that they think is most prudent to go with a specialist even if they’re not down the street. Because if you’re in a small town and there’s only two scrap yards in town or four scrap yards and you’re using somebody who’s got a geographic locality, then by definition they can’t be an expert in the scrap business if there’s only four scrap yards in town, right?

Ron: Yes, absolutely, yeah. Dave, to be honest with you, across the country almost every customers that we’ve obtained over the last 25, 26 years, it’s been a situation where they have been with a particular insurance agency for, gosh, 15, 20, 25, 30 years in some cases. That’s not an easy change, and I understand that. But in the end what most business owners understand is when something as important as this that could dictate when your company survives or not based on a claim being paid and so forth, or just simply the cost if they can pay half the premiums. That’s a huge cost to their bottom line. It’s usually just a no brainer to make the move. Typically, those agents being that they really care about the customer, they understand that is what’s best for them, and it ends up being a pretty easy transition in most cases.

Dave: Is it usually price that creates the opportunity for you to get in the door, or was it a claim that wasn’t paid, or was it is service, or all of the above sometimes?

Ron: Yeah, really all the above. That’s why it’s important when we talk to customers, again, it gets back to listening. What are their needs? What are their pain points? What’s bothering them? Sometimes it is a claim wasn’t paid, and it probably could have been paid in another circumstance if someone had more knowledge about it. Or we talked about some of these endorsements claim not paid because they didn’t have the right endorsements or right coverage, or simply it’s just they’re paying too much. We can save them a lot of money. What happens a lot of times when an agent doesn’t have access to multiple markets, we call it premium creep where that’s the only insurance market they have for their customer, and so it’s a certain price. The next year the insurance agent comes in and says, “Upper management’s told us we got to get a 20% increase or a 15% increase.” That’s what they pass along, and the agent really has no other choice but to accept it. Then the next year another 15%, and the next year another 15%.

Dave: Until they’re paying-

Ron: So over a period of years, yeah, it just creeps up to this astronomical amount of premium.

Dave: Yeah, where you’re paying double.

Ron: That’s why I get back to what we said earlier how really every single renewal year we look at that pricing. We pit the insurance companies against each, and we create a competitive environment to keep that pricing down.

Dave: Well, I can’t believe how much we’ve been able to cover in a relatively short amount of time. If somebody is in the scrap metal business and is not using your service but is interested in exploring it, what would you suggest they do? Do you want them to just call you or shoot you an email? How would you like them to reach out to you?

Ron: David, I think either phone call or email, but ultimately at some point I think it’d be best for us to actually talk. That’s the only way to really communicate and find out what their needs are, what their current situation is. As you know, we’re easy to deal with. We’re not pushy. Every once in a while we find a case where they’re where they should be, and we tell them that. We don’t want to waste their time if we don’t think we can be of significant help to them. Again, it gets back to communication. I think either a phone call or email, but ultimately it’s best for us to actually talk either in person or by phone.

Dave: Well, what phone number and email address might people use to reach you?

Ron: The toll-free would be 800-765-6767. Then my direct number, which call me day or night, is 903-571-1084, call day and night and welcome them to call me anytime. Email would be ron.hallmark, that’s RonHallmark@HibbsHallmark.com.

Dave: Okay, super. Then the other way they could connect with you is I believe you’ll be in Las Vegas in April at the ISRI annual convention. Is that correct?

Ron: We will. Now, we don’t have a booth there. We did it in past years, but we find it easier to be able to visit with our customers and prospects and get around better because it’s such a huge, as you know, convention. But certainly drop me an email. We can meet for a cup of coffee or something and visit while there because I’ll be there the whole time. We will have a booth at the Gulf Coast Convention in June down in Houston. We just got back, as you know, from the St. Louis Convention about two weeks ago.

Dave: Yeah, that was good. I will also be in Vegas in April and Houston in June. So that’s another great opportunity. If somebody’s interested in exploring or talking to you, that’d be a good way to do it. I can tell you Ron’s not pushy at all. He’s just very helpful. Oh, here’s one last question, how far before renewal should people be talking to you?

Ron: Actually, that’s a great question. Unfortunately, many times it’s two weeks, a month that we have a chance to look at things. With renewals, we always start about 120 days out, start working on it.

Dave: So four months.

Ron: Exactly. We’d really love to have three months. That being said, it’s very common we start about 30 days with a lot of new prospects and sometimes even less than that. We’ll do our best. Just so people will know, it’s also to the benefit to start early. I know there’s a lot on everybody’s plate, but the quicker and earlier you can start, the better pricing you can get and better coverages.

Dave: So really even six months out if they’re starting a relationship with you and their first one and to just get to know you before they even have you quote them. Even six months out is not too far out, is it?

Ron: Really there is no too far, to be honest with you, because I put our current customer, we really work with them year round. People don’t see that necessarily. Just like we talked about with work comp experience modifiers, that information is sent to NCCI about six months before the end of the policy, six or seven months. So about seven or eight months before the end of the policy we need to help a customer looking through their loss runs for work comp, finding out if they’re correct, if there’s something still open that should be closed because we want to get that information corrected before it goes to NCCI.

Dave: What about-

Ron: It’s really about a 12-month process.

Dave: Let’s say somebody has a 1/1 renewal, and so it seems like it’s way too early to start talking. Let’s just say they talk to you, and they’re one of those customers that you could reduce their premium by half. Conceptually could you start a new program earlier than 1/1 of next year and just terminate the current program, or does that current program have to run its course?

Ron: No, absolutely, and we do that quite often. It’s not uncommon at all to do that especially when we look at their coverages and we can identify that the pricing is way out of whack, way too high, or if their company is really in jeopardy of a potentially unpaid claim because of their coverages, whatever it might be. There may be a need and a desire on all parties to go ahead and get this changed right away. In most cases, there are no penalties to changing, so we can provide proposals, let them look at it, review it with them, show them how it benefits them. If they make that decision to change, there’s usually not a penalty of canceling their other policy and then starting with a new policy at lower premiums and better coverage. Now, there are some surplus lines companies that do have to wait 30, or excuse me, 90 days after the effective date, so basically after the third month of the policy, then you can change with no penalties. Again, that’s just on surplus lines type policies. We help walk the customer through that, the pros and cons.

Dave: If I’m hearing you correctly, the best time to talk to Ron is today, and the next best time is tomorrow.

Ron: Yeah, exactly.

Dave: The best time is tomorrow regardless of when the renewal is.

Ron: Yeah. It gets back to just talking. Again, call. It’s never too soon to call. We’ll just advise and show you the pros and cons of waiting to renewal or try to do something right away.

Dave: Now, what if somebody calls-

Ron: Again, at the end of the day, the customer’s the one that makes that decision.

Dave: Now what if someone calls you and says, “Hey, Ron. We’ve had the same insurance broker for 40 years. They’ve now retired, and somebody new in their office has taken over. We think we’ve got good coverage, but we just really feel like we’re not getting any kind of service at all.” Is it possible for you to come in and actually keep them with the same carrier but if they want you, you can take over the management of that situation?

Ron: Good question as well. For instance, there’s RecycleGuard. It’s an endorsed carrier of ISRI. We work with them. It is open to most insurance companies or to agents. So we do from time to time find a customer with RecycleGuard to a different agent. Then whatever may happen, the agent may retire, or they may not be happy with their service, or whatever the case may be. In that case we come in and do what’s called agent of record letter, and they make us the official agent. Then immediately they get our experience and expertise in the industry, and then at that point we go to work with them. We start negotiating with RecycleGuard to see if there’s anything we can do to improve the policies and maybe even get pricing down immediately, not wait to renewal. At the same time we start preparing for renewal to look at all our other markets. Again, getting back to who’s going to be the best choice, is it still RecycleGuard, or is it another carrier? It doesn’t matter to us. We just want what’s best for the customers.

Dave: I think my understanding is even broader now, so regardless of what carrier they’re currently with, regardless of who their agent is, and regardless of when their renewal is, today’s a good day to talk to Ron Hallmark, right?

Ron: I would agree, absolutely.

Dave: Well, super. Well, I really appreciate your time today, Ron, and I really appreciate the great job you’ve done for our clients through the years. You really make us look like a superstar because we know you and can bring you to the table. A lot folks just don’t know that there’s a specialized insurance brokerage firm such as yours, so thanks again for being such a great friend of our firm.

Ron: Yeah, Dave, I have the same sentiments about you and your service as well. You’ve done some great things for our customers. Again, it’s nothing I get paid off of. I love what you’ve done for them, and you’ve benefited them, and I really appreciate that. I appreciate you having me on today. This is fun.

Dave: Yeah, it has been. Well, hey, it was good talking to, and I will probably see you in Las Vegas in April.

Ron: Yeah, sounds good. See you then.

Dave: All right, thanks Ron.

Ron: Yeah, take care,

David: Bye.

Dave: John, welcome to the show.

John: Thanks, David. Good to be with you.

Dave: Yeah. So I’ve wanted to have you as a guest on the show for a long time, probably going all the way back to when I read your first book probably eight years ago, I Built to Sell. Believe it or not, I’ve probably listened to at least 200 of your 250 podcasts. So it’s-

John: You’re gunning for punishment my friend.

Dave: That I am at that. So you hold a couple firsts. You’re my first Canadian guest, and you might also be my first guest who was born in England. So why don’t we just start with that. Did you move to Canada as a child or an adult?

John: I did. My parents immigrated from England to Canada when I was five. So I really don’t have many memories. I do have some family over there though. Get over there once in a while, but home’s Toronto now.

Dave: Okay. And you attended college in Canada, I take it.

John: I did. Here’s a fact that is astonishing. Elon Musk went to Queens University in Kingston, Ontario one year at the same time I was there. I’d never met the man, but I think it’s great to be able to share that as my alumni. Queens, by the way I took sociology, which is the most ridiculous program you could possibly imagine. So I’m in no way comparing myself to Musk. But I think while I was studying girls at Queens, he was studying engineering, which is pretty impressive.

Dave: That’s awesome. I have a similar kind of touch with greatness. So I was at the University of Texas in Austin at the same time as Michael Dell, Founder of Dell computers. And we were there at the same time in the same dorm. I’m sorry. He was at a different dorm. But we were there at the same time and IBM had a theory, so this was 1983 that if you could get somebody hooked on IBM PCs, they would buy IBM PCs for life. So as a result they had a little storefront on campus where they sold computers at well below wholesale to the students. So while the other 50,000 students ignored it, Michael Dell started buying these IBM’s for blow wholesale and then marketing them between wholesale and retail. And that was how he gets started with Dell computers.

John: Yeah. That’s wild. Did you buy a computer from him?

Dave: I didn’t. Well, I mean, years later. But yeah, not at the time. So I believe he graduated in 1994 from Queens College. Is that right?

John: Yeah, I think that’s right.

Dave: Okay. And did you start your entrepreneurial career right after college, or did you go to the salt mines for a few years before you broke those?

John: Funny you should mention salt mines, because I went to work in a little town called Sudbury, Ontario, which is known as the nickel mining capital of North America. And I’m not a miner, nor did I mine in Sudbury. But I went to work in radio, actually. I was involved in radio and had a kind of idea for a show. This goes back in the early 90s. The show was to interview a different entrepreneur every week and say, “What did you learn? What would you do differently?” And the radio station said, “That’s a crappy idea that’ll never work.” And so in most cases where people get challenged like that as a young person, I decided that I would prove them wrong. And so I left Sudbury and I went back to my hometown of Toronto, and came up with the idea for the show called Today’s Entrepreneur.
Again, this goes back way before podcasts, et cetera, and pitched it to a syndication company in Toronto and ultimately, got the show nationally syndicated in Canada. We were on 22 stations and it was called Today’s Entrepreneur. And we just interviewed a different entrepreneur every day, and asked them, “If you’d known then what you know now, what would you have done differently?” And that’s what got me interested in entrepreneurship and entrepreneurs. It’s just all those stories from different entrepreneurs over the years ago.

Dave: Oh, wow. I did not realize that part of your story. So you’ve been interviewing entrepreneurs a lot longer than the five years ago that you started your podcast, haven’t you.

John: It’s funny because it feels a little bit like deja vu, like Groundhog Day, because yeah, while, I started my career interviewing entrepreneurs, and I’m 25 years later doing it again. But it’s fun. I’ve got a chance to interview 300 or so business owners who have sold their company. And it’s such an emotional experience but it’s been fun for me because I asked these guests about the last chapter of their journey to sell their business. And there’s very little out there. You seem to say that, I mean, I’m sure in your work is a ton of information about, how do you start a business? How do you build a business? How do you market a company? But very little on how to exit one. So that was the niche that I chose to focus on Built to Sell Radio.

Dave: That’s awesome. And then I guess you launched your own business in ’97. Today’s Entrepreneur, was it under that umbrella? All of this your own business?

John: Yeah. As typically the case, these businesses evolved one out of the next, so the syndication company that show was sold and ultimately, I went on to start a research company, and then an event company, and then a marketing company. So all of them evolving out of one, out of the next, really. So yeah.

Dave: Okay. So this is where to me, I’m more familiar with the story starting here. So you sold the company to a public company, I believe in 2009. Does that sound right?

John: Sound about right.

Dave: And then you wrote a book, Built to Sell that was released, I believe in 2011. I guess first off, what did you do after you sold the company? Did you have to hang around a while or did you take some time off or?

John: Yeah. We moved to Europe, actually. We had a young family at the time. We still have a relatively young family. This goes back to 2009. So my wife and I pulled up stakes, we sold our house in Toronto, and we moved to a little village in France and spent three years there. We put our kids into the local French school, and used that town as a bit of a jumping off point, and sort of traveled all around Europe. So that’s what we chose to do with our time after I sold my last company.

Dave: Okay. Did the idea for the book germinate then while you were there in France?

John: The book Built to Sell?

Dave: Yeah.

John: No, it was really before we left. And it wasn’t really written with any grand plan, per se. I had sold my last company. I was actually having lunch with a guy named Tom Dean’s, who’s written a great book called Every Family’s Business. If you haven’t read it, it’s about the dangers of doing a family business transition. Anyways, it’s a great book and Tom and I were just chatting over lunch and he said, “You’ve had all these experiences with these four different companies, you should think about writing some stuff down.” And so, I did. I went to the attic of my house and started typing out this parable, this story which was of an entrepreneur who had a marketing agency, which is one of the four companies that I’ve been involved in, was a marketing agency. About how he tries to transform it from a service-based business to sort of more of a productized company. And so, yeah, so that was written in Toronto. And then soon after it was published, we moved over to Europe.

Dave: Oh, okay. So that was the order. You sold it and then wrote the book, and then moved to Europe. So in the book it sounds like received a lot of attention. I understand both Fortune and Inc. recognized it as one of the best business books of 2011. And I also understand it’s been translated into 12 different languages. Were you surprised by how successful the book was?

John: In a way, yeah. I mean, it’s an easy topic. The first edition of Built to Sell was self-published. I didn’t have a publisher, I didn’t know anything about writing a book, really. So I self-published it and I was good enough, or I was fortunate to meet a guy named Bo Burlingham.

Dave: Sure. Small Giants, right?

John: Yeah, that’s right. Bo and I wrote for Inc. at the time, Inc. Magazine. I said, “Oh, I’ve written this book. Could you take a look at it?” And Bo was like, “Man, you should really get an agent and do this seriously, because the book’s got some likes.” And so he was the one who introduced me to my agent or his agent, I should say. I didn’t have an agent at the time. And he introduced me to his agent and she said, “Send me the book.” And she actually was the agent that Michael Gerber used to publish his first book. The E-Myth.

Dave: Oh, wow.

John: Yeah. So she took it to Random House, which is the ultimate publisher of the book and said, “Would you want to publish this?” And they were a bit skeptical for two reasons. Number one, the book had already been out there for three or four months. And so they don’t usually like picking up self-published books because obviously, the initial demand for the book has been fulfilled already.

Dave: Mm-hmm (affirmative).

John: The other reason was that they were like, “Nobody sells a company. Relative to the number who start a company, actually very few people sell a company.” And so they were the ones who really pushed the subtitle of the book and said, “We really need to have a subtitle that brings more people into the fold, and widens the target market for the book.”
So the original book was called Built to Sell, but when Random House put it out, they added the subtitle, Creating a Business That Can Thrive Without You. And I have to credit them for that because for every one business owner who wants to sell, there’s probably another 100 that want a business they could sell.

Dave: Sure.

John: And I just emphasized the word true-r, in italics, it doesn’t mean you have to want to sell it, but knowing that you’re building an asset. And I think that was a great course correction, and maybe, played some small role in the success of the book, is that it has been more widely adopted because its audiences is more broad speaking.

Dave: Okay. So then that’s when the French sabbatical, I guess, started.

John: That’s right.

Dave: Yeah, you must have been really well rested because you came back with a burst of energy in 2015. As near as I can tell you had three separate business initiatives in 2015. I believe you had your second book, the launch of the podcast, and the launch of The Value Builder System. Is my timing correct? Was that all in the same year?

John: Yeah. The Automatic Customer, which was the follow up book to Built to Sell was launched in 2015. You’re absolutely right. And I also launched Built to Sell Radio, which the idea behind that was, I was getting a chance to speak to audiences on the back of the Built to Sell, I do EO events, or tab events, and get asked to speak to entrepreneurs. And what I found was the questions interestingly, pertain the last two, the theory of building to sell, which was covered in the book, but the questions were more the mechanics of how to sell a company. And so that was a bit of almost a contradiction to the original reason that the publisher widen the audience or added the subtitle, to widen the targets of the book. But entrepreneurs, I think, really wanted the nitty-gritty, the details, right?
What proportion of your deal was on earn-out? Did you have to finance the buyer? What was the percentage of interest you charge… That kind of detail. And so that’s what triggered me to want to launch Built to Sell Radio, which was to get into the nitty gritty, the mechanics of selling a company.
And so to your point was 2015. And then we also licensed our very first certified value builder in 2015. So The Value Builder System is where we help entrepreneurs improve the value of their business leading up to an exit. As you know, we launched and we licensed our first certified value builder, which are independent advisors like yourself to do value building as an offering for their clients. So that was our first ever group of certified value builders was in 2015. So yeah, it was a busy time for sure.

Dave: Sure. I can imagine. So why don’t we go through these one at a time. So on the Built to Sell Radio yeah, one of the reasons I’m just drawn to this is because speaking about something you said earlier, there’s not a lot of data and information on when businesses sell, and correct me if I’m wrong, but it seems like what happens is the acquirer is usually a larger company and they do not want the terms made public. And so thus a lot of people know is just XYZ bought ABC business for undisclosed terms. And that’s all you hear. Is that your experience as…

John: Yeah, most of the time you see in a press release when big company A buy small company B. You don’t say, “Terms not disclosed.” Which basically means that the acquisition for the acquire, if it’s a public company, it was not material, meaning it had no material impact on the shareholders. They didn’t need to disclose the mechanics of the sale, and what they paid, and what the valuation was, et cetera. If a public company buys a company which is material it needs to disclose that and to its shareholders.
And so big company exits, typically all disclosed, like for example, one of the people I interviewed for the show was a guy named James Murphy. He sold a company called Viviscal, which had a treatment for women’s hair loss to C&D, which is a big consumer packaged goods company that competes with Procter & Gamble, and others. Anyway, C&D had to disclose what they paid for the revenue and profits, and all the details associated which is great because it allows the owner, the founder who sold to tell me more of the details, because it’s public information. That’s somewhat of a rarity.
So usually on the show, we have to dance around some of those mechanics. The guest before I hit record will say, “Well, I can’t tell you the price.” To which I’ll then say, “Well, could you tell me what multiple of earnings it was?” And usually we find some way communicate to the audience some of the more important details without getting into any of the secrets that the acquirer forces the owner to remain to keep as as private.

Dave: Yeah. One of the things I love about listening to the podcast is… So I’m an accountant by training. So I’m always trying to do the math in my head as you’re going. And it’s fun because… Sometimes you’ll be taught because you ask the questions cleverly. So for example, for anyone who hasn’t listened to the podcast, I’d highly recommend it, because is you might say, “Okay, I know you can’t discuss all the terms but what did it sell for as a multiple of EBITDA?” And they’ll maybe tell you, or they’ll maybe say, “Well, I can’t really say that. And then you’ll ask, “Well, what would a typical business in your industry trade for as an EBITDA multiple?” And they’ll say, “Okay, I can answer that. It’s a five to eight.” And you’ll be, “Okay. So did you guys sell in that range?” “Sure, sure. But I can’t tell you anything more.” But you’ve extracted what we really wanted to hear, which was really just a sense.
And then sometimes they’ll not say the sales price, but then later, you’ll get into their margins. And so maybe by the end of the podcast, you realize that a typical company in the industry sells for five to eight times EBITDA. They were within that range. They had 20% net margins and their sales were in the 10 to $15 million range. Well, now all of a sudden using mathematics, you can kind of figure out a range of what it sold for. So-

John: You’re giving away all my secrets man.

Dave: Oh, that’s right. What are your future guests going to do? Well, they probably won’t listen to this. No, that’s good. But it’s so useful because like you said, it’s hard to get this information and-

John: Yeah. One of the other questions I really like, and it’s not intended to be like a got you question by any stretch of imagination, but it is, I think, an interesting question, which is, as you were growing the company, what did you think it was going to be worth? Not, what was it worth and what did you sell for? But what was your assumption. I’m reminded of the interview this week, actually. It was built by a guy name Greg Carpenter who sold SBI sales, benchmark index. He was under the impression that his company would trade at around one to 1.2 times revenue. And so, he went through the process of bringing in partners into the company, a couple of guys-

Dave: At that price?

John: Yeah-

Dave: I’ve listened to it. Yeah.

John: Yeah, yeah. It was around 1.2 times revenue. And so he gave them a slice up that company, or sold. I can’t remember which at that valuation. Well, long story short, he sold SBI a $30 million revenue business for $162 million. So while that’s spectacular exited, amazing achievement, if you’re doing the math, you realize he sold for five or six times revenue. He’s selling shares at one times revenue. And so the guys who he sold shares to, “We’ve got a pretty good deal.”

Dave: Yeah, he referred to that as his $80 million mistake.

John: That’s exactly right. Yeah, yeah.

Dave: Yeah. Okay. So that’s the podcast. I don’t want to spend too much time just on the podcast. But I’d like to turn to The Value Builder System, because I’ve got to tell you, John, there were two people who have added more value to my business than anyone else on earth. So one is a guy named Ron Baker who wrote a book on pricing professional services. And I read that book about 10 years ago and I’ve recommended to hundreds of people. And I can honestly say that, that book has made me millions of dollars-

John: Wow.

Dave: Over the years with what I’ve learned from pricing professional services. But the other one is you have probably added, untold hundreds of thousands of dollars to maybe, seven figures to the value of my business based on the same principles. So let me just go ahead and thank you for that. If you’re ever in Houston, I think I owe you dinner.

John: I like steak, man.

Dave: Well, we have a few steakhouses here.

John: I would imagine.

Dave: So talk to me about The Value Builder System. The background and what made you want to start it. What’s the story?

John: Yeah. If you want the actual backstory, it was born out of the book Built to Sell. So when I wrote the book Built to Sell, I thought, “How am I going to get people to buy this thing? How can we market it?” And I came up with the idea of a little questionnaire, kind of like a Men’s Health, when you fill it there’s, how fit are you? And they ask you to answer 10 questions that will tell you-

Dave: Sure.

John: Whatever. And I came up with this thing called the sellability score, which was 10 questions. How much recurring revenue do you have? How fast are you growing? Et cetera. And it would give you a score.
And I was in Europe at the time, and I started getting calls from brokers in particular and some accountants, but mostly brokers saying, “Hey, that’s a little questionnaire. Can we put this on our website?” “No, but that was kind of intriguing.” And again, I was away and not really thinking too much about business, but I was starting to get the itch to do something else. And I started thinking, “Well, these brokers want this little questionnaire that I made up on a back of a napkin. There’s got to be an appetite for advisors who want a system to talk to their clients about the value of their business.” And so that’s the inspiration for everything we do is that little questionnaire.
So we launched a much more robust research-based questionnaire called The Value Builder Questionnaire. And that then became the underpinnings of the entire system, that system’s got 12 unique steps, you’d take owners through and it adds value to their business. But it all goes back to that little goofy questionnaire in Build to Sell.

Dave: Oh, that is awesome. I love hearing more of the backstory there. I love the research-based to this because my understanding is you’ve now had, is it over 60,000 businesses complete the questionnaire?

John: We have. And you know what’s interesting? The companies that come to us from the beginning, their average score is 59. And most hard charging entrepreneurs they’re used to doing well and lots of things. So when we tell them they got a score of 59 out of a possible 100, I think sometimes it’s disappointing. But those businesses are trading at around 3.5 times, pre-tax profit. And you compare that to the folks who go through the system score better on each of the drivers, if they can get their score up to 90, out of a possible 100, those businesses on average are trading at 7.1 times, pre-tax profits. So more than double. So there’s a real story embedded in the data that if you focus on these factors that drive the value of your company, it can really improve your outcomes from the sale of your business.

Dave: And I think even if they only have more moderate success, they increase the score to it, say an 80, that still has a significant statistical increase in the business value. Doesn’t it?

John: Yeah, 71% higher than the average performer. So getting up to 80 has real, real benefits. And it’s not just the exit, I think a business, if you try to distill all of the things that we do at value builder down to a central idea, it’s really this concept of building a company that can thrive without you going back to your original title before. It’s having a business that has transferable value because it’s not dependent necessarily on the owner. And so if you think about that, while it makes the business more valuable, 71% more valuable in the case of someone who scores an 80, it also gives the owner options. They don’t have to sell. They could bring in a manager. They could bring in a private equity group and sell them a percentage of the business. They could they could sell it out, right? They’ve got options at that point. And that puts them in a much more powerful position than feeling like they have to sell or want to sell, et cetera.

Dave: Yeah. That makes sense. And to me, the biggest insight about your whole system there is that, the conventional wisdom is, people that have some familiarity with accounting, finance business valuation, they understand the concept of EBITDA and EBITDA multiples. And it seems that the solution that if somebody goes to an accountant or a business broker and says, “Hey, we want to sell our business, what’s it worth?” And they ask, “Well, we want to double the value. What do we need to do?” It seems like the answer is always double your EBITDA, right?

John: Mm-hmm (affirmative).

Dave: But what you discovered and correct me if I’m wrong, is that these other drivers actually end up having a bigger impact on the value, or said another way, that in some ways it’s easier to increase the multiple than it is to increase the EBITDA. Can you talk a bit more about that and what you’ve discovered?

John: Yeah, for sure. So you’re absolutely right. I think a lot of businesses have the view that there’s a multiple in my industry and I’m preordained to kind of get that. And we’ve seen examples where owners will punch two or three times above their weight class in terms of getting better multiples for their company. And then we’ve also seen examples where you don’t get the industry multiple. And so really it comes down to, beyond just the revenue that you have, what is underneath the covers of the business? How are you performing on these eight factors? One of the eight factors is an example, is recurring revenue. And it’s a huge driver of the value of your business. So if you look at, for example, security companies these days, they trade at different multiples based on the kind of revenue you have. Security businesses, but guys who secure your home or your office have installation revenue where they install the keypads.

Dave: Mm-hmm (affirmative).

John: You get about 75 cents for every dollar of that kind of revenue, because it’s one-off, it doesn’t have a tail to it.

Dave: Sure.

John: And then those folks who have recurring revenue in the security space, that’s called monitoring revenue. Those businesses are getting about $2 for every dollar of monitoring revenue. In other words, the recurring revenue is worth three X to the installation revenue.

Dave: Right.

John: But it happens in virtually all industries. It’s one example of how not all revenue is counts the same in the eyes of an acquirer. And so I think, it does owners a disservice to just myopically focused on while my industry multiple is whatever five X and that’s what I’m going to get, you could get much better from buybacks if you focus on these drivers. Equally, you could get much worse if you don’t. And so, I’m a big believer in kind of getting under the covers and seeing what the performance on these eight factors.

Dave: Yeah, no, I’ve found that to be very helpful. Now, these eight drivers, I believe one of them has the title, The Switzerland Structure. Now, did this come from your time in France, where you visited Switzerland and you had this idea? So what’s The Switzerland Structure all about?

John: Yeah, yeah. No, I don’t know that it actually came from… I mean, we did visit when we were there, but no, The Switzerland Structure, it basically measures your company’s dependence on any one customer, employee, or supplier. And so the backstory is, we gave it the name The Switzerland Structure because of course, Switzerland is obsessed with independence, right? They didn’t join the World Wars. They didn’t send troops to Iraq. They don’t even use the Euro currency, because they don’t want to be seen as cozying up to any one geopolitical faction, right? And they’ve come under tremendous scrutiny for that. But we gave the name, The Switzerland Structure because it reminds people of the value of independence. Not being overly reliant on any one customer, employee, or supplier.

Dave: No, that’s great. I love that. I love that name. What’s the problem with having that reliance? Could you maybe give me an example of a situation you’ve seen where somebody did not have that independence and it really hurt them?

John: Yeah, for sure. So supplier dependence is one that is overly oftentimes misunderstood or overlooked. And so most people get the fact that you can’t have all your revenue coming from just a handful of customers, or that you’re overly dependent on one superstar salesperson. I think most owners sort of get that conceptually. Where I think an often misunderstood area of dependence can often creep in as around suppliers. And so if you’re getting all of your supply from just one vendor, it can cause a problem. What if that vendor were to go out of business or change their business strategy, et cetera. I’m reminded of one guy, he built a $26 million business in the area of value added reseller. He essentially installed phone systems in the businesses and it was a $26 million business.
They used Avaya technology, as well as Cisco technology. They were effectively a reseller. But over time, Avaya gave them better and better discounts, longer payment terms, and just treated them better. And over time, Avaya really started to sop up most of the business in this company. In fact, at the time of the sale, $26 million worth of revenue, 90% of it was supplying Avaya gear.
Well, when this individual went to sell his company, acquires looked at this business and says, “Yeah, but you’re too dependent on Avaya. What if Avaya changes strategy and goes direct. Hires a bunch of salespeople and eliminates its channel? You’re out of business.” And the long story short, he got, going by memory, I think 3.2 times EBITDA for his $26 million company, which on the surface is not a great multiple for a $26 million business. But again, the reason we had to sacrifice or accept a lower offer was that he had a Switzerland Structure problem. Too much dependence on one supplier.

Dave: Yeah, no, that’s a great example. That also made me think of another episode that you had, where the entrepreneur did some type of technology consulting, and they focused purely on AWS, Amazon Web Services. At least I’m pretty sure it was one of your podcasts. And they intentionally decided not to do a Microsoft product or anyone else because they wanted that laser-focus. Does that sound familiar or am I confusing it with-

John: Yeah, I think the company you’re referring to is Stelligent and you’re absolutely right. They play in the WebOps space. So if you own a website, you need to basically have someone host it and you can host it through AWS or Microsoft. I think it’s called Azure or Google Cloud. These are all kind of direct competitors. And there are IT consultant companies that basically configure your website to work on one of these platforms. And so what Stelligent decided to do early was focus exclusively on AWS.
In the early days they were using and helping people configure for all. The problem was that they had to have lots of employees trained in lots of different platforms. And actually, just consolidated on AWS. Now, in the case of Stelligent, it worked because they tied their horse to the wagon, to AWS, which was growing like a weed. And they ultimately got acquired because the company they acquired them was looking for more AWS chops. But it could have worked the other way and that they were too dependent. So I think there’s a quid pro quo on one end, you become a specialist in the case of Stelligent focusing on AWS. That works provided that you’re required or looking to make more into that space, but it does leave you susceptible to the structural problem I referred to earlier.

Dave: Yeah, no, that makes sense. And one of the other drivers that I love the name of is that the teeter-totter. The evaluation teeter-totter. So what’s that all about?

John: Yeah. Teeter-totter refers to, you think of the kid’s teeter-totter or a playground, whether it’s the big kid that’s on a little kid chunk goes up on the teeter-totter.

Dave: Right.

John: It’s the same concept, but in specific terms around cash flows. So the more cash your company generates, the less the acquirer needs to invest in working capital. And therefore the more they can pay you for your company. The opposite is also true. If an acquirer comes along and says, “Okay, this business looks attractive, but if we buy it, we’re going to have to inject a truckload of money and working capital.” Which is what you need to do when you’ve got a negative cash flow cycle. In other words, you get paid after you pay your suppliers.
If you have a big working capital problem, the acquirer is going to say, “Well, we’re going to buy this business, but we have to jack a ton of money working capital.” Which means, their appetite to buy and spend on your company goes down. Because both the working capital, I mean. So the more they have to inject in working capital, the less they’re going to pay for you. And so it works a little… Again, more, you’ve got to invest in working capital the less the value of the-

Dave: Right, right. Well, thank you for that. Well, let’s now turn to the third book in the trilogy. What prompted you to write the third book?

John: Man, you could have been my coauthor, right. I noticed that a lot of the people I’ve interviewed for Built to Sell Radio, and again, these are all owners of companies, generally selling businesses valued in a two to $50 million range, although we have some exceptions outside of that, generally in that space. So these are life-changing events for the owners, absolutely life-changing. But they don’t show up on any news feed or a media release. They’re relatively below the radar. And so what I kind of come to know is that for a lot of these owners, they exit at relatively subdued multiples, relatively average multiples.
And then there’s this other cohort of owners. I would put James Murphy, the company I referenced earlier, Viviscal sold to C&D into a second camp, which are people who seem to punch well above their weight, get valuations much, much higher than the average. Again, Greg Carpenter from CBI, I said he’s getting 1.2 times revenue, at least getting five or six times revenue. And so I wanted to understand, what are these guys doing? What are their negotiation tactics? What are their tips and tricks for punching above their weight? And that’s what I wanted to do with this new book is try to put together a bit of a field guide for entrepreneurs to follow.

Dave: Okay. So it released about three or four weeks ago?

John: It came out on January the 12th.

Dave: Okay. And how’s it done so far?

John: Pretty well, yeah. I’ve actually got visibility into the sales numbers and it’s tracking out where we’re Built to Sell was at the same time. So pretty happy with that. Just given the trajectory that Built to Sell has had over the years.

Dave: Well, hopefully, it will be translated into 12 languages as well.

John: Won’t that be great? Yeah.

Dave: And then where can people buy this book? The usual places, or would you rather, they go to builttosell.com to buy it?

John: Anywhere you like buying books is fine. If you happen to go to builttosell.com. We put together a special page which is, builttosell.com/selling, where folks can get some extra gifts if they order from that page. So that’s just builttosell.com/selling.

Dave: Okay. So that’s good. That’s where they get the book. Based on feedback you’ve received, has there been anything that was particularly interesting or surprising on the feedback you’ve received that may be one of the stories resonated more than you might’ve expected or what’s been the reaction?

John: Yeah. I mean, look, I think one of the stories that really pop to mind for me, because he had the worst of times and the best of times is a guy named Arik Levy. Arik is in a locker business. So if you’ve ever been to a Whole Foods and you see those Amazon lockers, that’s the space that Arik is in. His first company was called Laundry Locker, where they put your dry cleaning laundry into a locker for people who needed to pick it up after hours, business was a success, but he decided he wanted to sell. And he got an offer and agreed to negotiate with one acquirer, which is one of the mistakes we talked about in the book. He got an offer, the acquirer did the due diligence, but 60 days later, they started to retrade, retrading in the industry lingo for basically a bait and switch.
They tried to lower the price that they’d agreed to pay in the LOI. And Arik with no other offers on the table, agreed to the lower price. And then once they sort of nickel and dime to dabble in a lower price. They then turned around, said, “Oh, we don’t have the money to buy your company. We couldn’t borrow the bank. So we need to borrow from you. And so Arik had to finance part of the sale of his business. They essentially financed the acquirers to buy his business. So it was a bad exit along, not a horrible exit, but there were some things that didn’t go as well as he’d hoped. And so when he went to sell his second business, a company called Luxer One, also in the locker business, but in this case lockers in Manhattan apartments for people who buy online, he learned everything there was. He kind of applied all the things he learned the first time around to the sale of Luxer.
So went out, ran up a process, got five offers for his company. And once he’d received those five offers, he started to play one off the other, trying to get them to raise their price in a success of series of negotiation. Well, he played them quite well because by the end, he was able to triple the original offers for his company and he ultimately, agreed to sell it. And it’s just a good example of some of the tactics in particular, the importance of having multiple offers to essentially give you more leverage in the sale of your company. So that’s one of many stories in the book.

Dave: Yeah, I remember that that episode specifically, because he was talking about this disconnect between people like to drop off their dry cleaning at the hours that the dry cleaners are not open, basically. They like to drop off their dry cleaning on the way to work, or on the way home from work. And if they work long hours and the dry cleaner’s not open then… And I believe that’s what his laundry locker was trying to address, right?

John: That’s right. I mean, you think about people who wear a dress shirt that needs to be pressed. Typically, they get in before nine and leave after five, certainly. And those are the hours a lot of dry cleaners are open. So it’s kind of a disconnect. You didn’t want to pick up your laundry before work or after work, in the case of Arik Levy, you found that they were always closed. So that-

Dave: Right. And then his second business was the lockers for the apartment complexes, right?

John: That’s right.

Dave: To receive packages and stuff, because it’s been a while since I lived in an apartment, but I can only imagine what it’s like now with Amazon Prime in that these poor apartment leasing offices must just be without this service. I can just imagine they’ve just got boxes stacked to the ceiling, and it’s the same problem, right? The leasing office closes at five o’clock and the person doesn’t get off work in time to go by the leasing office.

John: And these days in a pandemic around the holiday season, must have been just atrocious, right? Because all these boxes end up on the floor behind the desk. And the apartment owner has to come out and sift through dozens of boxes. It’s a terrible experience. So in the case of Luxer One, the business that Arik sold, the five offers, he was able to basically solve that problem for apartment dwellers because he installed the lockers.

Dave: Yeah. I remember that story. That’s awesome. So as we wrap up here, my final question is one that I stole from Tim Ferriss. You know who Tim Ferriss is?

John: I do.

Dave: Yeah. And you’re the first guest I’ve ever asked this. So if you had a metaphorical billboard that millions of entrepreneurs would see what words or phrase would you put on it? You’re going to distill all your wisdom that about selling your business to distill it to a sentence or two, what might you say?

John: Great question. I don’t have any name kind of pithy and that would sit on a billboard, but it would be something along the lines of revenue is vanity, value is sanity. Maybe something to that effect-

Dave: Oh, I like that.

John: Yeah. Okay. Maybe he’s a little pithier than I thought it was going to be. Okay. So revenue is vanity, value is sanity. So it’s a play on the old revenue is vanity, profit is sanity, adage that accountants talk about a lot. And of course, as entrepreneurs, I think we’re often susceptible to shiny ball syndrome trying to reach new top line sales thresholds because they make us feel good, or they make us proud. And we love boasting about how many people we employ or how many locations we have, et cetera. And I first-hand seen many, many examples where the owner of those businesses chasing revenue has given up a lot of equity, a lot of control, a lot of lifestyle benefits to chase the next zero on their top line revenue. Yet it doesn’t always translate into value.
I’m reminded, I did two episodes almost back to back. One was a guy who built a $15 million business. So pretty good size business over the years, but kind of chasing revenue, very seasonal in nature and sold it for 25% of one year’s revenue.
About a day later, I interviewed another guy named Rob Walling who built a company called Drip, which was an email marketing platform. He sold to Leadpages. He built it up to just $2 million of annual revenue, a dozen employees, small, small company in the grand scheme of things. And was entertaining offers between nine and 12 times revenue.

Dave: Right.

John: So the math is astonishing. Here’s a business owner in the first case that has been running on a hamster wheel for years, sacrificing sleep for cashflow worries and hours from his family and so forth just to try to hit the next top line everybody go. And then Rob Walling, quiet, toiling in relative obscurity with a little 12 person company sells for a multiple many, many, many times more than the guy chasing revenue. So it’s not always the top line revenue that’s the thing to chase. I don’t believe in owning a business.

Dave: That is great. And that’s what I wrote down. I’ve never heard that quote, but I’m going to remember that. Revenue is vanity, value is sanity. That’s great.

John: There you go.

Dave: Well, I really appreciate you taking time out to be on the show. Were there any questions that I didn’t ask you that you wish I had?

John: No, I think we covered a lot of ground. And I really appreciate the opportunity to chat with you and your listeners. So I think we did a lot of real estate today, so thank you for the opportunity.

Dave: That is great. So if people want to reach out to you or say, hi, what’s the best way to do so?

John: Really, all roads lead to builttosell.com.

Dave: Okay.

John: So builtosell.com, get the latest episodes, my social links, you can opt in to get an episode every week. That’s probably the best place to go. So just go to sell.com.

Dave: That is great. Well, I think that will do it. Well, thank you again for being on the podcast. I think our listeners are really going to enjoy your insight and your experience, and really appreciate it.

John: Well, thank you, Dave.

Dave: There we have it, another great episode. Thanks for listening in. If you want to continue the conversation, go to ic-discshow.com. That’s I-C-D-I-S-C-S-H-O-W.com. And we have additional information on the podcast, archived episodes, as well as a button to be a guest. So if you’d like to be a guest, go select that and fill out the information, and we’d love to have you on the show. So that’s it. We’ll be back next time with another episode of the IC-Disc Show.

Dave: Hi, Sheila. Good morning.

Sheila: Hi. How are you? Good morning.

Dave: So, first of all, thank you for being a guest on the IC-DISC Show.

Sheila: Oh, my pleasure. Thank you for letting me be on.

Dave: So, you’re a unique guest. We’ve had the same guest on twice, but we’ve never had two guests from the same firm on two different episodes. So here, let me go ahead and get the background and then I’ll explain why you’re the second one.
So, my guest today is Sheila Enriquez, the managing partner of the Texas-based CPA firm of Briggs and Veselka, which is a Houston-based CPA firm. And in the interest of full disclosure, I was an employee of the firm for several years, about 15 years ago.
So, why don’t we start by just telling me about Briggs and Veselka, the history of it, and how long you’ve been there and your role at the firm.

Sheila: Oh, absolutely. I would love to have that opportunity. So, Briggs and Veselka is the largest independent CPA firm in Houston. We currently have a little bit over 320 people now. But we started in 1973 with three people, and one of the co-founding partners is Johnny Veselka who is the main partner. It started out historically as a tax firm, and then grew to be the largest independent firm providing full-service accounting services including tax, audit, and financial consulting, and even technology consulting now in terms of offerings to our clients.
So, as a firm, really, we’ve evolved primarily because our more senior partners that started the firm, Johnny Veselka, John Flatowicz, who’s one of the ones that I know you’ve interviewed previously, Steve Awalt, Charlie Weller, Gary Trochta, several others that have started the firm, and Bill Pitt, their vision was really to create a legacy firm that is committed to the community and committed to Texas specifically. So, in that process, they’ve really done a great job over the years of creating a pipeline of leadership and identifying services that enhance our relationship with our clients providing value.
I personally started with the firm in 2007. So, I’ve been with the firm now a little bit over 13 years. I started as a manager in the audit group, and through my joining the firm, I really was able to take advantage of the opportunities that the senior partners at the time were offering up and coming managers and leaders within the firm. I’m very fortunate to have found a firm when I did because we were at a transition point. That was a time when Johnny Veselka was starting to look to transition his role as managing partner to John Flatowicz, who eventually took over, I believe, in 2009.
And I remember in ’07 when I first started, there might have been 80, 90 people. So, it’s a pretty incredible growth since we started, tripled, really, in number over the course of John’s leadership, eight years total. Because I actually just celebrated my second-year anniversary as managing partner yesterday. So, it went by really quick.

Dave: Oh, congratulations.

Sheila: Thank you. It really went by super fast. But John, in his eight years of leadership has tripled the size of the firm, both revenue-wise as well as people-wise. And so, he’s really given me a huge scale in terms of transitioning from him as managing partner to me taking over. It set us up very nicely in putting forth a vision for what the next 10 years would look like. And part of that then is our goal could be one of the largest independent firms in Texas, not just Houston. We’re the third largest currently.
And I think the notion of independence is very important to us because it really allows us to preserve our culture that is very much a client-centric type of a culture, but very people-focused. So, we start with our people first and giving them the right opportunities, leadership development, and also giving them paths that are more in line with their interests and that marry within the needs of the firm too.
So, I have sort of that poster child, I would say, of that individual that came to the firm as an audit manager and evolved to become a partner that leads even our litigation support practice that I am very proud to have helped build within the firm, and it’s one of our fastest growing areas now as a firm. It’s a passion of mine. Mary’s my legal training, I’m an attorney as well, so my legal training with the audit background. It’s a great example, if somebody that was looking for a path that was unique to me and just love my experience overall, because that type of an opportunity is not unique to me. There are many, many people in the firm as you know, David, because you know our firm quite well, that have found their own paths and created their own niches. And it’s very rewarding and it’s like being an entrepreneur within the support structure, the firm like Briggs and Veselka.
So, that’s our firm. I don’t know if that gives you or your listeners a good flavor.

Dave: Yeah, it does, and we’ll delve into that. But I’m glad you highlighted the opportunities of what the firm offers because not only have you been at the firm 13 years, that I know that you’re not a native Houstonian and I think you’ve moved to Houston just 13 years ago as well. Correct?

Sheila: That’s right. A little bit over… Well, actually, July 19, 2006, so 14 years, going on 15 years.

Dave: Okay. And the reason I want to accentuate that and then I know that you’d move from New York. But what I don’t recall is whether you were born in the U.S. or not?

Sheila: Oh, okay. So, I actually wasn’t. I grew up in the Philippines. Yeah, l I lived there, graduated high school there. And the reason why I actually had an opportunity to come to the United States was through a scholarship. So, I was fortunate to be picked as one of 10 students that received a full scholarship, all expenses paid, through a very generous Japanese sponsor, who actually paid for the 10 students, including myself, to study in an American college.

Dave: Oh, wow.

Sheila: Yeah, it’s State University of New York Theater School in Loch Sheldrake, New York, so SUNY Sullivan County Community College. I ended up taking that opportunity, which completely changed my trajectory because I was supposed to be a doctor. I was graduating from high school, already accepted at the University of the Philippines in a pretty much medical program. And I decided to take the opportunity for this great adventure.
It was a two-year program, a year-and-a-half in Toyama, Japan with SCCC campus is located. And I actually ended up living with my sponsor. There were two girls and eight boys. My husband was one of the eight as well.

Dave: Oh, wow.

Sheila: Yeah. So, there were two of us that lived with a sponsor family. They had two daughters as well. So, it was a wonderful experience. We got immersed completely in the culture. Whereas the eight boys had their own apartment. So, it was a wonderful experience, got to travel in Japan, got to spend a great time learning the culture. It’s still one of our favorite places. And we were supposed to go actually this year, June 10th, and go back and visit and take our kids but with the Coronavirus, we had to cancel it.
But then, the last six months is at the New York campus in Upstate New York. But then, the story continues because what ended up happening is we actually both ended up getting a scholarship to attend Mercy College, which is located in Dobbs Ferry, New York, Westchester County. So, we transferred into that program. I ended up taking undergraduate in Management and my husband, Jose, pushed through with Accounting.
But as I was about to graduate with the undergraduate program, on my last semester, I had three credits left for electives. I ended up talking to the MBA, the dean of the graduate program of Long Island University that happens to actually have a campus within Mercy College as well, and I think it was just serendipity, really. The dean, Wayne Cioffari, ended up offering a graduate assistantship to actually pursue my MBA for free in exchange for working 20 hours as his assistant because he chose not to have a secretary.

Dave: Oh wow.

Sheila: Yeah. So, he ends up giving high-performing students opportunity to attend the program for free while working for him rather than him hiring a secretary. So, there were several of us that were in that pool. And so-

Dave: What a great strategy.

Sheila: But he changed my whole life because in that process, I was graduating with a management degree, and he pretty much sold me on the idea of pursuing my CPA license. Because he developed this 4+1 program, he called it CPA/MBA 4+1 Program. I can still see the brochure in my head. It was a pilot program that he was doing, really, ahead of the time because that’s a pretty common program now, the professional accounting program. And so, I took the opportunity.
I ended up deferring my graduation and started taking graduate classes and undergraduate classes, mostly Accounting undergraduate to come up with my undergraduate degree in Public Accounting, so I can take the CPA exam. And the rest is history because I ended up passing the exam when I first took it and it opened up a lot of doors for me to be able to actually stay in the U.S. under a working visa. And then, my employer in Rhode Island sponsored me for my green card.
It’s a bit of a long story, but I think it’s really a story of serendipity and people opening doors for me. So, that’s been the story of my life.

Dave: Sure. And I think you’re being a bit too modest. It is a story of serendipity, but it’s also, I think, a story of seizing opportunity. And it’s obviously-

Sheila: Yes, absolutely.

Dave: … most of it. And then, so I believe, the story then progresses from, so you’re living in Rhode Island. Was that-

Sheila: Yes. So, I lived in New York for about six years, five or six years. After finishing my undergraduate, Wayne introduced me to my first employer, Brenner, McDonagh and Tortolani, which was an outsourced accounting CFO controller firm focused on non-profits. So, really, it starts with them in terms of my experience in financial consulting. But then one of the partners as McDonagh was retiring, he happened to be living in Rhode Island. So, the firm itself is still in existence. They’re focused on a niche market. It’s Catholic religion basically. And so, they have offices all over the country. So, New York was their main office, still is, and then they have an office in Rhode Island, Maryland, really all over the country.
So, there was an opportunity to move to Rhode Island in 1998. And because neither my husband nor I have roots in New York, we were pretty adventurous. We were, “Why not? Let’s start over,” because Westchester County was so expensive if you all aren’t aware. New York is expensive, but Westchester is really up there in terms of…

Dave: Yes, it’s one of the affluent suburbs, basically.

Sheila: Exactly. I mean, that’s these pretty affluent, like you said, people that work in the city, they live there. But ultimately, we made the decision in ’98 to relocate to Rhode Island. So, we ended up living there for actually eight years in Rhode Island, and in that process, I made a decision shortly after we moved there to work for a CPA firm because I needed 500 audit hours to get my license, even though I pass the exam in New York. I didn’t have the experience, because as a financial consultant, we weren’t a CPA firm, so, I needed a year experience and 500 audit hours.
The plan really originally is, to your point about seizing opportunities, the plan, really, for me was to just get the hours and then potentially go back to my other firm because I was so much more in a senior position than starting at a CPA firm where I started as a staff. So, at that point, I already had a couple of years of experience. I literally started as a staff accountant and they did every… You go in there, it’s a smaller firm, Sparrow, Johnson and Ursillo, I ended up doing everything. I would do the audit and then I would do the tax, and that would be at the corporate or partnership level. And then I would do the parents and then the kids. I got so much exposure in many aspects of the business because it’s a smaller firm and my experience, or lack thereof, didn’t stop my progression within the firm, which was great.
So, I was a staff for three months, they promoted me immediately to senior. It was one of those, just a perfect place for me at that time. I stayed there for eight years. And I had my first baby while working for them, started law school in the evenings while working for them, and they were very, very supportive throughout the whole process. So, I ended up working for them through 2006, and the reason why I left was primarily because my husband and I, Jose, decided to start over in Houston.

Dave: I know. I love this story, because, as I understand it, because you all both came from the Philippines. You didn’t have “family” in the U.S., but you basically decided to make your own family, if you will, like developing close friendships. So, please continue with how that brought you to Houston.

Sheila: So, I mentioned earlier that there were 10 students that were part of that scholarship program, and one of them is really my husband’s best friend. His name is Mario, Mario Dominguez. So, when he finished his associate’s degree in New York with us, he ended up moving to Houston because his older sister, Chona, she is a nurse and she works here in Houston. So, I just remember throughout the years prior to us moving to Houston, he would come visit him because we’re very close. His family is our family at the end of the day. So, we were in his wedding party, we’re the godparents to his oldest son, Josh, he and his wife, Anjanette, are the godparents our oldest son, Anthony. So, they’re practically family. And they would come visit us in New York and they were in our wedding party when we got married in 2000.
But there was just the point in time when, and it happened to be ’05, ’06 period, where Jose and I started thinking about, “Where do we lay our roots?” because we decided we’re going to stay in the U.S. There are a lot of opportunities, but the reality is we didn’t have any support. And by this point, Anthony was two years old, I was in law school attending in the evenings, working full-time.
I think that the turning point for me was when I was asked by the daycare like, “Who’s going to pick up Anthony if we’re not there?” And I’m at a loss because all my friends are from work and school, and they have older kids., and the neighborhood we lived in was an older neighborhood, there weren’t kids around. And so, it got to thinking, “Okay, when should we move?” because at two, Anthony will not remember it, right? He’s going to be very adaptable.
So, it literally was just a leap of faith. We looked at California because we do have distant relatives there, but Mario is such a close friend to us. And I think the one trigger for us, too, is it’s so inexpensive, like the cost of living here compared to Rhode Island. We looked at the house that they were building in Sienna Plantation where we ended up moving, that’s where I live now, I mean, I think it was like 3, 000 square feet and brand new and master-planned community. And this was a long time ago when Sienna was just starting, and I think it was like 175,000 or something. It just was mind-boggling because that would be a million dollars.

Dave: Right. And then, you also throw in the lack of state income tax.

Sheila: Exactly, exactly. I think the one thing that we didn’t even really expect that was such a great bonus was the fact that Houston is such a thriving business community, right? Again, we came here for our friends, and we didn’t realize just how many opportunities there were and how warm the business community really had been to me. It’s such an open and welcoming business community. I think a lot of us come from somewhere else, and then found this very diverse… I’m just so passionate about it.

Dave: Yeah, it’s amazing.

Sheila: It’s just an amazing city.

Dave: So, I’ve been here since 1987, since I graduated from the University of Texas in Austin with an Accounting degree, but I say that so many people I know go through several stages with Houston. First, they hate it, then they tolerate it, and then it just seeps into you. I say hate because I moved here from Austin, smaller, more geographically pretty place. But you move here and at first, you just see the people, the traffic, the humidity, but what you realize over time is just how friendly and welcoming, not just the business community, but the whole city is.
I have a theory on this because I’ve talked to a lot of people and I’ve lived in places a lot smaller, and the normal reputation is that small towns are friendlier than big cities. But if I use Houston as the big city example, I found that to not be the case. I found that smaller towns are much more closed. I joke that I’ve lived in places where you live in a house for 20 years, and the neighbors still call your house the old Johnson house. It takes a while to really break in.
Back in the late ’80s when I moved to Houston, there was a joke that really summarized how welcoming the Houston business community was. And the joke then was anybody with a cell phone and leased a Mercedes could be a real estate developer in Houston. I mean, back when having a cell phone was a bigger deal. But yeah, I’ve always loved that. And that dovetails to my thing of, not only are you an American success story, but you’re a Houston success story, because I can’t imagine there’s many cities that you could move to and not be from the community.
I have friends that live in Dallas tell me this would have been harder, that Dallas is a more closed community. If you didn’t grow on Highland Park and you didn’t go to SMU, that is… But Houston is just so meritocratic. Really, when you think about it, you move here, you have no business contacts, no roots, no family and reputation. In 10 years, you not only get promoted several times, you’re the leader of the largest independent CPA firm. Is it in Texas? Are you the largest in Texas now or is it-

Sheila: We’re the third largest independent, but we’re the largest in Houston. And you’re absolutely right, David. I mean, I pinched myself. I was talking to our new employees the other day and I was telling them about these many, many opportunities that they can have in the firm and paving their own path, and I mean it because I am that person that lived through it. And I think it’s a testament to finding the right place and the right organization that is very inclusive, that is really pure point, very meritocratic what is it that you can deliver, right? And so, it’s been such a wonderful ride for me.
And to your point about certain communities being very insular, and this is not a knock, I think what happens is when you do have a smaller community, and I grew up in one, my hometown in the Philippines is Baguio City, 350,000 people now, which is a lot more than when I was growing up there, it does tend to be very tribal, very insular, who do you know, and it’s hard to penetrate relationships. And I kind of felt that way a little bit in Rhode Island.
Rhode Island is a very small state. So, I moved from the smallest state to the largest state. I think you can fit Rhode Island probably in Beltway 8. It is such a small, beautiful state and I built so many, many close friendships living there, but it is one of those where people rarely move. They grew up there, their friends and childhood friends. And I think Houston just is a melting pot. We all come from, not all, but a lot of people come from somewhere else, and my inclination is to embrace people that come from somewhere else because I’ve been there and I want to help. I want to tell them just how amazing the city is, and I think it almost becomes this pay-it-forward mentality and it creates this wonderful environment for people to want to come to.
And of course, for me and my husband, we grew up in the Philippines. So, I’m not as used to the humidity as he is, but it was one of those things where we still like… I still like warmer weather than dealing with the snow in Rhode Island. I do miss the fall though. I miss the fall season.

Dave: Sure. I’m from Iowa originally for the first 30 years of my life. I have a saying that says, “The worst Houston summer is still better than the best northern winter.” Because at least, this time of year, in the evenings, when the sun’s starting to set, it’s pleasant. I mean, you can actually walk around and be outside, and during the day, you’re in air conditioning. And so, it’s-

Sheila: Yeah, that’s the one aspect people forget unless you actually have lived in the East Coast is that we didn’t have central air conditioning, we had a window air conditioning, and they have heat waves there too. I typically would hang out in the basement whenever we have those 100-degree days. So, it’s really just how you look at it. I feel like the heat is really just bothersome when you’re going from the house to the car, car to your building. And then, you can pick your day of, like you said, 8:00 at night, it tends to be pretty comfortable. So, it’s just a longer day too. I feel like you can do more because with the winter, it tends to be, confirm me anyway, it starts in November, right?

Dave: Yeah.

Sheila: It gets cold, dark, and then it’ll be a while before you see spring. And again-

Dave: Yeah. So, you get off work and it’s dark in the winter, and so, you’re not really motivated to go do much except go home. And it’s interesting, the part you mentioned about Rhode Island.
My other observation is, I think, it’s a function of the growth rate, I think, as much as anything else. Because I’ve been to other large cities like Milwaukee, Chicago, Philadelphia that has those same elements of the smaller communities that you go to a place like Philadelphia, and I think a much larger percentage of the residents of Philadelphia were born in Philadelphia. And when you look at growth rates, like I tell people from Houston, I said, “If you go to a place like Philadelphia, the average age of a house there is probably 80 years old,” because the population hasn’t grown much so there’s not much need to build new houses. And so, you keep in the old ones.
And on the other hand, I tell folks not from one of those northern cities that hasn’t had the growth, I said, “The average age of a house in Houston Metro area is probably less than 20 years old.” They’re like, “How can that be?” And I’m like, “Yeah, we don’t do a great job with our history. If the house does get to be 50 years old, we tear it down and put up a new one.” Because our construction costs are relatively low here and there’s not a lot of regulation, that it’s much easier for a neighborhood to transition than I think some of the other northern cities where there’s just a higher regulatory environment.

Sheila: We were amazed, yeah. We were amazed because the value of land, I think, is what makes the difference. And I think a lot of it is also maybe the fact that Texas is a lot bigger, right, and so there’s more land compared to if you pick any one of the major cities, New York, Chicago, even LA for that matter.
But what I’ve found, though, is that the quality of life, at least for us, is just so much better, even raising a family. We decided to move to Sienna Plantation because the main reason why we wanted to move here was because of Jose’s best friend, and we didn’t look at any other neighborhood because we love Sienna. It has everything. It’s a master-planned community, which is not common at all in the East Coast. I can’t think of one off the top of my head, where you have a neighborhood. Here, it’s very common.

Dave: There’s only 20 I can think of off just the top of my head. And just to give you an idea of people not from Houston, Sienna Plantation is about 20 miles to the southwest of downtown, 25 miles, something like that.

Sheila: It’s about 20, give or take. Yeah.

Dave: Yeah. And it’s in what’s called the Sugar Land general area, but there’s probably a dozen master-planned communities just out on the southwest side of Houston.

Sheila: Absolutely. And to have all the amenities just within your reach, we have a golf course, waterparks to gyms, all the elementary schools are pretty good schools. It is such a different environment. And I have a 17-year-old and a 10-year-old.
This is something I wanted to mention too, because speaking of serendipity, so my best friend since I was 5 ended up also coincidentally moving to Houston in 2008, like the same time that-

Dave: Oh, wow.

Sheila: When did I… Actually, it was sooner than that. We moved here in ’06. They ended up actually moving a few months before we even did. Just a coincidence. Yes, her name is Veronica. And so now, she lives two minutes from me, also in Sienna. So, it’s an amazing support group that we’ve created, and it cemented that with additional families.
It’s such a wonderful neighborhood that when she was looking for a house, because they were renting when they first moved here when her husband took a position in Halliburton, I told her, “You can’t look at any other neighborhood. You got to look at Sienna.” And so, she did.

Dave: Because selfishly you wanted her nearby, right?

Sheila: Absolutely. Because her oldest, Kenzo, is the same age as my oldest. She’s got three boys, but her two boys, my little one, Jacob, is in the middle of them because her second one is 14 and then her youngest one is 8. So, it’s just an amazing story that we all got together. And she’s family. She really is like my sister. So, it’s been amazing. But this neighborhood has been so good to us, too. You’ll love it. You’ll love this neighborhood.

Dave: That is awesome. Well, thank you for being so willing to share your personal story because I think it’s just a great reminder for those of us born in this country like me, you just take the country for granted. We fail to recognize the specialness, I meant, opportunity that the country offers. And so, it’s always great to hear that perspective.

Sheila: I do want to echo you on that and emphasize that. I do feel like I’m a testament, we are. My husband and I, are both testament to just the American dream, where if you work hard enough… And this is why I’m also very passionate about education because education is what led me to where I am today, that opportunity that is given to me by a very generous philanthropist that just wanted to help just completely changed my trajectory. And it’s really very humbling to think about the past and where I am now. So, I’m super, super committed to paying that forward.
I’m very focused on being involved in educational organizations and then also just for the firm as well, being able to tell people about the CPA designation and just how special it is. This profession to me is something very special that can open up so many doors. If we have any listeners out there that are thinking about what major they might want to take in college, I can talk all day long about why you need to pursue CPA.

Dave: Well, and there’s a great opportunity, right, because a significant number of the current CPAs will be retiring, I believe, in the next 10 years. Isn’t that right?

Sheila: Exactly.

Dave: So, there’s a great opportunity. Well-

Sheila: I remind our associates that we’re very blessed because even in the midst of this unprecedented crisis, we are an essential business and I think CPAs are really able to help our clients navigate through a lot of legislation and a lot of financial issues that are coming up. So, if you’re looking for a purpose, I mean, to me, it’s really one of those professions that definitely you can find your purpose in helping other people.

Dave: For sure. And just speaking of that, what, I’m not up to date on these numbers like you are, but what are the general range of starting salaries for people who go into public accounting with an Accounting degree?

Sheila: Sure. We start off, give or take, mid-50s for staff accountant, which I think is a pretty good starting point. And then from there, it can really go up depending on the level, right? It actually can be very lucrative when you just start looking at pursuing perhaps a partnership in a firm because it’s one thing about public accounting firms is that if you end up going down that path, it’s more of a business that is based on what you bring in in terms of the time that you put… So, the profit type of role, because you’re delivering a service, and there’s a value to the service that you’re putting out.
Now, if you decide to go the industry route, there’s also a good progression that you can have there starting out as a staff accountant, senior, picking a direction that you want to take, and then maybe playing the role of a CFO controller. And I think because you’re in the numbers, you’re always at the table. You’re always part of the decision-maker. So, the potential for compensation goes up, I think, as you hit the manager level, and then you start to progress from there.
But if from a job security perspective, I also talk about that quite a bit because it is an essential role. I think there’s a good job security that comes with it.

Dave: Mm-hmm (affirmative). Now, I would agree. So, what I’d like to do now is just talk a bit about the characteristics of the companies who seem to really be the best fit for your firm. So, my sense is that a Fortune 100 company is not the best fit. The market may prefer that one of the large international firms do their audit. But on the other hand, at the size you’re at now, I’m guessing that your focus is not on trying to crank out 10,000, 10-40s for a few hundred dollars each. So, talk to me about who you really are best set up to serve the types of companies and individuals

Sheila: Sure. So, I had mentioned earlier that we have evolved the services of the firm to expand it so that we’re actually hitting a lot of the needs of our client base, and our client base has also evolved over the years. Basically, I could probably characterize it as the middle market clients is what we’re targeting and middle market businesses. And of course, middle market is a fairly large range, so it could be businesses with $20 million in revenues all the way to half a billion. Our sweet spot, though, I would say, where we are now is $20 million to maybe about $100 million, if not over, but we’re starting to move up market as well simply because we’re creating niche practices that also can help larger organizations.

Sheila: For instance, we’re creating a fairly robust consulting practice. We’ve already created it. It was initially started in banking with internal audit and-

Dave: Yeah, I remember that.

Sheila: … financial consulting.

Dave: David Phelps, really-

Sheila: David Phelps, exactly. But now, we’re actually able to serve even those that are in billion-dollar private middle market companies because they may not hire us for the audit, but they may hire us for the consulting piece. So, whether they’re preparing for the audit, that we’re now helping them through technical accounting issues, or internal controls, or any kind of maybe processing improvement that they may be looking at.
So, even though our target market for audit, I would characterize, as 20 million to two maybe 500 million, if I look at our tax group, that has also a different range because for tax folks, we still do individuals, for sure, but those are mostly they have complex issues. It’s not one where it’s just a simple 10-40, but rather they have a business, they’re so full of proprietor. There’s more complexity in their taxes.
So, we’ve started to really build what we call niche areas so that we can create a team that is focused on a particular expertise via a subject matter expert, whether that’s in an industry or a service line. But the big thing that we’re doing right now is the collaboration across the firm, so that it’s not a siloed approach in servicing our clients.
So, we’re looking for very… The ideal client for us is one where we’re able to help them with the audit and then help them with the tax as well, tax planning, and then also help the individual owners to help navigate through a lot of maybe exit planning and trying to sell their business, or tax planning and creating an estate plan, or gifting plan. So, it’s really more of a comprehensive service.
Because of that, I think our ideal client really falls into the entrepreneurial category, owners that are opening their businesses, they have a high growth company that they’re excited about. They’re looking for a partner, not just to do their compliance, but to really help them navigate to the challenges and to connect them with the right resources. You know this about us, David, because you’ve been with our firm, and that was the role that you played. We’d like to think of ourselves as truly that trusted advisor that connects our clients to the right resources, whether that’s us or somebody else that we can refer to them, because-

Dave: Sure, yeah, like a banker, like a bank, a law firm.

Sheila: Right. Exactly. So yeah, we’re a pretty industry agnostic, even though we’re building these industry verticals. We have manufacturing construction, real state. We even have a huge banking practice, we have about 50, more than that, around 50-plus banks now that we work with. We’ve realized over the course of the evolution of the firm that there is now an opportunity to really create these verticals that is servicing the industry, but also expanding the services that we offer within each of the core audit, tax, and consulting.

Dave: Yeah. In fact, I think one of your first niches, even before you joined the firm, was the benefit plan auditing. I assume that’s still probably a significant niche for you all.

Sheila: It is. And kudos to Meresa Morgan. Meresa, she started that practice from the ground up. And I think right now, we’re close to maybe 150 that do audit, and we’re definitely in the top percentage of firms in the nation who do the number of EBP plans. So, Meresa’s done a really, really good job of building the succession as well. We have several senior managers and principals that are helping her build up practice. We see that as a very sustainable and continuing niche for us. Very excited.
And what’s nice is that we also have built up the team, even at the lower level seniors and staff that are very passionate about that area and would like to see themselves developing within that niche. Yeah.

Dave: No, that sounds good. I’ve got… Boy, I can’t believe how quickly the time has passed. So, there’s a couple of last things I would like to talk about before we wrap up.
One is I would like to talk about some of the misconceptions people have about the accounting industry or the public accounting industry. And then, I’d also like if you could give me a real-life example or two of companies or individuals that just come to mind, just an example of someone that you were able to help. Maybe somebody who was with a very small firm that they’ve outgrown, or somebody who had been with a very large firm that they weren’t getting the personal service.
So, if you could just touch on those two things. Why don’t we start with maybe some of the biggest misconceptions people have about the public accounting industry?

Sheila: Yeah. And I thank you for that opportunity. I didn’t expect that to be a question, but I’m so glad that you bring it up. And I think it’s very, very timely, because when we’re talking about that in the profession, I’m very active with the profession itself, both actually at the local state and national level. So, you might know I served as the president of the Houston CPA Society a couple of years ago, and I’m currently on the executive board of the state society. And I’m actually the chair of the Brand and Community Relations Committee, which is a new committee that we created for this year. I also just served three years on the governing council of the AICPA and I’m rolling back in next year.
So, one of our biggest hurdles, right, as I had mentioned to you before, is that we believe in the profession. I believe in it wholeheartedly. I feel like there’s so many opportunities. But there is this perception about accountants, I think, that is out there for whatever reason, and I had it too. That’s why I took management in the first place. My husband went accounting, but I went management because in my mind, “Oh, gosh, accounting is boring.” Exactly. Every time, we’re portrayed in the movies, it’s usually like this person has a half card or, you know what I mean?
So, I think essentially that you have an image issue is how I put it. And I think it’s compounded by the fact that we also have busy seasons, where some of the students may be thinking, “Gosh, if I want work-life balance, I cannot achieve that in the CPA realm and in the public accounting realm because they work 80-hour weeks during busy season from January through April.” And there are firms, obviously, where there is that need, and maybe you do work a lot of hours.
But I think it really is a misconception. If you look at the opportunities that CPAs have just in the diversity of the opportunities, so I had mentioned to you as a firm, we have our core services of audit, tax, and consulting. But if you’re coming in as a practitioner, as a staff, there’s so many exposures that you can have in these different areas because even within tax, you can be doing personal taxes, you can be doing corporate taxes, you could be doing partnerships, international tax, high net worth, state planning. So, you can pick a path that is of interest to you with impacts.
And then, if you look at audit in the same token, you can pick an industry, you can say, “I want to learn how to audit oil and gas companies, real estate companies, construction,” and then even within that, you get trained to be a consultant. So, you can become a controller, you can become a forensic accountant, which is essentially what I ended up gravitating towards where you actually do investigations and I testify in court to calculate damages involved in commercial litigation.
And then, you throw in technology. Technology is a big piece of what we do as CPA firms, where we actually implement systems, enterprise systems like SAP and Oracle, so you have the technology piece. And even as we deliver our services, we use data analytics. We’re into artificial intelligence now. We talk about blockchain. So, there’s such a broad opportunity depending on your interest.
So, we’re not just here sitting, calculating and preparing tax returns. It really is a very exciting and continuing to evolve profession, very centered on helping clients. So, whatever the client’s needs are when it comes to financial, we’re there and we can help them. And then, it even goes beyond that operationally, operational excellence, visioning, creating a plan for the future, so future planning, implementation. That’s our role as advisors. So, I really would love to change the image that we have out there of the stoic, cannot convert because we’re boring.
I mean, at the end of the day, what is the number one, to me, the number one requirement to be successful in our profession, is the ability to communicate, because every day we’re communicating with our clients, with our staff, with the community whether that’s written, whether that’s verbal. So, if you are looking for a really solid profession that you can develop yourself and then become a leader too, I think being a CPA is really one that you should be thinking about.
And I want to just touch on real quick the work-life balance issue is real, right? I mean, but you know what, I look at any profession out there, though, and it’s the same situation, a lawyer, an engineer, you name it. I mean, work-life balance, it’s just a universal issue. It’s not a CPA’s, it’s not an accountant’s issue. What I tell people, though, about that is you got to find the right organization that can provide you with a work-life balance, and I am very fortunate because that was my number one requirement when I moved to Houston.
So, when I moved to Houston, I didn’t know any firm in the area. I relied on my recruiter. But my number one requirement was work-life balance because I had a two-year-old. My oldest was two at the time, and I was going to transfer into University of Houston Law Center to pursue my law degree in the evenings. So, I needed to have an employer…

Dave: Right. With all that free time when you go to law school.

Sheila: Exactly. So, I needed to find an employer that actually understood what I was looking for, that recognize that I can deliver, but they have to give me the flexibility. You would probably be surprised, or maybe not, to learn that certain firms just weren’t open to that. They offered me a part-time position because they thought, “Well, how can you really do that?” But Briggs and Veselka said, “Yeah, go for it because that is better for us as a firm, because once you graduate,” and that’s what happened, I started our Litigation Support practice.
And so, I think, to me, don’t let that keep you from pursuing the CPA license because, if anything, it gives you the credibility and the leverage to work with your employer in creating a more balanced schedule, because I don’t think it’s a woman issue, either. I mean, it may seem that way, but I do know that millennials, in particular, the dads want to get involved, right? It’s not that Boomers didn’t know Gen Xers didn’t.
But when I started, there wasn’t really that expectation, right? It’s almost like we had to live within the structure that we found ourselves in, which is really interesting to me, because I never questioned the hours when I started in public accounting until I had Anthony. And then I said, “I’m only going to work four days with my former employer in Rhode Island.” They were like, “Sure.”
So, it’s really finding, I think, the right employers too. It’s so critical, but they share your values. So, if the value is family and finding a work-life balance, then find that employer that actually embraces that. And then, if you’re one that just really wants to put in the hours and work really hard maybe at a stage in their life, you find that employer as well that value. So, it’s really not a right or wrong, but I certainly want to just emphasize.
And I know for Briggs, we’re very, very committed to allowing our people to have flexibility. We’re all working remote right now, all 320-plus people, we’re all working remote, working from home because of the COVID crisis. But even before, they were letting people work from home some days of the week. So, I think it’s important to find the employer, so please consider. That is truly, a very good one.
And then, I think you were asking if we have some clients that maybe we’ve helped?

Dave: Yeah. So, here’s where you get to really… Here’s a great opportunity, with one or two examples, maybe just one because of time, that can illustrate and really allow you to accentuate some of the positives of the firm with a real world story. It could be probably a textbook one, maybe be some entrepreneurial company that had… So anyway, if there’s an example that comes to mind, I would love to hear.

Sheila: I’ve got one. Yeah, so I’ve got one and it’s not a specific company, per se, but I think it reflects our core mission of really assisting our clients, and because generally speaking, I can give you examples of situations where we would actually get a client that maybe outgrew their CPA, and they’re now involved in, say, international tax issues because they’re growing and we would tend to bring them in and then realize that there are mistakes that were done or things that we’re not even filed, but we can now help them remedy. Those are fairly common in terms of being able to assist them.
But the one thing that actually comes to mind, for me, that is pretty recent, is this Payroll Protection Program. These stimulus packages that were put out very quickly as a response to COVID. And I think for our firm, our focus is always how do we help our clients in a situation where they’re struggling, like “What do I do? All of a sudden, I had revenue in one month, and then I have zero in next,” and they want to protect their employees because a lot of our clients are similar to our core, they’re very people focused.
And so, when the PPP program came out, we really took the time within a few days to digest and understand it and figure out a way to help our clients. And the best thing that we did in hindsight, which in the moment… I just remember, I think the legislation was finalized. President Trump signed it, I think, on a Friday, and we had a task force ready to take it in, figure out a way for us to push this out to the clients, and then figure out a way to help them.
So, the following Monday, we actually mocked up a webinar to be able to reach our clients and give them the specifics of the program. And if you’ve been staying on top of the PPP, it’s an ever-changing, very fluid situation where you think one thing as defined and then the FDA comes out with new definitions. So, the need to actually be on top of it is so crucial.
But long story short, we ended up putting out a webinar back-to-back within two days where we had over 1,000 people attend in that two-day session. And then, we added another one that Friday for non-profits specifically, because non-profits, that’s an area that we’re also building out. I was really, really proud of the team, and the feedback that we got from the clients. Because, again, it was happening so quickly and the opportunity to apply was such a short window to think about the funds initially that ran out until it was replenished. So, that, to me, was a huge thing.
I remember, at the time, we were sending out daily communication to the firm. The challenge that I asked the team was, “You got to step up. This is a time to help clients, answer questions, put them in the right direction in terms of what they need to do in order to make this happen.” And really, our connections work well for us too because the banks were in a tough position to respond. I don’t really recall that certain banks were only offering it to their clients. So, if you happen to be a client that doesn’t have a relationship with a bank just yet, you could be out in the cold.
So, we help so many of them get connected with our community banks, that really were not partial to just their clients. And so, being able to connect them… That’s been a few months now, and we’re now in the phase of the forgiveness, and we’re continuing to help, we’re continuing to push out information every time there’s an update. That task force has evolved into a niche group that’s actually helping clients with, not just their application, but their forgiveness application as well. I think it’s a testament to our ability to really pivot and address issues as they come. It’s very client-focused and being able to provide that resource to them beyond their compliance.

Dave: Yeah. Well, thank you for that explanation. And that turnaround time from the legislation being signed Friday to having a game plan by Monday is… Not every service organization respond to that quickly. So, that is-

Sheila: And by the way, we’ve never done a webinar in the history of the firm, so that was-

Dave: Oh, wow. Yeah, to get that figured out in a hurry.

Sheila: Yeah, we piloted it with the internal people first, and thankfully, we implemented Zoom last year. And by the time Zoom took off as the media of choice, we were already pretty well versed in it and had a good relationship with Zoom. I think our license was capped at 500 for the attendance and then we started getting registrations. So, we ended up expanding into 1,000.
Again, it still amazes me. I’m so proud of the team that made it happen. That’s the one that keeps resonating with me when you asked me the question.

Dave: Well, that is great. Well, thank you for sharing that. I can’t believe our hour is already up. This has been a real treat for me, Sheila. And again, I just want to reiterate how my heart is warmed by your American success story and your Houston success story.

Sheila: Oh, thank you, David.

Dave: That just is really, really inspiring and a reminder to really every native-born American about just what a tremendous opportunity this country provides. And so, yeah, thank you for demonstrating that that opportunity exists. And also, thank you for taking such good care of our clients. We share some clients, so thank you for the good job you guys do.
I don’t know if you know, we just picked up a client that a bank referred us that you all do their audit work, and I can talk offline about it.

Sheila: Oh, that’s great.

Dave: But yeah, so-

Sheila: Thank you to you for, I know you’ve always been a huge supporter of the firm as well. So, I always appreciate you keeping us in mind and the relationship. I’m hoping by the time we get to January next year, we can have the open house because I know that’s usually a time that we get to catch up. I really just appreciate the opportunity to talk about the firm and myself too.

Dave: Well, it was my pleasure. Well, thank you again for your time and have a great week.

Sheila: You too. Thank you,

Dave: Bye-bye.

Dean:Hi, Dave.

Dave:Hey, there he is. So, are you in Winter Haven today?

Dean:I am. Yes. At the lovely Four Seasons Valhalla in Winter Haven.

Dave:Which is the name for your house, right?

Dean:That’s exactly right. We are bunkered in and yes, I’m luxuriating, yes, in home comfort.

Dave:And what’s the … Yeah. What’s the weather and temperature like? I’m always conditioned to always want to know what the weather and condition … And temperature.

Dean:It’s beautiful right now. Let’s see, weather today … Well, it’s a hot one today, Dave, 90 degrees right now.

Dave:Okay. And climbing, sunny?

Dean:90, not a cloud in the sky.

Dave:Okay.

Dean:Not humid though, so it feels nice today.

Dave:Okay.

Dean:I was out earlier this morning. Yeah.

Dave:Well, good. Well, thank you for being a guest on my podcast.

Dean:I’m excited.

Dave:I am too. Well, let’s get started.

Dean:Okay.

Dave:Let me read your bio. It should only take about 20 minutes to go through it, so I’ll try to shorten it.

Dean:Okay, perfect.

Dave:So, Dean Jackson … So, I’m not even sure how to describe you, but I’ll take a shot at it.

Dean:Okay.

Dave:You’re a published author-

Dean:True.

Dave:Host of multiple podcasts-

Dean:True.

Dave:An entrepreneur, owner of multiple companies-

Dean:Yeah.

Dave:A consultant, a coach and formerly a world class tennis player, I believe.

Dean:That’s … Wow, this is like … I feel like This is Your Life.

Dave:So, but how do you describe what you and your companies do?

Dean:So, overriding our simple organizing purposes, that we help entrepreneurs make more money. That’s really the bottom line of what we do and that means that’s our kind of guiding core so that all of the things that we do … We’re not an education company that’s teaching technical skills or teaching theory or teaching how to do this or that. We are a strategic providing coaching and tools that are directly related to increasing revenue and whether it’s through generating new clients, through generating referrals, all of the things we talk about in this holistic approach to businesses that divide them into a before unit, a during unit and an after unit and all of those with an eye on maximizing revenue.

Dave:Excellent. Well, that is a good summary. What are the types of companies who most benefit from the type of work you do or maybe give us an example to just kind of help understand, our listeners to understand some ways you’ve helped companies?

Dean:Perfect. So, there’s so many … Like any business, you’ve seen the model that we use which is our breakthrough DNA process where … And I call it that, the breakthrough DNA process, because we’ve identified eight profit activators that are universally present in every business and they are all there whether people are paying attention to them, aware of them, moving the knobs and dials that control them or not and they are all universally present but they manifest differently in every business. So I’ve had a long … Starting now since 1988, 32 years now of experience working on this model and I think the first 10 years was unconsciously working on the model without the name for it and without the structure around it and the last 22 years consciously with the …
Once I identified the system and … So, I’ve seen the application of it in businesses from the real estate business to the coaching business to industrial businesses to mainframe outsourcing for Fortune 1000 companies business, franchise operations, business to consumer companies, business to business and I’ve seen so many types of businesses that when you apply all of the things that … You see how many things work in other businesses. There’s always a way to find the way to apply it to your business.

Dave:Okay.

Dean:But it’s been the fun thing for me.

Dave:Sure, sure. And you have a podcast where every week you do just this with a different business owner, right? Isn’t that-

Dean:That’s exactly right, yes.

Dave:And what’s the name of that podcast?

Dean:So that one is called More Cheese, Less Whiskers, which is one of our philosophies of business is that you focus on the results that people are going to get more than … Make your approach to things about them more than it’s about you.

Dave:Right and what does that name mean? Because the first time I heard that, I’ll be honest, I was … I misunderstood it.
I thought it meant like me as the consumer buying cheese, I wanted more cheese and I wanted less animal whiskers in my cheese.
I don’t think that was the idea, was it?

Dean:Well, how that podcast came to be was out of the I Love Marketing podcast, which is crystal clear in the name of what that one’s about-

Dave:Sure.

Dean:Is that we … I started talking about this idea that I was curious why are mice used in psychological testing because it turns out that their motivations and response systems are very similar to the way humans respond to things and I started thinking about it that the reality for a mouse is that they have a very simple life. The two prime directives of a mouse are get cheese and avoid cats. That’s pretty much it for a mouse, and I started thinking about that-

Dave:Hence the whiskers.

Dean:Yeah, exactly.

Dave:The cat whiskers.

Dean:What I look at is that you don’t have to convince a mouse to try some cheese. They’re drawn to it. They’re seeking it out and if there’s cheese on the other side of a three-inch wooden door, they’ll chew their way through the door to get to it but as soon as they sense whiskers, as soon as they sense a cat on the other side, they’ll run away because we’re conditioned that we’re always skittish about … It’s more important to live than it is to get that cheese. So I learned something interesting about evolutionary psychology and how that applies to us that why bad news is always more motivating is that we’re weighted … We’re genetically wired to put more importance on negative news than on positive news because if it was a 50/50, if we had to evaluate every piece of incoming information and make a decision on whether is that cat close enough to get to me or anything that we would be extinct as a species because we don’t have time to evaluate this stuff.
So, at a mitochondrial level, we’re wired that it’s almost like if you touch a hot stove, before you can logically figure that out, your hand is immediately drawn away from that and that’s the way that we, as consumers, are looking at the things that we’re considering, right? Like we want to seek out the cheese, which is the good thing, the result, the benefit, the outcome that we’re seeking from an interaction with a company but as soon as we sense whiskers or a sense that this could be a trick or a trap or somebody’s more interested in a sale than my outcome or my wellbeing, that we are wired to withdraw from that or to run away from that.
So the longer that you can keep your prospective customers view on the outcome and the cheese and that the collaboration with you is going to lead to that cheese with certainty, the better off you are.

Dave:Ah, so another way to think about this is that you could have say six really positive conversations with a potential customer but if you have one really negative conversation, like where they sense that you’re just trying to sell them something, that that-

Dean:That’s exactly right.
That that one negative thing in the mind of the customer will more than offset those six very positive conversations, right?
That’s exactly right. Yeah, that’s exactly right and it’s such a balance because part of the process is educating and motivating people and when they’re properly educated and convinced that something is the right course of action, there’s nothing … Their own momentum is going to carry them towards you and a lot of times people spend a lot of time trying to convince people when they’re not ready yet.

Dave:Right and that reminds me … Yeah, and I’ll just say reminds me of … So, just to be clear to the listeners, I’ve known Dean for a number of years because we’re both clients in the strategic coach program and we’re both big fans of Dan Sullivan and one of the interesting research items that I learned from you several years ago is around the percentage of people who ultimately buy, how many of them buy in the first 30 days. Can you walk us through that? How those numbers play out?

Dean:Yeah, because I had always been a student of lead conversion. When you start learning direct response and you start learning how to run ads that generate leads, then the next evolution of that ultimately is you start to observe well, why doesn’t everybody buy or what’s happening here and so that took me down a real study of it and realizing that I came across a company that does nothing but lead management at an enterprise level for all kinds of industries and they would do … They would generate millions of leads a year for big corporations like say Kohler for faucet people who go to home shows and inquire about faucets or they respond to magazine ads or on the website and request literature or request information about Kohler faucets.
This company would handle the fulfillment of those leads and then pass them onto the sales team and what they did that was very smart was they started doing something they called did you buy surveys. So they would call people up and take a sampling and people who had responded 90 days ago and people who’d responded 120 days ago and six months ago and they would do a survey that would just ask one question, they’d call you up and say, “Dave, you came to the home show, you inquired about faucets, have you bought any faucets?” And that’s the only question they would ask is whatever it was that they had inquired about, did you buy any faucets or did you buy a new deck or did you buy a washer and dryer or whatever people had inquired about and what they found in their research was that all the people that inquired about anything just over half of them would buy what it is they’ve inquired about in the next 18 months but only 15% of them would do it in the first 90 days.
So, that means that there’s five times more people … If we were to generate a bundle, a cohort of a hundred leads today and we were to march them out and I set up for my model, I always like to be conservative, so my model is to take a hundred leads today and march them out for not 18 months but two years and downgrade the expectation to 50%, so my model is that my expectation is that 50% of the people who inquired today will buy something in this category that they’ve inquired about, whether it’s a new car, a new boat, a new law firm, accounting service, whatever it is, they’re going to buy that within the next two years but the only time, the only thing is there’s only two time frames, there’s now or not now and that’s taken me … That’s a new realization for me in the last three years.
That’s the latest sort of iteration of all of this, that rather than trying to time a sales cycle like if they say it’s going to be six months that we call back in three months or that they say it’s 90 days, we call back in 45 days or whatever, rather than trying to stock pick, like to time the market via a stock picker, I’m taking more like Warren Buffet’s approach of being a value investor and stay invested in the market, that I’ve got these 100 leads, I’m going to stay in contact with them continuously for a hundred weeks. A hundred times a hundred, that’s two years of weekly … And weekly is the right cadence in most cases. In some cases, monthly or we can go less than monthly if you’re doing … Monthly, if you’re doing something by print, weekly if you’re doing something by email or biweekly, and email are biweekly and not trying to ever then time it and reach back out to people but to see who are the five-star prospects.
And what I mean by that is that at any time, in order for somebody to do business with us, they’re going to have to meet five criteria. First of all, they have to be willing to engage in the dialogue. Then they’ve got to be friendly and cooperative when we talk with them. They’ve got to know what they want. They’ve got to be ready to get it and they’ve got to want us to help them. Those are the five, so five-stars. I look at those as like the staged lighting at the drag races, right? First one goes on, the second one and then we bail out if at any point they’re not moving to the next level. We need to stay at that level until we determine that they’re ready to move to the next.
Now, what traditional marketing and what especially online marketing has really done is they approach it from the bottom up instead of from the top down. They generate leads online and then they start saying to people, here’s what you should buy and you should buy it now because I don’t know how long we’re going to keep this up or how … This is going away after midnight and this is the lowest price you’re going to get, they’re trying to induce people to buying now and so I look at it that if they have to be all five, then why not just start at the top and see who’s willing to engage in the dialogue.

Dave:Right, right.

Dean:So, when they respond, if we can just engage them and ask by email a simple question to engage somebody in a dialogue. Somebody comes to our real estate website as a buyer looking for a home in a particular area, we will send them an email the next morning and say, “Hey, Dave. Welcome aboard. Are you an investor or are you looking for a house to live in?” That would be a simple question that we can ask people that get a lot of response. The five star prospects, see this is the thing that people get confused about is that we’re not creating five-star prospects, we’re discovering the five-star prospects.

Dave:Yeah.

Dean:And so by asking a simple question, if they say … If they respond to that, then the odds are when you reply back to them, they’ll be friendly and cooperative and engage with you in a further kind of dialogue, which now we can steer to number three, which is do they know what they want? And do you know what they want? That’s the whole thing. So everything about the dialogue should be about determining what is it that they want and when you’re crystal clear on what they want and that it matches up with what you’ve got, then we move onto are they ready to get it now?

Dave:Right, and that’s where the…

Dean:Yeah, it never feels like selling-

Dave:Well, and I think my recollection is that although 15% buy in the first 90 days, I think it’s only like 5% that buy in the first 30 days.

Dean:Right, that’s exactly right.

Dave:But on the other hand, the average … I think you coined a term, so many companies put the prospect through the gauntlet. They just bombard them and after about two weeks, you’re sick of them and they think you’re a deadbeat, so they’ve passed up 95% of the opportunities by not recognizing that there’s only so much you can do to persuade somebody to change their buying timeframe.

Dean:That’s exactly it. It’s just discovering it. That’s the funny thing. Yeah, that gauntlet series was actually … That’s a term that internet marketers use that you got to send people through the gauntlet series and what I really … I was speaking at a Dan Kennedy event and I looked up the word gauntlet and found out that it’s actually a military punishment where a man was forced to run through a line of other men who were beating him with a stick until he got through the other side and that was your punishment. Once you ran the gauntlet, then you were considered disciplined kind of thing and I think that’s what we’re … That’s exactly how your prospects feel then. Some of them are going to feel…

Dave:Like they’ve run the gauntlet.

Dean:They’ve run the gauntlet.

Dave:How well would they do if they transparently said, “Hey, mister prospect, how would you like to go through our punishing, annoying gauntlet? What do you think?”

Dean:Right.

Dave:I’d say the takeaway would be low. So hey, I’d like to switch gears and talk about a couple … So, this is great stuff, I don’t want to minimize it but there’s a couple other things I want to talk to and there’s a couple concepts that I believe you either invented or at least you created a name for and so this is the quiz part of the podcast. I’m going to quiz you here, okay? So the first one is what is the alternative to the mainland?
Cloudlandia.

Dave:Ding, ding, ding. You are correct. That is the first one. And then let’s get to the next one and then I’m going to come back and go into more detail. So the second one is let’s say an entrepreneur gets an idea he wants to move forward on. He thinks it’s the greatest opportunity ever but if he’s not careful, he’ll get stuck and if he gets stuck, what’s the first question he should ask himself?

Dean:Okay. So my thing is I would say who can do this for me would be the question but I-

Dave:Ding, ding, ding. Yeah, who … And you have a shorter term for it, right?

Dean:Yeah.

Dave:Who, not how.

Dean:That’s exactly right, yes.

Dave:So, we’ll come back to that one. Let’s jump into the Cloudlandia idea here.

Dean:Okay.

Dave:So, the mainland versus cloudlandia. So tell us what this means.

Dean:Well, we’re seeing right now and this is before as we’re recording this, we’re in the midst of the quarantine. Everybody’s got to stay at home, nothing like we’ve ever seen before but up until this point even-

Dave:By the way, let me just interject, let me interject Dean, so we’re recording on April 8, 2020. So go ahead.

Dean:There we go. Perfect. And so everybody, up until this point, we were seeing already a mass migration of people into the cloud as the main world, right? That this was the thing, it’s happened over the last 20 years but 20 years ago, the main focus of our world was the mainland and the internet was a slight distraction from the real world and then overtime, as we got more and more into the decade that we’ve seen that the transition has happened that the main world is in the cloud now, online is the main thing. Cloudlandia is what we call it. We’ve all migrated to Cloudlandia and we have to really put things in place to carve out time to do things on the mainland, that we really are, our whole lives, moving faster and faster towards being sort of cloud dependent.
I remember in the 90s, there was a mainstream magazine that had a journalist lock themselves in a New York City apartment for a week with their only means of communication the internet to see if they could survive for a week on just the internet and he struggled and found a restaurant that was online and he was able to order Chinese food and have that delivered to his apartment and now, the daring thing would be to see if you could lock yourself in a New York City apartment and survive for a week without the internet.

Dave:Right.

Dean:That’s really where we’re at now is that it’s not just this little distraction from our mainland world, it’s the main world now and god forbid, could you imagine what the disruption would be like if they said we’re going to have to shut down the internet for the next 60 days.
Yeah.

Dean:I mean we are so fortunate that all we’re seeing right now is a mainland disruption but could you imagine the impact of having to shut down the internet for 60 days?

Dave:Oh, for sure. I was listening to a podcast this morning about a guy that specializes in ecommerce and he works with all these companies and these little companies who sell things through Amazon and he was talking about how their business … All of his clients’ businesses have exploded in the last 30 days.
And yeah, and so like a really simple example might be like say a movie, like 20 years ago, in theory, I mean assuming you were watching it like on cable, you had to go to a movie theater, right?

Dean:Yeah.

Dave:You had to get in your car and drive to the movie theater and wait in line and buy a ticket and then hope you got a good seat and then hope there wasn’t sticky popcorn on the floor, right?

Dean:Right.

Dave:And then you had to watch 30 minutes of previews and then when you left, you had to fight the crowd out to get out and now, you just sit down in your comfy chair and 30 seconds later, on Netflix, you’re watching a movie.

Dean:That’s exactly right, yeah. So, life’s getting better and even when you do go to the movies now, that’s elevated the … It still coexists but it’s elevated the movie experience.

Dave:Right.

Dean:Now, when we go to the movies, the movie theaters are much nicer. They’ve got reclining seats. They bring you food. All that stuff.

Dave:Right, and you didn’t wait in line for your ticket, because you bought it on Cloudlandia.

Dean:Bought it ahead of time, that’s right.

Dave:So, now let’s switch gears. I can’t believe how the time is just flying by. So let’s talk about the other concept I mentioned, the who not how and so what does this mean and what kind of … Is there a story you can kind of pop into this?

Dean:Yeah.

Dave:I think this came from a conversation that you had with Dan, wasn’t it?

Dean:Yeah.

Dave:Around procrastination?

Dean:Yeah, that that’s the thing that often when an entrepreneur is faced with a new idea, an idea, a what, this is … That’s really what an idea is, is a what and so what you want to do. Here’s an idea for you, this is what you should do and an entrepreneur sees it and says yeah, I should do that. I want to do that. Now, they’re at the crossroads. Now they’ve got a choice and they can go down the choice of how do I do that and now they’ve got to go down that long winding road writing a blank check with the only resource we have that’s nonrenewable. We don’t know how long it’s going to take for you to learn how to do whatever that new thing that you want to do is and then even when you learn how to do it, now you still have to then do it slowly and poorly because it’s your first time doing it until you get to done, right?
Now, if you are at that same crossroads and instead of saying how do I do that, you ask yourself who can do that for me?

Dave:Yup.

Dean:Now, the great thing is when you find that who, they’re going to bring the how with them and they’re going to save you all that time because anything that somebody anywhere has already done is just a technical problem that the answer is known and you just need to know how to do it or find somebody who does know how to do it and just describe your what, describe what you want and then you’re done. Once you articulate it and describe it to the right who, now you’re done and you get to stay on that high road of the high value thing is going out and discovering what else you could do because you don’t have to spend any units of time on how.

Dave:Well, and I have a perfect example of this that will, I’m sure, resonate with you about three years ago, I was quite a … I listened to a lot of podcasts and I’ve thought, it’d be kind of neat if I had a podcast and so this idea kind of … And then I’d maybe do a little research, how to do a podcast and it appeared I needed some kind of microphone and some kind of gear and there were all these things and so I had this idea, classic case, I’d like to do a podcast and then I started instinctively saying well, what do I need to do? Or how do I do this podcast?

Dean:how do you do that, yeah.

Dave:So this goes on for a couple years and I talked to other entrepreneurs, wouldn’t you like a podcast? Yeah. Nobody makes progress. Well, then about nine months ago, I get an email from one of your colleagues or maybe it’s from you and the question was, hey, how would you like to have a podcast? If you would like a podcast, just say yes and you’ll have a podcast and so the IC-DISC show is a product of that interaction and I said, yeah, I don’t have to know what to do to have a podcast or how to do it, I just need to know who and the funny thing about it is, when I launched this about six or eight months ago with your company, I was so excited and I shared it with other entrepreneurs who also wanted to podcast.
And I probably shared it with 10 entrepreneurs and they all said, “Well, that service is really interesting but I’m not sure it’s for me because I’m about ready to launch my podcast as it is. I’ve got my microphone, I’ve got this thing,” and I’m sure you’ll not be surprised, none of those other 10 entrepreneurs have a podcast and I have a podcast. Now, is it the greatest sound quality like in the whole world? Is it produced in a studio? No. But we cruise out-

Dean:It’s not NPR. Yeah, it’s not NPR quality but let’s face it, we’re not talking about NPR.

Dave:Right, right. I guess it’s a good enough solution. So, no, I’ve experienced this first hand and I find that so many of my life or business opportunities are so much easier by just asking that one question, who not how.
Okay, well, a couple other items I’d like to discuss because I could spend the whole time just delving into any of these, so what was … So, I think you referred to this time we’re in as the quarantine and I’ve thought about this and I’ve chosen … And I think this was influenced by Dan and when we talk about Dan, we’re talking about Dan Sullivan, the founder of strategic coach, the best coaching organization on the planet for entrepreneurs in my opinion and I suspect yours as well.

Dean:Absolutely.

Dave:And so some of this I might have gotten from Dan but I prefer to label this the pause and the restart. So we’re currently in the pause and then one day, we’re going to have the all clear sign and we’re going to have the restart and so Dan invented a question called the R-factor question as you are well aware and the question goes something like this, “Hi, Dean. If you and I were sitting down three years from now and looking back over these last three years, what needs to have happened for you to be satisfied with your progress both personally and professionally?” But I have a version of this I’ve been asking people lately and I’d love to get your reaction to it.
So, my version is Dean, if we’re sitting down three years from now and we’re looking back over those three years, what do you think the probability is that you’ll be more likely to say A or B? A is the pause and the restart destroyed my business and my life or the pause and the restart was the greatest opportunity in the history of my business. Which one would you be more likely to lean to, if you just had to guess?

Dean:Oh, for me?

Dave:Yeah.

Dean:Obviously, yeah, I’m already looking at it as a slingshot.

Dave:Yeah.

Dean:Yeah, no, it’s going to be one of the greatest things ever just because it’s opening up so many possibilities. The greatest benefit of all of this is that we, as a country now, are going to be familiar with and accustomed to virtual gathering and that is a big thing. I mean I can’t tell you how big that is. And this has opened up so many opportunities.

Dave:And if I could … Well, and to just interject, to give some context here, you have a program. I believe the name is The Breakthrough Blueprint, right?

Dean:That’s right, yup.

Dave:And you historically do what? About eight or 10 of these events a year?

Dean:That’s right, yup.

Dave:And you typically have, call it an average for easy math, 10 people at an event.

Dean:Yeah, that’s right.

Dave:And I think you’re … The investment for somebody to attend this event is about five grand.

Dean:Right, that’s right.

Dave:So, on the surface, you just do some quick math and you’re like that’s … And these are in-person events, right?

Dean:Yes, yes.

Dave:So, on the surface, you would think, one might wonder well, Dean, how can this because good for your business? Because one of the significant … Hundreds of thousands of dollars of annual revenue are now off the table for you-

Dean:Oh yeah, yeah.

Dave:But I know you have an answer to this because I know you had a Breakthrough Blueprint scheduled that you had to change. So tell us about it and what you learned and why you’re so excited about this opportunity. So tell people first a little bit about the event, how is it normally structured?

Dean:So, this is something that is a three-day event we do in a boardroom style, so 10-12 people at the event and it’s three days just going deep and applying the eight profit activators to all of the businesses that are there. So you came to one of those events and you got to see the model.

Dave:Yup, two years ago in Orlando.

Dean:Yeah, it’s a very intimate gathering. Time flies when you’re there but the ideas and the understanding that people leave with of the opportunities in their business is so rewarding to see it unfold. Now, this time of year, I am normally … Most of the events I do here in Florida but I also do a little world tour each year. So I’d go … I had five events scheduled between March, middle of March and July 4th, including Orlando, Toronto, London, Amsterdam and all of those events are off the table. So like you said, you do the quick math, it’s a swing of hundreds of thousands of dollars, especially because some of those people who attend those will also become consulting clients on the back of that.
So, you could either be distraught by that or you adapt and you start just thinking well, what is actually the outcome that we get from it? I mean the benefit of it is that we get to spend the time in depth, in the boardroom, having the conversations that lead to the breakthroughs and that is something that we could do virtually and so Zoom is a great environment to have a 10 or 12 person meeting in that everybody … It’s just as intimate as being in the boardroom and I did an event two weeks ago that we had exactly that experience and people from Las Vegas, from Canada … We had someone from Belgium, someone from Bangkok and we all gathered in the virtual boardroom and had an amazing experience and so I got a taste of what that’s like and I realized, boy, it’s so great to be at home too, because we were all then, at the end of the day, we’re in our own homes, which is just so much … So exciting.

Dave:Yeah, you’re sleeping in your own bed-

Dean:Well, I … Yes, but I’m super excited about the future here and it opens up a lot of new avenues for doing these kinds of events where you don’t have to necessarily get it all into three days because we could spread it out a little bit in that it’s not the … No travel, so you don’t have to kind of make it all batched like that-

Dave:Oh, you have a really good point. You could spread it out over like every other day for a week so people could have a day and then they could have a day to kind of digest it a little bit.

Dean:That’s it. So what we settled on was we did two days from starting at 10 o’clock and we would end by five with a lunch break and a couple of … A break in the morning, a break in the afternoon and then instead of doing a third day, I just set aside a 90-minute consultation for each of the participants to schedule, at some point after the event, after they started implementing some of the stuff, to do a followup and specifically help with their situation and so it works out tremendously. It’s a great … I think a wonderful experience and I’m super excited about doing more events just like that.

Dave:Yeah, I can see why. So, have you heard Dan Sullivan’s theory that this pause and restart, again this is the way I’ve chosen to label this from now on, is the pause and the restart, it’ll be like a game of Monopoly, because Dan says when you play Monopoly, you finish the game. There’s a winner, there’s a loser. Then all the pieces go back on the board and then you start a new game and you may not get the top hat or you may not get the horse, it’s a whole new game but it’s still the same game. It’s Monopoly.

Dean:Yeah.

Dave:And Dan says it’s like Monopoly except the pieces all go back in but when it comes out, it’s not even the same game anymore. That everybody on earth has had their game put back into the box and they take it back out and the pieces are different, the board’s different and the rules are different. What do you think of that?

Dean:I think that’s absolutely true and you’re either going to adapt or you’re going to pine away for the old game and in a lot of ways, the old game’s not coming back, right?

Dave:Right, right.

Dean:So, you adapt and I think that’s the thing.

Dave:Well, I know Henry Ford reportedly said, it’s one of my favorite quotes and he reported said, “Whether a man thinks he can or he thinks he can’t, he is right.”

Dean:That’s exactly right.

Dave:And I think this quote could be tweaked for our situation and here’s what I’m thinking and I’d love to get your reaction to this. So, if you think the pause and the restart will ruin your business and your life or whether you think it will end up being the best thing that ever happened to your business, you’re right, what do you think?

Dean:Yes, I agree, 100%. That’s the thing, when you focus on … When I had the event scheduled for March and then of course, I had these future events, I started seeing, okay, I could’ve focused on what I’m not able to do and that would lead you down a path of despair kind of thing, I think. It would be easy to do that or be victimized by it or I could set it behind, get through the grief curve and get on the other side and just start moving forward on what is possible now. What’s not affected is Cloudlandia, so let’s just jump aboard and realize that’s what’s going on.
One of the things that I’ve psychologically been kind of focused on is as a tennis player, the thing that was, I think, the greatest life lesson I got out of that was what a sports psychologist taught me, that every shot makes somebody happy. That’s really the reality of playing tennis, right?

Dave:Right, right.

Dean:We’re playing and I hit the ball out, that makes you happy but it doesn’t make me happy and the best position to be in is to take the view of the umpire who just sees the ball in or out without any emotional attachment to it. So, if you can do that and then do what you need to do, adapt, that’s the best win.

Dave:Yeah, it seems like it. The part that’s … Maybe discouraging is too strong but you hear about the numbers of people that are playing video games, you know how that’s just skyrocketing and streaming has skyrocketed and I’m like these same people are the ones in three years who are going to say this thing ruined their life and it strikes me that it seems like the majority of Americans have the ability to influence their answer to that question I ask three years from now, was the pause and the restart the worst thing that happened to you and did it ruin your life or was it the chance of a lifetime and it seems like most people, and there’s always exceptions, some people just got lucky like all the Amazon sellers. They just kind of got lucky with this, right?

Dean:Right.

Dave:Or maybe not quite lucky but things … They had a business model that was suddenly enhanced and I can appreciate somebody who’s been a restaurateur their whole life and they’ve got three restaurants and they maybe aren’t going to restart them and they’re maybe toward the twilight of their career and they’re just not up for a comeback but I think … It seems to me that the vast majority of Americans have the ability to choose which their outcome is going to be.

Dean:Yeah, I agree and that’s one of the great things of being in a free market country like that, that we can literally choose our path.

Dave:Right, it’s amazing. I was telling a friend of mine the other day that he said, you’re always so optimistic and you always see the glass half full and I explained to him that I’m not that way naturally, I’m really kind of a pessimist and I tend to see the glass half empty but when I chose to become an entrepreneur about 15 years ago, I realized those are mutually exclusive. You can’t be an entrepreneur and a pessimist. Like you have to decide which is more important to you, maintaining your affinity for being a pessimist or being an entrepreneur. So for me, one of the greatest things about becoming an entrepreneur is I had no choice but to change my mindset from one of all the things wrong to all the opportunities that it presents

Dean:Yeah, it’s so exciting. There’s so much opportunity.

Dave:Yeah, so what else, I guess in the five minutes we have left … Well, here, first of all, let’s get your website out, deanjackson.com, right?

Dean:That’s a good start, yeah.

Dave:DeanJackson.com and it’s a unique website because it’s just … How would you describe your website?

Dean:Well, it’s like a holding company in a way. It’s all of the different projects and companies that we have going on. A good place to start is there’s a free book there called Breakthrough DNA that explains the eight profit activators and everything that’s the foundation of what we talk about. So that’s a good place to start and from there, you get access to all the podcasts and everything from there.

Dave:And if they happen to download your free book, they can have confidence that if they’re not looking to engage further next week, you’re not going to put them through the gauntlet, are you?

Dean:Right, there’s no gauntlet series, that’s exactly right.

Dave:You’re a gauntlet-free zone?

Dean:That’s a gauntlet-free zone. Conversations only. That’s right.

Dave:Awesome. Well, Dean, is there anything else on your mind that you think we should have discussed but we didn’t?

Dean:No, I think this is … I think that the opportunity that we really have right now, while we’re in this sort of groundhog day situation, we have nothing but time to catch up on sleep and to develop the habits and the routines that we want to carry through and it’s a gift that we’ve got right now.

Dave:Yup, I agree. Well, Dean, I really appreciate you being on the podcast.

Dean:It was fun. That went fast.

Dave:Yeah, it sure did. I appreciate you being on here and I appreciate your friendship and great business ideas and marketing leadership that I’ve enjoyed over the last several years from knowing you, so thank you very much.

Dean:Awesome, Dave. Thanks.

Dave:All right, well, you have a great day.

Dean:You too. Bye-bye.

Dave:Bye.

Dave: Good morning, Ali.

Ali: Good morning, Dave. How are you?

Dave: I am great. Thank you for joining me on the IC-DISC Show today.

Ali: And I’m excited, very excited to be here.

Dave: So let me go ahead and start by reading the bio of Ali Nasser. So Ali is the CEO and founder of AltruVista and an instructor at Rice University’s CFP Graduate Program. He’s an expert on the environmental mindset and how it relates to wealth and financial strategy. His professional life is dedicated to helping business owners capture their life’s work. At AltruVista, Ali and his team provides specialized guidance to business owners who have outgrown the traditional sales based model of financial services. Using the trademark, Wealth With Purpose planning process, they help high net worth individual business owners align their business vision with their financial strategies while integrating their team of professional advisors. Ali’s upcoming book, The Business Owner’s Dilemma will uniquely address the critical decisions facing highly successful entrepreneurs. Well, so there’s your life’s work captured in 30 seconds, Ali. What do you think?

Ali: There you go. It’s always funny hearing your bio being read out loud when you somewhat write it yourself.

Dave: Sure, sure. Well, let’s get started. So how did you get into the financial services business?

Ali: So about 16 years ago, I was finishing up university at U of H in Houston and got accidentally started in a career in financial services. And I really, really enjoyed the consultative side of the business, helping individuals get to a better place, feeling like you could start a conversation and an hour later have a positive impact on the person that you’re working with. But what was very frustrating is the industry itself had so many conflicts of interest and I felt as though… You’ve experienced this and we’ve talked about this in the past Dave, that so much of the industry historically has been product focused and someone was selling an investment program or selling an insurance policy. And I noticed in the industry when I got started that people really needed guidance and advice, they needed those financial solutions, but what they needed more than anything else was a plan and a strategy to get there and to figure out what they needed to do before they start looking at what solutions might fit.
So seeing that issue I said, I love the consulting, getting a feel for the conflicts, why not just build a better model and create something that was more focused on what clients needed, which was a planning process, strategic guidance and advice, someone to help them understand their vision and their goals, and then build a plan to support it? So about five, six years into my career I decided to start AltruVista as a business that could help cater toward that type of solution and service versus the traditional sales focused aspects of the business.

Dave: That makes sense. And so I guess that’s been a little over 10 years ago that AltruVista was launched, right? I think you just celebrated your 10th anniversary.

Ali: That’s right. Last summer we had year 10. So it was exciting to have that first major milestone.

Dave: That is great. And you are correct that when I… between my original job out of school with Arthur Anderson here in Houston and getting into the IC-DISC business, I spent a number of years in financial services and one of the main reasons I left was for that inherent conflict of interest that you described. And I’ve discussed with you before that if AltruVista had existed at that time I very well might’ve stayed in the financial services arena and just shifted over to a firm like AltruVista. So yeah, I have a particularly good appreciation for what you all do. And-

Ali: Thank you.

Dave: … by the way, thank you for taking such good care of our clients. I’ve referred a number of clients to you Al and also thank you for what you’ve done for my wife and me through the years as well.

Ali: It’s been a pleasure. I love working with you and Christine as well as the mutual clients that we have. Then on the flip side, I know we’ll talk more about it in today’s talk, but yeah, the IC-DISC has been a huge win for several of our clients and a big tax saving opportunity that many of them come back and say, “Wow, I still can’t get over the fact that we saved as much money.”

Dave: Sure. Well, you are welcome. We’ve always tried to take good care of your clients as well. So let’s drill down a little bit. So let’s look at, you mentioned that you were set up to serve business owners but I’m guessing that you’re a little more focused on that. You’re not just looking for anybody who owns a business or are self employed. So what are the characteristics of the business owners that you find most benefit from your work or who most resonate with the value that you all provide?

Ali: Yeah, that’s a great question. So business owners was initially… it has been a focus of ours for I’d say eight or nine years now that we’ve really been a channel focused on business owners. The particular target from a mindset standpoint their best investment tends to be themselves or their own company. They are super focused on growing, building, developing a business that they have, and it tends to be one core company that they might’ve owned for 10, 20, 30 years that they’ve really been building up. It’s their core focus. And in some cases they may have already sold that company, or they’re just building it up and they’re generating really great cash flows.
The business owners that we deal with typically have already hit a substantial level of success. They’re not in startup mode, they’re not in more of a self employed business. They own an institution and they’ve built something that has a lot of value outside of just their efforts that are put into each day. They tend to have many different advisors. Usually when we meet someone, they have four to seven different professional advisors, tax, legal, financial. They tend to be very community and charity focused, whether it’s inspiring social change or being involved in their local community or religious institution or whatever it may be. They tend to be family and community oriented.
And I think a big mindset thing is the business owners we advise really enjoy maximizing success. They like finding opportunities to enhance their existing success, look for ways to continually leverage their best abilities and from an opportunity cost standpoint of always looking for their highest and best use. And usually the target, I’d say the majority of our business owner clients are in that 20 to 100 million of net worth, including their business value. Usually they’re not very liquid. Some are, they’ve had a liquidity event, but a lot of them aren’t. Typically about 20 to 100 million of net worth. And I’d say the range is from 10 million to 200 million. That’s our core client base. We do have some outliers that are above and below, but generally that’s the space.
And what we find with that group is that they’ve really outgrown the traditional sales based model of financial services. They’re not looking so much for someone to pitch them a portfolio or come up with an insurance plan. They’re looking first and foremost for more of a personal advisor or a personal CFO or a family CFO. And one of our clients mentioned that to us as a descriptor this past year, and it’s something that’s latched onto our business that we’re a family CFO. Anyone in their family, any decision that they’re making from a business or planning standpoint, they want our strategic input on to help them make that best decision. And we do everything with a plan, we develop a comprehensive strategy and plan for their whole balance sheet and their whole position and their life goals. And then we help execute that and whatever financial mechanisms are needed, they can fill the gaps. But the main thing that we’re doing is building that strategic plan for their whole life position.

Dave: Okay. Yeah. Thank you for succinctly describing that. So you’re really focused on these business owners and so you kind of touched on some of the characteristics of them, but what about… Let’s look at some of the biggest challenges they face. In your experience, what are the challenges these business owners face in regards to their planning or financial advisory needs?

Ali: I mean, the first thing is they’re so committed and focused on their core company and what they do every day and building a business is not easy. I’ve been building one in the past decade, over a decade now, and it is a difficult process to build a business and there’s a million things that you end up having to focus on and you end up being the catchall, even if you have the right people, there’s always a certain element or certain amount of work that you just will always get caught up in. And what tends to happen with that is personal planning gets put on the back burner. So most of the business owners that are out there they’re incredibly talented in their space and they’re focused every day on their space, but they’re usually not looking at their personal financial strategy. And the reality is every dollar of revenue that is generated in the company there’s a certain amount of filtration that goes through, and then the profit’s leftover. And we focus a lot on that in the business, top line revenue and bottom profitability.
But the true bottom line profitability is what ends up on your personal balance sheet and how you end up capturing your business’s success on your personal balance sheet. And for a lot of business owners, a big challenge that they face is they haven’t… and they may not even know they’re facing this challenge. They’re so business focused, they forget to have a capture strategy for their personal balance sheet to be able to capture the success that they’ve had in business. And I think that is kind of a leading, the reason that we exist is that whole notion of having someone to help guide you through the journey of capturing your success is a space that is often not filled. And that’s kind of an overarching challenge. And then within there, and I’ll talk about this a lot more in my book, but within there, there are three major business owners’ dilemmas that business owners will face throughout their lifecycle in a business.

Dave: And what are those three dilemmas?

Ali: So the first major one that hits is once a business owners come up, they’ve built their company, they have a proof of concept and making money, there’s revenue and profit coming in, the first major dilemma that a business owner faces is what I call the reinvestment dilemma. So this is where a business owner says I’ve made whatever the amount is, 500,000 or 5 million of profit from my company. What do I do with it? Do I buy real estate? Do I reinvest back in the company? Do I invest in the market? Do I park it in cash and wait for a deal to come along? What do I do with the success that I’ve created? And what’s that reinvestment strategy? And usually this will hit a business owner and without a clear plan, I could go in any which direction.
They might end up investing in 10 different startups. They might further invest in their company. They may put money in the market, et cetera. But that’s the first dilemma that they face is how do I reinvest and what is my next best opportunity for the capital that I’ve generated?
The second business owners’ dilemma is usually a little later in the life cycle where they’re asking questions about their legacy. What is this all for?

Dave: Sure.

Ali: Should I leave this to my children? Or to charity if they don’t have children or… whatever that goal. What is this all for? Why have I built this? I want to leave a legacy for my kids, but I don’t want them to be entitled. I want them to be empowered. And what happens to my company if I’m not around and who do I want to take up the tone? That’s that second major dilemma that goes on. I call it the legacy dilemma.

Dave: Okay. Yeah, I follow that.

Ali: And then the third dilemma is… it happens to some. To most, I would say at some point is the exit. And I did a Ted talk for Entrepreneurs’ Organization on this topic. But the big dilemma that comes up here is, should I, at the point that it arises, should I exit the company? We’re all going to have an exit, whether we like it or not, we all will have an exit at some point.

Dave: Yeah.

Ali: Whether voluntary or not. But for the voluntary exit, there’s a big decision that comes in as to do I sell the company and take this deal or opportunity? Do I take the capital or do I continue to build my life’s work, or is the business I’m in not really my longterm vision and should I sell? So that exit dilemma, which is one of the most difficult, if not the most difficult of the three. So we got the reinvestment dilemma as the first, the legacy dilemma as a second and then exit or liquidity dilemma is the third. So those are the, I would say the major things usually any business start at any point in time that has hit success. Just prior to success, they can be thinking all about how do I get this business to be successful? But once it’s been successful, I find that most business owners are in one of those three places and helping them develop strategy and the right conversation around those topics, asking the right questions can be enormously impactful to a business owner at those stages.

Dave: Sure. So just to check for understanding, there’s three main dilemmas you’ve identified in your experience of business owners’ experience. One is what do they do with excess profits in the business that they don’t need for kind of immediate financial support of their family? Do they reinvest that in the business? Do they diversify it away from the business? And if so, where do they put it? The second piece is legacy questions that they might have, they’re just trying to figure out kind of what the meaning and what they want to be their legacy from the business. And the third and what you’d indicated was the most difficult is that exit decision in recognizing that everybody will exit the business at some point, either on their terms or not on their terms. When is the right time for that? And that that creates a lot of… in some ways, that’s the most stressful of the three dilemmas. Is that about encompass it?

Ali: Wow, that was about the most perfect regurgitation I’ve ever heard of those three. That’s pinpoint on the spot. And that’s what the book I’m releasing that we’ll cover in depth what goes on in these stages and how to think through it, as I feel at the end of the day if you can give an owner better perspective and better clarity over their entire position, they’ll inevitably make better decisions. Because the business owner knows how to make… they know how to make decisions, but their decisions are part input and part instinct. And I think as business owners, we make a lot of decisions based on instinct and the amount of input that we have. But I think if we can have the right input delivered to us in the right way, then that allows us to make our decisions with much more clarity. And I’ve never known any time in life when having more clarity ever led to a bad decision.

Dave: Sure.

Ali: More clarity always leads to a better decision.

Dave: Sure, sure. Well, that makes sense. Well, I’d like to go back now to something that we touched on a bit earlier. And I think you’ve mentioned that the average client of yours, when they come on board, they have four to seven advisors currently. Was that the correct number?

Ali: Well, I mean it’s a range. Sure. Yes.

Dave: But that’s kind of typical, right?

Ali: Mm-hmm.

Dave: So my question is… I’m sorry, go ahead.

Ali: No, I think you’re… Keep going.

Dave: So with that number of planners, does that create any challenges for the coordination within the planning? I mean, is there any… is one of those advisors kind of the quarterback overseeing all the other advisors?

Ali: That’s a great question and I can tell you’ve got insightful background here, but what typically happens is these four to seven advisors come from different disciplines and there might be a CPA there that’s been around since the business was started 25 years ago and there maybe an attorney that’s been there for 10 years and then investment and insurance advisor they’ve been there a few years. What we typically find is the business owner goes to each professional on their own, and they all work in silo. So they get the tax input and then they got the legal input and they get financial input and then the business owner is left with having to sort through, organize these ideas and make a decision.
And what we find ends up happening is because all of the advice was given in the silo, there are major planning gaps that happen at the intersection or where these different professionals overlap. And usually these planning gaps are costing the business owner, a substantial amount of money or a substantial amount of risk and they’re unaware of it altogether. And it’s not until a catalyst comes along that the business owner realizes that there’s a problem. And a catalyst might be they just had a big jump in income. It might be that they sell their company. It could be a lawsuit. It could be a divorce. There could be anything, or God forbid it could be someone passing away. And it’s at that point that all the advisors in the family realize there’s these major planning gaps and why did no one catch this and that this situation I just described is the reason behind us creating Wealth With Purpose 10 years ago is that business owners need a process to help extract their vision and align their professional advisors to one plan. And that way everyone’s pulling in the same direction.
I use this analogy with… Let’s say you have a business owner that has a net worth of $50 million, right? Highly successful business owner. Well, if you met somebody that had a $50 million company and their C-suite of executives had never met, what would you tell them?

Dave: I’d tell them that they’ve got a problem.

Ali: They’ve got a problem. It’s pretty crazy if your C-suite has never met and you have a $50 million revenue company.

Dave: Sure.

Ali: Well, when you have a $50 million personal balance sheet and your tax, legal, financial, investment advisors have never met and they’ve never collaboratively worked together, I think you’re dealing with a similar situation. And the reality is, is that once you’ve built up that level of net worth, and you have the optionality to where you could, if you wanted to not to say you would, you could sell the company and have enough capital to be financially independent forever. You could do that, but hypothetically you’re dealing with enough personal capital at this point that you need integrated guidance and advice. And if you don’t get that integrated guidance and advice, what you’re probably already doing is there’s gaps and issues that are costing you money or creating risks and you’re not able to fully maximize your success.

Dave: Sure.

Ali: So going back to your initial question with, is there someone that usually quarterbacks this? The short answer is no, there’s not usually a quarterback. There’s usually one advisor that is, I would say the most trusted, or is the greatest confidant to the business owner. Oftentimes that’s their CPA that they’ve spent their 20, 30 years with. And they may not be a quarterback, but they may be the person that the business owner goes to for the most guidance. What we try to do in our Wealth With Purpose process is we know we do not have a monopoly on good ideas and the greatest way to success for the business owner is to get their trusted team of professionals working together.
So within our process, as we build out the planning strategy and we align with the business owner and usually their spouse to figure out what their life’s vision and goals are, we get an inventory of their position and then we bring their tax and legal advisors to the table with us so that we can work together and say, here’s what the client has expressed as their current vision. And I know they’ve expressed five other visions over the last 20 years in five different conversations, but here’s where they are today. Here are the key obstacles that we face and what additional obstacles might you see on your end. And usually tax and legal advisors are adding in their things as well. And then as a team, knowing the client’s goals and objectives, how do we best accomplish the most effective outcome? So that we’re looking at all of this and wondering how do we work together to build this?
And what happens in that meeting is nothing short of magic because you have advisors that really care about the clients. Some that have known them decades and decades. You have aligned goals, you have a clear balance sheet and financial position, and then you have the right structure in the meeting to where you’re not spending time arguing over why I want to do this versus I want to do that. You’re saying, here are the key issues, what’s the most effective solution? And then you can have some very collaborative conversation about the how, and what usually ends up leaving that conversation is, wow, he may have been a tough hourly bill for the two or three hours, but we created huge opportunities for success that are usually exponentially higher than the time and cost invested. And I think that’s something that is really great about an integrated planning process. Because you discover things that you otherwise wouldn’t have. And when you put three or four great minds, professional minds in a room at the right format the business owner wins.
And I think that’s something that when we get done with our process, many owners will come back and say, “Man, that meeting, it really helped. Every time I talked to my CPA now, and my attorney, we’re all speaking the same language on why and where we’re going.” And I think that is really powerful.

Dave: Yeah. And it sounds like you may end up being that catalyst that you discussed earlier. That person who brings everybody together.

Ali: Yeah. And that’s usually are… I find that the CPAs and attorneys, once they know we don’t file tax returns, we don’t do legal documents, but we understand them and we can help do planning. I think a lot of times they really enjoy us being someone that is pulling all the pieces together for the business owner and getting a lot of things teed up so that when we can have a meeting, they can focus on their technical tax or legal strategy and how it applies versus trying to get the business owner to go through a process, to actually get to the point of making the right decisions. Because I think a lot of time in relationships so much time is spent in the back and forth and there’s a lot of wheel spin. So when there’s one structured process that helps motivate the right actions, it just allows everybody to get better traction.
We typically do service at quarterback, I would say that’s the norm. And if-

Dave: Yeah, that’s-

Ali: … the CPA or an attorney.

Dave: Yeah, I was just going to say that that was going to be my next question is how do the advisors respond? Are they threatened by your presence? Are they like, “Hey, who’s the new kid on the block? We’ve been working with this guy for 20 years. But it sounds like they generally appreciate the role that you play once they realize that you’re not a competitive threat to their piece of the puzzle.

Ali: Right. I think you said it, you nailed it on the head there is once they realize we’re not a competitive threat. We do have some attorneys and CPAs at the moment they hear about us, their guards go up and they want to convince everyone at the table or convince the client that they’re the… They want to prove their value, which I totally understand. But I think once they see that we’re all looking for the same outcome for the business owner and we’re not competing with them and we don’t do their services, it shifts the paradigm and it is sometimes, maybe one out of three, or one out of five clients, and I’m making up a number here, but one out of five clients advisory team might have someone that feels a little threatened. But by the time that first meeting’s over, the collaborative meeting, I find that we’re all on the same page and the norm is how do we work together versus anything else?

Dave: No, that makes a lot of sense. Well, now we come to my favorite part of these interviews and that is the real life examples. So could you give us some examples of some ways you’ve helped business owners and I’ve got some ideas, but I’ll just let you just kind of run with some that come to mind.

Ali: Sure. I mean, I certainly can run with a few, but I love ideas. So if you’ve got something you want to start with, I am happy to piggyback off of that.

Dave: Sure, sure. So what about from owners that liquidity seems to be one of their biggest issues as far as short term. And by liquidity, meaning either what to do with their excess liquidity or insufficient short term liquidity, either one. What do you… And actually I’m more… Let me shift that question. I’m actually more interested in what they do with the excess liquidity. So do you have an example of that, where you’ve worked with a client on that excess liquidity?

Ali: Yeah. Yeah, we actually… So one of our talks for… we do talks for CEOs groups, and one of our most popular talks is The 10 Biggest Mistakes Business Owners Make with their wealth. And the number one mistake, the first one on the list is they have no buckets and no boundaries is what we call it, which is a lack of any cash flow or liquidity strategy. And I’ll explain this briefly. So most business owners, what ends up happening is they generate profits in their company and they have a big chunk of cash sitting inside their company account, or a big chunk of cash sitting inside their personal savings. And when you ask a business owner, what’s this cash for, this huge chunk of money? And they’ll say, it actually either, “I might want to expand the company. I might want to buy some real estate. If the market falls I might want to put money in the market. And it’s just a rainy day fund.”
Well, how’d you come up with that number? It might be $2 million in that bucket. “Well, that’s just what… That’s the excess. I’m not sure what I want to do with it, but I need it to be liquid and I need it to be available at any time.” And that’s the typical situation I’ll see from someone with excess cash. Well, while it’s great to have that excess cash liquid and available, I think all things being equal, you’d rather have efficiency on that cash, than not have efficiency.

Dave: Sure.

Ali: So what ends up… What you ideally want to create is your working capital, which is really what is the capital that you need for the next 12 months to operate your company or your personal life? And that can be liquid sitting in a reserve account or cash management or checking account, whatever it may be. But then there’s that second bucket which is, this is capital that’s really, most of the time we find is one to five year, and it might be for the examples I gave earlier about real estate or business expansion, and that capital that doesn’t have to make nothing in a bank account. You could make one to 3% in a very illiquid, very low risk account, very secure and that’s one to five year capital. And then if it’s over five years and you don’t need… it’s not your working capital, it’s not something you plan to spend in the next one to five years.
Well then by definition, that’s excess. And that really should be dedicated to your longterm capital, which could generate a much higher return, that might generate 5, 10, 15% return, whatever it may be in that longer term bucket. So for the question you mentioned about the excess liquidity. That one to five year liquidity, if you’re making 3% on a million dollars, that’s 30 grand a year. And I find most business owners have been sitting on that excess cash for three to five years. On a million dollars that would be 90 to $150,000 of excess cash that they could have made in interest just by repositioning the cash that was in their business. And this isn’t taking on special risk. This isn’t losing access to their capital. This isn’t buying a illiquid product. This is just having a liquidity strategy. And something like that, that could be the first hundred thousand dollars, the benefit that a business owner gets just purely from better management of their cash or their reserves inside the company.

Dave: And you even have… I believe you have a solution, a strategy around that exact challenge, don’t you with the business owners fund?

Ali: Yeah, yeah, we do. We noticed this about five years ago and essentially some clients want something that’s no risk and they’d rather sit in U.S. treasuries and make one and a half percent. Some say I’m comfortable with a very, very small amount of risk, but I need it to be liquid and available at any time. So we launched a simple portfolio called Business Owners Fund, and that’s a way for business owners to generate 2 to 3% on their liquid cash without having it be tied up and being at ultra short term, ultra low risk. And that’s been very successful for our clients. It’s saved a lot of… Actually made them a lot of money on something that otherwise would have made zero at the bank.

Dave: Okay. What comes to mind is an example of say maybe a client who was the most extreme that the cash they had effectively earning nothing or very little was just way outsized to what… like their one year needs are. Do you have an example that you could just share like the numbers of?

Ali: Yeah, it’s interesting how the brain works, because the moment you said that I thought of the most extreme example, and it was from years ago. But a business owner is going through our process. He had multiple different financial advisors. So his thing was he had met multiple advisors over his career and had a few millions here, a few million there, a few million in this 401(k) and pension. Kind of everything was spread out, but he had a very large portfolio with different advisors and then have three or four different companies within his business and each one of those companies had kind of their operating and savings accounts.
So I remember going through Wealth With Purpose with him, and we got to a point where we had aggregated all of the different accounts and… I’ll call it 20 different places and we aggregated everything together. And I said to him, “How much cash do you think you have between all your different accounts?” And he said, “Probably around 2 million, maybe three.” And I said, “The number is six. You got $6 million of capital completely in cash between all these combined accounts that you have.”

Dave: Oh wow.

Ali: Because they were in different places with different advisors in different companies, he had never really pulled it all together to see what his true cash allocation was. And I remember this so clearly because it was the end of 2013 when we went through his planning process and in 2013, the market was up about 30% and then his portfolio allocation was about half stocks, half bonds. So I remember him in the conversation thinking of himself or saying, “The market was up 30% this year, if I’m half stocks I would have made 15.” And he was doing the math on the 15% on 6 million.

Dave: Right.

Ali: Then it was right in this moment where it’s like, it doesn’t matter how you performed relative to a benchmark, just having efficiency of your planning and cash that’s 90% of the battle, is just having the right structure in place. It doesn’t matter if you’ve made 12 or 15 or 18, it was about not having it in cash. So I hadn’t revisited that story in years. So thank you for that question.

Dave: Oh, you’re welcome. And I can understand how that happens where you’ve got your money spread out in different areas and it’s not like they’re getting a report each month saying, “Hey, this is your excess cash and it’s total $6 million.” So it doesn’t really… It’s not really top of mind to them. How about another example of a business owner that you really felt like you were able to really make a big impact on? And it doesn’t necessarily have to be around liquidity, it can be around tax minimization or just helping them have clarity. So let’s look at another kind of real life anonymous example. I find those tend to be the most interesting way to understand your business.

Ali: And I’ll give a couple of broad struck ones, just so that your different listeners can hear from different angles. So one of them is having a true balance sheet strategy, and so… I’ll call it 90 plus percent of the financial service providers will really focus on what’s your allocation for an account or portfolio. And the reality is for most business owners, their largest stock is their company and the business that they own. So it really, if you’re worth $30 million and you’re a business owner, I would gear to guess that over 70%, 80% of your net worth is in one stock and it’s the stock that you founded. So when you’re investing or you’re planning, or you’re developing a strategy, not taking into consideration your stock in the company as your main asset, you’re really missing out on the greatest planning opportunity. So what we-

Dave: So let me just make sure I understand where you’re going with this. So for example, you’re saying if 80% of their wealth is in their company, if you look at it from an objective perspective, you’re saying, “Hey, not only do you have 80% of your wealth in small cap stocks, it’s all in a single small cap stock.”

Ali: Right.

Dave: And with that in mind, they perhaps don’t need any small cap exposure in the market, right? I mean, they may have all these small cap exposure they need, and perhaps their market exposure needs to be more conservative and recognize their huge concentration risks and small cap risk that they already have. Is that where you’re going with this?

Ali: Yeah. Well, that could be, what you just described could be the solution. I think that what you captured there was right on is that you have to take into consideration what you have right now and what your exposure is when you’re developing your strategy. So for some people, it might be, well, you know what? I’ve got so many exposure at my company I want all of my personal liquidity to be extraordinarily conservative because it has to barbell the risks that I have in my business. And you may have someone else that says, you know what? I am comfortable with the amount of risk that I have in the business and as long as I have enough liquidity separate from the company that I’m financially independent, I don’t mind having excess risk. But the key thing is, are you factoring in your business and your personal assets on your balance sheet when you’re making decisions on your total allocation.

Dave: And this is why this plan… It all comes back to the plan, right? Because depending on their age and their charitable inclinations and other things will dictate, right? You could have two people, one’s 35 and one’s 65 with seemingly identical portfolios that because of what they may want to do with the business, they’re in dramatically different situations, or even two 35 year olds that look very similar, but one has a plan to exit the business in five years and one as a plan to bring his children into the business. Right?

Ali: Right.

Dave: And that’s what all come… all comes back to the plan, right? Without the plan, you don’t know where to guide them or to assist them.

Ali: That’s exactly correct, Dave. And one little example I’ll give, there is a gentleman I was working with a couple of years back, he was telling me about his company and he said, 90% of our business comes from one, extraordinary large retailer. And I won’t give the name just because privacy, you never know who’s listening.

Dave: Sure.

Ali: It’s a very large retailer and it was 90% of his business. And his entire personal portfolio, and when I say entire personal portfolio, I mean, 100% was in treasuries and high quality municipals. Because he said, I don’t care what return I make on my personal capital, I have so much risk in my business and it’s all 90% with one customer. I need my personal capital to be as stable and secure as possible. I don’t care what the return is.

Dave: Sure.

Ali: And that can sometimes be the solution for that person and sometimes it can be totally different. All depends on the profile, the critical thing is making sure that you factor in the business risk as part of that total balance sheet strategy.

Dave: Well, and it would also matter, right? Like just the magnitude of that dollar amount, right? If their net worth outside the business or their investible assets outside the business was a million dollars they might have a greater desire to be hyper conservative than someone whose investible assets are a hundred million dollars outside the business. Right?

Ali: Right. Absolutely. That matters too. And at the end of the day for a lot of these business areas where the greatest opportunity for savings comes in, we can do all the planning. It’s how you position things from a tax standpoint that can sometimes be a big impact to the net dollar saved. There’s about a half dozen… maybe even a little more than that, but about a half dozen major tax minimization strategies that we utilize for business owners. And through a combination of those, we may have two people with the same plan, but one of them is deploying the tax minimization strategies. They both might generate the same return from their business and their personal investments, but one is netting 30% more return than the other because of tax positioning. And that can add a lot of outflow to their balance sheet.
And that’s something that when we think about like our work with you with the IC-DISC, the IC-DISC is one of those half dozen tax strategies that can really help a business owner keep more of their net return through their business versus just on a personal balance sheet. So that’s another way that’s like a real life example of tax minimization is using a strategy like that can end up just… You’re making $10, you can keep six after tax or you can keep eight after tax. The difference is how you do your planning.

Dave: Right. Right. Well, that is helpful. But boy, I can’t believe how fast the time is going. We’ve got about 15 minutes left. So why don’t we talk about a couple of misconceptions that people may have about your service? What are some misconceptions that come to mind?

Ali: I think the first and most common is the perception of what an advisory firm… We call ourselves a family CFO, an entrepreneurial wealth planning, but the moment you say wealth, everybody thinks money management, product, some stockbroker or insurance agent trying to pick something. And that is by far, the most challenging misconception of our services is that it’s very focused on money management, liquidity, product. And the reality is it’s 90% of what we do, and I’m not speaking for the industry, but specifically for AltruVista. It’s really more of a consulting and planning and helping a business owner and their family get aligned with their advisor team, with their goals, figuring out the nuances of their balance sheet position and maybe 10 or 20% is time spent on the actual end solution. Because so much is really in that creative side of the planning and consulting. So that’s probably the largest misconception.
And the second thing is that business owners feeling as though they need to be planned or have their ducks in a row before they come to us. That, “Oh, I really need to get organized and when things have the right time, then we can talk. Right now things are crazy.” And the reality is, is that the planning process, it’s a process. It’s not an event. It’s not one meeting. When we engage someone, it sometimes takes us nine months, 12 months, 18 months to get all the way to the finish line. But during that process, we’re having multiple meetings to make progress and we get progress, we get momentum and it gives the business owner the time and space to really think and rethink about their goals. I find that many business owners can make a decision if they want to in a microwave, but most of them prefer to make it in a crockpot-

Dave: Sure.

Ali: … and take their time and revisit the decision again and again. So they really have certainty it’s the right thing. So you don’t have to be in a position where, I have everything organized and then what I want to do, now I want to meet with someone. Actually it can be more beneficial to say, “I’m not exactly sure what I want, and I’d rather take this slow and go through this process.” And I think that works out really well because they get the space and time to think, and we can really learn about them and not make immediate decisions that we could one day end up on doing, but really be intentional about what we’re doing.

Dave: No, that makes sense. What is the typical… You’ve made me think of something, what’s the typical relationship like over the first 10 years? Like, how many meetings do you have a year? What are the purpose of the meetings? I think kind of really your people have context of how the service works.

Ali: Yeah. That’s a great question. And I really appreciate that question, because I don’t think I’ve ever been asked that before, what a decade might look like. Year one is our trademark year of Wealth with Purpose, where the very first thing that we want to do is determine what your goals are and really work with you and your spouse, figure out what it is that you want to accomplish and why and where your current positioning is. Who’s on your advisor team and how do we take your vision and your goals and identify the major gaps, considerations, opportunities within your position. So think of a SWOT analysis. We want to look at your overall entire financial position and say, what are the best strengths, weaknesses, opportunities, threats to kind of keep it straightforward and get everyone on your team agreed that we’re going to pull in the same direction. And that year one is doing that process and getting alignment from our clients that this accurately reflects your goals, vision, and values and you’re now in a position to say, let’s execute and let’s make the changes that we need to make.
This is typically going to involve revisiting your tax strategy, revisiting your estate plan, revisiting your investment strategy, looking at your cash flow and developing the right cashflow structure, looking at risk management and asset protection. Something like if you got sued tomorrow, how are your assets positioned? Every aspect of your balance sheet planning and personal life planning as a business owner will be addressed. And we won’t necessarily have a solution for 100% of the things year one. We might have 60 or 70% that we solve in year one and then the rest carry over to year two.
Then once we’ve built out that plan and blueprint, then we’re implementing or working with your tax and legal team, we’re implementing on the financial side, they’re implementing on a tax and legal side, and we are navigating through getting all of those key obstacles addressed and executing those. Then ongoing, I’ll call it… once we’ve implemented and this may be year two, year three, year four. Once you’ve got through the major portion of implementing, then we’re managing this plan for change. Because I can guarantee you this as a business owner, you are going to have change and economically there is going to be a change. The tax law is going to change, your business value is going to change, your cashflow. Economically, things are going to change and that plan that we build has to be fluid enough to adapt to the changes in your position and the changes in the marketplace.
So each year we are looking at ways to revisit that plan and continually create more value. So not just updating the plan, but updating the strategy. And I’ll give you a small example of this because we went through it together actually a few years ago with some of our clients in oil and gas. 2014, 15, 16 was a very tumultuous time for oil and gas. And some people that I knew that were making profits hand over fist in 2015 were losing money.

Dave: Sure.

Ali: And I had some clients that were business owners and they said, “Ali, look, I am underwater this year. We’ve had losses in the company.” Some even Hurricane Harvey in 2017 had lost money and they said, “We really don’t need to do planning. We’re losing money right now.” And I convinced them otherwise and I’ll explain why. Sometimes when you have down years or economically you go through a tough period, it’s the best time to plan. And years like 2015 or 16 are great opportunities where a business owner may have a negative tax return and they might be able to recognize gains on their portfolio with no tax. And even when they convert. They could convert an IRA to loss and pay no tax because they had no income that year. There’s great opportunities to do strategic planning and save a lot of money in those bad years. And sometimes from a gift and estate planning standpoint, those are great times when values are depressed to do any gifting or selling of assets that you have confidence in longterm.
So the maintenance stage in the plan really is a maintenance, it’s all about strategic update. So in summary year one, develop your blueprint plan and strategy and implement the critical items. Year two, let all the dust settle from the changes, help conform to the new norm, help a business owner understand now that we’ve done what we’ve done, here’s your new normal. And then year three onward it’s how do we maintain and manage the strategy for change and continually make sure that we’re staying ahead of the curve. So if there is a change in tax law where that firm is looking at the tax law and saying, how does this impact a business owner and how can we bring strategic thought and guidance to business owners to say, here’s what this looks like, here are your opportunities and let’s get some momentum toward capturing and capitalizing on change?

Dave: No, got it. That’s a great summary that I think will help people kind of paint a picture of what they would expect over the next 10 years, working with you versus say what the last 10 years have looked like without your input. Well, as we wrap up here…

Ali: I was going to say one little thing when you said 10 years again I realized kids or children, I should say. A lot of times when our clients have been with us a decade plus is that we’re now getting their children more involved in planning. And sometimes there’s multigenerational planning going on and translating expectations and values to children and being that partner as they steward their wealth to the next generation. So it’s another aspect I didn’t touch on, but it is definitely a core part of our work.

Dave: Excellent. Well, as we wrap up, if somebody is interested in exploring a relationship with you and your firm, what would you suggest they do?

Ali: Well, they’ve got a few options. They can come to our website, which is altruvistawealth.com, A-L-T-R-U-V-I-S-T wealth.com. And basically there’s four ways they can connect with us. We have a guide specifically created for business owners on hiring an advisor for high net worth business owners. They can download that guide. It’s free to them to help kind of give them the… Empower them to know what to look for, more questions to ask, what to be aware of. So the advisor guide. They can go to our website and complete a scorecard to help them assess their current position and answer a few questions to get an idea of what kind of value and what kind of change might I get from this Wealth With Purpose planning process or from a personal CFO, a family CFO team. What does that look like? So we can do a scorecard.
They’re always welcome to reach out to us to schedule a meeting. We offer… our first stage in our processes to identify where gaps and considerations may be and kind of provide a initial written proposal like what planning process might look like and where their major considerations are. So it’s a meeting. And then the fourth one, if they’d love to connect with you and us together when we have our next CEOs’ lunch, they can come to one of our CEOs’ lunches as a guest of Dave Spray and we’ll have a seat and a meal ready for you and one of your podcast guests. So four ways guide, download, scorecard completion on the website, set up a meeting or attend one of our CEOs’ lunches or event with Dave.

Dave: Great. And otherwise my only complaint about your lunches is that they’re not frequent enough. These are amazing events. You’re always having them at a nice restaurant. You’ve got to eat lunch anyway, very informative. It’s a small group, but there’s still some opportunity to meet new people. Yeah. So kudos to you and your team. Those are always great.

Ali: Thanks Dave. We appreciate that. Appreciate your support at those as well.

Dave: So what’s the main phone number if they want to just call up the office?

Ali: Sure. (713) 581-2440. (713) 581-2440. And we’ll be happy to chat with them or set up an initial call and our meeting and take it from there.

Dave: And if they heard about this from the podcast, maybe just mention that. Just for context when you schedule a meeting.

Ali: Absolutely.

Dave: And I’m sure you’re curious to know how people come to you. Awesome-

Ali: 100% of our clients come from introductions from either an existing client or a professional alliance like yourself. So we always… First thing we want to know about anyone is how did you hear about us? And that’s always… I feel like your best clients and your best relationships tend to breed the next best relationship. So that’s something that’s been great.

Dave: Sure. I would agree. Well, is there anything else we need to add before we wrap up?

Ali: Oh, I think this has been great. I sincerely appreciate the time and the opportunity to speak to your audience. We’ve had a tremendous amount of benefit for our clients using the IC-DISC and that’s definitely a tax strategy that where it makes sense it’s hugely valuable for business owners. So it’s great to be able to partner on something like that. And thank you so much for the call.

Dave: Oh, you’re welcome. Hey, one last quick question. Your clients you’re looking for, do you… I know that they tend to be more in Houston and Texas because that’s where you’re located, but do you have clients outside of Texas that you’re still able to work with and provide value?

Ali: Yeah, we do. We have clients in different states and we do business… We’re licensed to do business across the U.S. It really just depends on their needs and engagement, but we can certainly have that discussion and call and with meeting technology nowadays, it’s so easy to meet virtually or to fly in and have a meeting, whatever it may be, but we’re absolutely open to having clients outside of Houston. Just have a conversation and we’ll take things from there.

Dave: That sounds great. Well, hey, thank you so much for your time, Ali and thank you for being on the IC-DISC Show.

Ali: My pleasure. Thank you, Dave. Appreciate you, sir.

Dave: All right, bye.

Ali: Okay. Bye.

Dave: Good afternoon Charlie.

Charlie: Hey David.

Dave: So how are things in North Carolina?

Charlie: Very nice. Can’t complain.

Dave: Excellent. Well, let’s get started. So today my guest on the IC-DISC Show is Charlie Rowe from North Carolina. Charlie has a unique story and I’m really excited to have him on here, but I guess his story isn’t that unique. But his current situation is really unique in terms of our clients. And the reason it’s unique is because Charlie sold a scrap metal operation several years ago.
And because he’s no longer in the business, no longer concerned about competition from other scrap folks. His willingness to be more transparent about some of his business lessons and some of his dealings, is a lot greater than a typical client of ours who’s currently involved in the business. Is that about accurate Charlie?

Charlie: Yes, definitely. It’s very accurate.

Dave: Okay. Well, let’s start at the beginning. I actually, even though I’ve known you for nearly a decade, I don’t really know your background. Are you from North Carolina originally? Take me from when you were born up to how you got into the scrap business?

Charlie: Yeah. I’m a native of North Carolina born and raised here. I Went to school here N State on a ROTC scholarship. And so from college went directly in the Marine Corps. And I’ve told people that, when I was in college, I didn’t know what the scrap industry was. I had my plans to go to Marine Corps. So I went straight in the Marine Corps from college, spent four years in the Marine Corps, loved it, but never really planned to make it a career.
So I got out of Marine Corps and went into manufacturing, operations. It fit with my background, I’d been operations in the Marine Corps and that kind of thing. So I really enjoy my time. I spent eight years in manufacturing operations. The last two of which took a job as a conservation and recycling manager.
So I was responsible for helping the company, the manufacturing company conserve energy in various ways, and also took over responsibilities for selling the scrap. It was doing that I met my business partner Chris Dalzell. Chris was a buyer for Midsize Yard and he was looking to leave and I was actually starting to look to leave the manufacturing sector. Wasn’t sure what I wanted to do.
And so he and I got together and started a company. So that’s how Gateway Recover got started. And that was back in 2000. So I’ve been running that company with Chris for, I guess is almost 11 years before we met. I think the first time I ran to you was an Israel convention and that was probably 2011.

Dave: Yep. I believe it was 2011. So did you buy Chris out at some point or was he just a silent partner?

Charlie: No. Chris and I were 50/50. Chris is older than me and his desire to retire came sooner than mine. So yes. So Chris I bought him out in actually late 2010. So right before you and I met Chris and I had … I had bought out his half and he retired. I was running the company by myself by the time you and I met.

Dave: Okay. Well, thank you for that background. And I believe you’ve also been married a few years and have a couple of kids. Is that right?

Charlie: Indeed. Yep. So my wife wouldn’t marry me until I … She was positive I was getting out of the Marine Corps. So yes, so I got married in may of ’92, right after I got out of the Marine Corps. And yeah, we have two kids, they … Born in ’95 and ’97. So they’re now out of college and one’s in grad school, one’s out in the working world but I’m very proud of my kids.

Dave: Well, that’s excellent. Well, let’s get in to the … By the way, first off, thank you for your service to our country.

Charlie: Thank you. I appreciate that.

Dave: So, although I’ve never had the opportunity to serve, I have a number of relatives, cousins, and uncles and grand fathers that have so I always appreciate the service. And once a Marine, always a Marine. Right? So, I’m not going to call you a former Marine. Am I?

Charlie: Absolutely.

Dave: So you’re right. I think we met in 2011 at the Israel Conference. That was an interesting year. It was the only year we ever set up a booth there. So we had a booth and I remember you stopped by, because we were giving away an iPad, we had a drawing for an iPad. And which conveniently, I believe you were the winner of.

Charlie: Yeah I was. And I think you got a fishbowl or something throw your business card in, for an opportunity you and I have had. And I had no recollection of having done that, and then got a call a few weeks after the convention and I was told I won an iPad. I’m thinking, “Okay, who’s trying to … So what … I’m thinking, what scam is this?” But yes I did win that iPad still has it.

Dave: That is awesome. You’d never even heard of the IC-DISC before 2011. Do you remember what your initial response was? I mean, high skepticism, reservation, too good to be true?

Charlie: That last one would be exactly the words I’ve used people. It just sounded too good to be true. I’m like, “You know what? This doesn’t sound…” I was a little worried about why does this sounds too good to be true. But I guess, we continued the conversation probably not as much in 2011. I just got introduced to it in 2011. I think we started talking more seriously when I saw you the next year at the convention.

Dave: I think you’re right.

Charlie: Regrettably, it took me a few years. We didn’t get my first DISC until 2014. So to this day, I’m not sure exactly why I was dragging my feet, I guess it was just … wasn’t a hundred percent sure it was going to benefit me, which in hindsight was a mistake. I should have jumped in a whole lot sooner. Could have bought more than an iPad every year.

Dave: Well, you have something in common with every single client of ours and that’s two regrets they have. They regret that, that beautiful Oak tree that they planted 10 years ago, that they wished they’d planted 20 years ago. And that they wish they’d started the IC-DISC sooner. So the DISC has been around since 1971. So we have scrap clients that have been in business since 1971 that also drag their feet.
So the point is you’re in good company, but for anyone listening to this, who’s considering an IC-DISC, the takeaway is that whenever you start an IC-DISC you wish you would have started it sooner, I think. Right?

Charlie: Yeah. I would absolutely agree with that.

Dave: Do you recall how you got past this sounds too good to be true, to having some comfort with it? Did you do some research or talk to your CPA or how did that process work?

Charlie: Yeah. When I first brought my CPA great guy, he’s a very talented CPA, still use him to this day. But he had not had any exposure to it, and he covers a wide range of businesses. There’s a whole lot more CPAs in the world in our scrap yards. So I can’t imagine it was very me that specialized in scrapyards. My CPA certainly had not heard of IC-DISC and I wouldn’t think most would I guess.

Dave: Yeah. That’s accurate. It’s rare that we find a client who CPA really has any familiarity with it. For the very reasons you mentioned, they might be the only client who’s a fit for it.

Charlie: Yeah. So he didn’t really have any input there. I mean, he did some research into it. Actually, I think his research was really once I told him I was going to do it. He didn’t really even recommend me the head in that direction. It was once that I decide I was going to do it, that he really got more up to speed on it.
Early on you had a pricing option for me that basically if I didn’t make any savings off the IC-DISC it was going to cost me nothing. So, that was the direction so I decided to get it first year. I mean, I always consider myself a smaller company. 15 employees of those 15 employees, two of them worked in the office with me. So really myself and two others will be the only office staff that would be able to provide any information. We had plenty to do.
I had to try to put more on our plate, but with that option you gave me of, if you save me some money, then I thought that was a good option to go with. So that’s why. That really pushed me over the edge to get started was, I chose your option of you sharing the savings with me?

Dave: Yeah. And you know what, to your credit, I think in 2011 we didn’t have that option. So perhaps the fault was mine for having not gotten my act together sooner and had that option available. And hey by the way, I didn’t realize how few employees you had, because I can tell you based on your revenues, revenues versus the number of employees or revenues per employee, I’ve got to say, you probably have one of the, or had one of the highest revenues per employee of any scrap yard client of ours.
I mean, I’m not going to punch in your revenues. Anyways, so kudos to you because you’re obviously doing something right to have had such few employees. I’d say our scrap clients your size typically have more like 30 to 40 employees.

Charlie: Wow, yeah. Okay. Yeah so I mean, we certainly had a small staff in the office, which like I said, I wasn’t thrilled with the idea to put more work on anybody. And I actually knew most of this would fall on me as it did. But in hindsight as it turned out, it was not a difficult burden to bear. The amount of time I had to spend on it just pales in comparison to what it did for us.

Dave: Yeah. Well, no that’s great. So I would actually like to just kind of delve a little bit into the fee options that we had then when you came on board and that we have now. Because I think it’s relevant for companies who are considering becoming a client of ours. Normally, I like to let my guests do most of the talking, but if you’ll indulge me to just give a little recap on the fee structure and then it’ll make more sense.
So the traditional IC-DISC model, is a model by which you pay a onetime setup charge to set up the DISC legal fees and stuff. And that’s about 7,500 to $10,000 and that’s a onetime fee. And then you are able to get the benefit from that date forward. And then the ongoing fee would just be a fixed fee or some percentage of the savings calculation. And what we noticed was that, so here’s the challenge on January one of say, 2020, you have to commit the 7,500 to $10,000, plus commit to spending the fees for us to do the work for 2020.
But you have no idea if it’s going to be worth it, because you don’t know on January one, what your export sales are going to be. You don’t know what your profits are going to be. And my guess is that was probably part of the reason you did move forward, was it just wasn’t a compelling enough story for you. Because it wasn’t like you were doing so much exports, so it was just a no brainer. And we saw that with many companies.
And so what would happen is we talked to them in January 1st. They’d say, “I don’t know. The dollar’s strong, China is not buying, Mexico’s not buying.” And they were understandably nervous. We’d get to the end of the year. We chat with them and they’d say, “Well, hey out of curiosity, what would we have saved?” And we’d do the math, we’d say, “Yeah, you would have saved $110,000 last year.” And they’re like, “Ah, I can’t believe we passed up on that. Well, let’s do it for this upcoming year. Remind me again how it works.”
And I’m like, “$10,000 setup fee plus the ongoing costs.” And it was funny because it was always the same story on January one. “Ah well last year was a great year, but this year, boy businesses looking tough, who knows if it’s going to happen.” So I literally had clients who like five years in a row, I would talk to them about the DISC at the start of the year. They would say, “No. I don’t know.”
And so from that, I started trying to come up with ideas to make the DISC more financially compelling. And so one of the things I did is I figured out a way to basically reduce all the risk. Where in essence, I would set up the DISC for them on January 1st, I would absorb that $10,000 setup costs. And then without getting into all the gory details, it would basically … That client could lock in the option to use that disc.
So then we get to the end of the year, they’d take a look at it and we’d run the numbers and they decide if they’d want to use it or not. And that was effectively the program that we were on. And then you were just paying us a percentage of the IC-DISC commission amount. And I believe that we actually considered, or had several discussions about transitioning to just a fixed fee model where you would just pay us a fixed amount.
And in the really good years, I think that would mean you’d pay us less. But the tough part was though in the bad years where you didn’t make money, where cash was tight, now you’re having to write us a check for something that you’re not even using. So why don’t you jump in? So walk us through what your cost benefit analysis was and why you chose to stay with that … In essence that sharing the tax savings approach?

Charlie: Yeah. There we go. I have call coming on my line. Yeah. So I definitely was happy with the … Because what you presented to me was that cost sharing model. And I looked at, did I want to pay you a flat fee per hour or a flat fee or whatever to work on it? Wasn’t sure if I was going to get the benefit. To get me to jump in the first time, the no risk model of, “Hey, if you don’t save any money, it doesn’t cost you anything?”
Certainly pushed me over the edge you get involved. And then staying with it was really a factor of had enough things on my plate as a small company, small staff, that really just … It was pretty painless every year for us to extract the data that you needed, dump it into spreadsheets, send it to you. And you guys did all the crunching and all the handling from there. So that’s definitely why I stayed with that model.
Didn’t have to worry about where my export markets were going for the coming year. Wasn’t really focused on any of that. Was just focused on trying to run the business, and this was just a great benefit. So, that’s how I stayed with that model. That was my thought process.

Dave: Yeah, that makes sense. And that’s consistent with what I’ve heard from other clients of ours. By the way, we never mind if a client wants to shift to a fixed fee model. Because quite frankly, when there’s a really bad downturn in the markets and the clients aren’t using the DISC, we don’t mind that we’ve still got some revenue coming in, even though the clients aren’t using the DISC. So from our perspective, we’re neutral because there’s pros and cons to both.
Just there are pros and cons to both for you, there are pros and cons from our end as well. Well, good. Well, thank you for sharing your thought process on that. So the next thing I wanted to talk to you about was, you may recall that we had two calculation methodologies we could do for that DISC. There was the standard calculation, and then there was the more advanced calculation.
If my memory serves me correctly, that on average, that advanced calculation benefit was about three times what the standard calculation benefit was. Does that sound right to you?

Charlie: Yeah. Based on the numbers that I’m looking at from the years we use the DISC, yes. That’s just three times higher for the advanced.

Dave: Yeah. And that’s actually real typical of our … What we see with our clients. And you may not recall this, but that first year when it was time for us to do the work, I said to you, “So Charlie, there’s an easy way to do the calculation and a hard way, which way do you want to do it?” And you said, “Well, probably the easy way. Why would I want to do it the hard way?” And my reply was, “Well, on average the hard calculation triples the benefit.” And that got your attention.
And so we went through and you said, “Well, what do I have to give you to do the easy calculation?” I said, “All, you have to give us as a copy of your draft corporate tax return when it’s ready, and then tell us the total amount of exports you had for the year. And that’s it. That’s all you have to do. And from there, we do a group calculation, we’ll regroup all the calculations.”

Dave: That process would have taken you a very little time. But the advanced calculation to do that, we need a way more detailed information. So I guess talk to me about that. For that three X increase, was it worth the extra time that it took you?

Charlie: Absolutely. And for my company specifically, we were using a ROM, which is software program called Recycling Operations Manager. 21st Century Programming is the company that sells and maintains that system. So I had bought that system from 21st Century Programming before … A few years before I got involved with you. And I was paying my buyers on a commission system based on profit, not pounds or anything.
So it was always based on profits. So we were always asking 21st Century for the information that you ended up asking me for. So we had already done some of the groundwork with them to have some of that data. But even if I hadn’t had ROM based on the savings we got, it wouldn’t be quite as easy. But I certainly could have done it and would have done it without ROM because of the savings. It just obviously worth the time to get the data to you.
And really Dave it was just about providing you with the cost of … As every load went out, we had to tell you every export load, here’s the cost for this load, and here’s what we sold the load for. So there’s a gross profit number for that specific load. And we were able to do it with ROM and I would have found a way to do it if I didn’t have ROM. It’s doable, and I certainly would’ve put the time into to get it.

Dave: Yeah, I can understand that. Another thing that makes your business unique in the scrap business, is the fact that you had that costing data for each transaction. I would say most of our clients on the scrap metal business, they’ve got good sales data. They know the commodity they sold, they know their poundage and they know the price. They know who their customer was. They know if it’s exported or not.
But what they oftentimes don’t know is what the cost is, and as I understand it that’s because of conversion. Right? I mean, they buy a mixed load of something over the scale that they’re selling number two copper, and they didn’t show a purchase of number two copper. They showed a purchase of a mixed load where they maybe have a shredder and they purchased a car body, but they ended up selling some copper and steel and other things.
And that is actually the biggest challenge that folks in the scrap metal business have of doing the advanced calculation. Now, the good news is we have the sophisticated enough data and analytics and manipulation team here, that we usually can go ahead and create that costing structure for them. That if they can get us all that sales detail, we can do the … Figure out the costing based on their purchases logs and such.
But I do know that through the years, as we’ve had clients that have run into that challenge, some of them have reached out to their software provider to see if they can help them with a report. That’s music to my ears, because I always tell our clients that just because you can’t push a button and get it, it may still be worth some manual effort because of the tax savings.

Charlie: Yeah. I absolutely agree with that.

Dave: So, okay. So you’re cranking along, you bought the business 20 years ago. 10 years ago, you bought out your partner and then at some point you decided you wanted to do something different. So talk us through how that came to be that you sold the company.

Charlie: Yeah. So in 2016, just for where I was in life and what I’m wanting to pursue, and just as anybody in the industry would knows, as I was looking at the future in 2016, I wasn’t sure which direction I need to be taking my particular company in. I always had more of a emphasis on the operations and the finance side of the business.
So I was really more interested in what was going on inside my plant and running my book, than I was and really trying to look at the overall market and which directions we need to be going. So just given all those factors, I decided it was time for me to let someone else run it. So, yeah. So I started looking for a buyer in 2016 and was fortunate enough to find one who we actually got the deal closed right as 2016 was ending.
So, yeah. At the end of 2016 I sold the business, continued to work in 2017. And then by 2018, the new owner was well on his feet and this is his company now, and he’s going forward and it has been a good transition.

Dave: Now, did you engage a third party like an investment banker to help you find a buyer or did you just run that process informally yourself?

Charlie: No. Basically I worked with a guy. A lot of people in scrap industry would know him. Tim he’s been in the industry forever. He was the first person that I engaged to help me with selling the business. I high recommend him, he did a great job as far as helping me evaluate the business, helping evaluate if it’s got a good market for it. He brought in a business broker who was more to handle the actual transaction.
And so Tim worked as my consultant. He brought in the broker, the broker helped us list it. And then it just worked out great that the right guy found it. And it fit perfectly for his life plans. So it worked great. So he was able to take over the business. He’s been very happy running the business. I felt like this was a win, win.
Because he’s continuing to run it, it’s doing well. And I was happy to hand the business over to him. And as I tell people, now I’m happily unemployed for now.

Dave: That is great. And if my recollection serves me you were also … That pricing structure you had with our program served you well as you transitioned out. Because I think as you were closing down things, you had some export transactions, I believe in ’17 and then a very small amount in ’18. If my recollection serves me correctly.

Charlie: It was interesting as we worked on the sale of the company. One of the things that the new buyer didn’t want to pay me for all the inventory up front. So we basically worked out a deal where a certain amount of the inventory I got to still own, but within his warehouse and as he sold it, I was the one who would get credit for the sale. And even though I was not the business owner in 2017, I was still selling scrap under my name, a different company name.
And so I was able to continue to use IC-DISC even in 2017 when my sales were a fraction of what they had been the previous years. But still there was some sales going out there, we were going to export. And so we even even got some benefit from it in 2017. But that was just part of the … How we structured the purchase for the new buyer.

Dave: Well, and you didn’t I think even fully also realized the final benefit of DISC, of the price of the fee structure we had. But when it was all said and done and it was time to shut the DISC down at the state and at the federal level, you didn’t get the bill from the law firm that had to do all the work to shut it down. That bill went to me. So that was another reason that that model worked out well for you.
Which by the way, I’m not complaining at all. But just another example of you truly … It was a no money down deal for you from start to finish. So do you have any other new business venture ideas on the horizon or things you’re thinking about?

Charlie: No, not at this point. I’m very happy right now. I’ve actually had to learn how to start saying no. Because my first year or so after selling business, I said yes to every single nonprofit that need my time. And I discovered I can’t do that. So I’ve had to learn how to say no. But between nonprofits I get the help and just pursuing my own hobbies and stuff.
And my wife and I once we finally sold the business, we built a Lake house. We’ve had the property for many years, so we were able to go ahead and build that Lake house that we’ve been wanting to build. So that’s consumed a large amount of our time. So far I had two months the same yet. If I have a couple of months, several months in a row, that seemed to be the same then maybe I’ll start looking to see if there needs to be something different.

Charlie: But right now I’m very happy to be able to just use my time as I so choose and help nonprofits, help my family. And it’s been great.

Dave: That is awesome. Well, so I’m curious if I could ask a favor of you. If anyone listened to this podcast, is in the scrap metal business and is either considering a DISC or has a DISC that is just doing the standard calculation, would you be amenable to a phone call just to learning more about your experience?
Before you answer I promise you our … We don’t have millions of listeners, so you’re not going to get hundreds of calls. I would suspect if you get any calls, it’s probably going to be less than 10. Would that be okay?

Charlie: No. Yeah, I’d be glad to talk about it and be glad to share what I learned and how my experience went. So, yeah, I’ll be glad to say yes.

Dave: So the easiest way would just be for them to shoot you an email?

Charlie: Certainly.

Dave: Yeah. And what is your email.

Charlie: The one is the Charlierowe944@gmail. So that’s C-H-A-R-L-I-E R-O-W-E, and then numerals 944@gmail.com.

Dave: That’s great. I appreciate your willingness to talk to them. Because like I said in the intro, our clients are … Tend to be concerned about confidentiality. They’re in a competitive market space. They don’t necessarily want their competitors down the street to know what they’re up to. So it’s not every day a client in the scrap business sells their business.
And it’s not every day that we have the opportunity for someone to tell their story really from start to finish like you have. From starting the business to the sell and, or the sale and how the IC-DISC has factored into it.

Charlie: Yeah. It is a little bit of unique situation. And I agree with you that I certainly would not have been as willing to discuss these items when I was running the business. And yeah, I certainly would agree with that assessment. That is the nature of the business.

Dave: Sure. Well, Charlie, I really appreciate your time. The only sad thing is I don’t see you a few times a year, like I used to. But the next time-

Charlie: I miss a lot of people from the industry.

Dave: Yeah. But the next time you’re in the Houston area or Breckenridge Colorado, let me know. I split my time between those two places and would love to see you.

Charlie: Awesome. Well, thank you David. I do appreciate it.

Dave: Thanks again Charlie for being a guest on the IC-DISC Show. Really appreciate it and best of luck to you in the future.

Charlie: Thank you very much. Glad to do it.

Dave: Hi, Bob.

Bob: David, good afternoon. How are you doing?

Dave: I’m doing great. Thank you.

Bob: Are we on the podcast?

Dave: You’re live.

Bob: Are we live now?

Dave: We are live. Yep. We are live.

Bob: Well, I appreciate the opportunity, and delighted to speak to you the other day and set this up.

Dave: Yeah, the pleasure is all mine. So let’s get started. My guest today is Bob Blades, the founder of Blades International, Inc. Bob began his career in 1979 as a foreign exchange intern with Texas Commerce Bank, where he remained throughout a 30 year career dedicated to international banking. He served as vice president and manager of the bank’s European division in Houston. And then as the bank merged to become JP Morgan Chase as senior vice president and manager of the trade and to international banking divisions. After 30 years with the bank, Bob established Blades International in 2009. As a broker and advisor for international trade finance, your firm advisors and brokers transactions for corporations, banks, and foreign multinationals specializing in structured trade finance, letters of credit, foreign exchange, and XM bank solutions, such as guarantees and insurance support US exporters.
Your company’s known for its innovative FX rate service called FX rate integrity. And you earned a BBA with honors and an MBA from, my alma mater, the University of Texas. And he is a native Houstonian. And along with his wife, Cindy, is blessed to have four children and six grandchildren. So, wow. Welcome to the show.

Bob: Well, thank you. Thank you, David. No, it’s a pleasure. And I recall you and I must have met some years ago as we both have a passion for international business, international trade, and we both have, I guess, niches in helping exporters. And so I have an appreciation for what you do because I can remember studying at the University of Texas about the DISC, which became a FISC, and I guess it’s now an IC-DISC. So I have an appreciation for how you help your clients save money related to their export trade. There’s some similarities as we also help exporters in the multinational companies with international trade.

Dave: Yeah. That is exactly right. And we appreciate what a great resource your firm has been not only to us, but to our clients through the years. So thank you for that.

Bob: Do we go to some questions? You’ll ask me some questions?

Dave: Yeah, that’s exactly what we’ll do. So what was it that prompted you to leave the bank after 30 years? Did you just see an opportunity in the marketplace?

Bob: Well, I did. About 10 years ago, I was fortunate to have an opportunity to pick up a couple of clients that had been good clients of mine while I was at JP Morgan Chase. One was a steel trading group and another was a major multinational engineering group. So with that, I started on international trade. And at first it was mainly structured trade, some Mexican bank business. And then we got into some letter of credit business, and it was just me at first. But then over time Jack Borland joined me who had been a long time colleague at JP Morgan Chase managing the foreign exchange business. And then a woman named Sherry Mama also joined us and she had been in Halliburton on the letter of credit side, and she’d been my longtime colleague at Chase in the letter of credit side. And then one thing led to another and we have a handful of other people that joined the business now. And we’ve evolved to where we are, as you mentioned, brokers and advisors and advisors for international trade.
So international trade has been my passion. We started out doing more loan advisory work, but with the downturn in the market in Houston a few years ago, that slowed down. Some of the challenges that XM bank has had, that slowed down. But fortunately, we had expanded our business to do more letter of credit and foreign exchange work. And today the fastest growing part of our business is the foreign exchange side. And as you mentioned in the introduction, we’re known and we’re promoting our service called Foreign Exchange Rate Integrity, a service we’ve trademarked and something that we’re investing in and growing and developing because we’ve had success in helping smaller companies, middle market companies, and in one case, one of the larger oil companies, and some multinational companies.

Dave: So let’s dive into that one. Tell me a bit more about FX Rate Integrity. So what is it and what’s it do?

Bob: Well, we have a contract with Bloomberg. And Jack Borland, he spent his career in front of a Bloomberg and knows how to use it well, because he used to manage foreign exchange at JP Morgan Chase. And he and I were longtime partners. While he was managing a team of traders, I managed the international side and I had clients like a Pemex, and Pepper Bras, The Wood Group, and the multinational companies that were here in Houston that were owned by European Asian companies. And those companies naturally did a lot of foreign exchange, so Jack and I did a lot of work. Well, then Jack joined the business about five or six years ago. And I had been dabbling on the foreign exchange side in terms of our advisory work. We put our heads together and we saw the opportunity to help clients be more efficient with foreign exchange.
So FX Rate Integrity is basically a rate service where we help our clients understand what they pay by way of markups for foreign exchange, and then help them get good foreign exchange arrangements or competitive arrangements. Jack and I are former bankers and we believe banks need to make money, they need to have a fair return, but what is often the case is there’s an opaque market and there’s an inefficiency, and companies can pay way up for foreign exchange if they are not paying attention or if they’re indifferent. So it took us a while. We started about five years ago, but today we’re doing more and we’ve had some good success, and we’re working on automating what we do to hopefully take it to an even higher level.

Dave: Okay. Could you give us some real world or give us a real world example of maybe a firm you’ve worked with on FX Rate Integrity?

Bob: Yeah. Let me tell you about a few stories if I can, because I love sharing about deals stories, and because we have nondisclosure agreements, I won’t go into names. But we got started and we helped a couple of modest sized companies, but our first big deal was for a major energy service company, used to be public. Now it’s part of the larger group, an energy service and a turbine company. And this is a company that Jack and I had helped from our days at JP Morgan Chase. And we looked at their data, we finally got their foreign exchange trades, including their timestamps, so we could look at our Bloomberg and go back to the very specific minute that they did these trades and see how much the bank made on these transactions.
And lo and behold, it was well over a hundred basis points. It was high for the volume of business that this company was doing. So we explained it to them and we shared what we wanted to do. And again, this was the early days and we were trying to establish this service. We were trying to sort out how we would market it, how we would provide it, what we would call it. So we were making our way. Well, the client said, “Thank you.” They went to the bank and immediately the rates were lowered and they shared some data with us, and they probably lowered the rates on the markups by like 80%, real significant savings. But then they came to us and they said, “Thanks.” But they didn’t hire us. And so we scratched our head and we thought, “Well, gee that was tough.” Because we basically gave a real good service.
So we stayed in touch. It was notable that we had a good relationship and we were still trying to think how we would do this, but we went back to the client some months later and they shared about six months of data. And then we put that on a chart and crafted as we analyze trades. And lo and behold, there was a real story. The chart showed a story. The chart showed that they’d been way up over a hundred basis points, how he’d come down significantly to less than 20 basis points. But then over that six month period, each trade was going up or kind of ratcheting up, maybe not each trade, but the trend was up. And it was real clear and it was obvious that by not monitoring or seeing, that they were going back up.
So that chart that we took to them and showed them was a real teaching moment. And at that point we were hired. And we went forward and lowered their markups. And I believe in that case, the average markups that they ended up paying was around seven basis points. And speaking of the energy service company, in their mind, they were doing a modest amount of foreign exchange. But it was over 20 million a year and it was significant. And when you looked at the inefficiency, it was nice savings. So we were delighted to have them be one of our first larger clients. And we stay in touch with that company today. And in fact, a while back, we helped them with what we call FX Rate Integrity Audit. They actually became part of a larger company and we helped their parent in them with what we called it. So that’s one story. Can I tell you another one?

Dave: Sure.

Bob: So we learned a lot from that. And then one of my other favorite stories was a transportation company, a freight forwarder here in town. And again, this was a company that I had known from my banking days, and I visited with their CPA. I happened to know their CPA. CPAs have been very good referral sources for us. In developing this business, it’s important to us to collaborate, similar to how we’re collaborating here with you and spreading the message with what we’re doing is still innovative and it’s a new service and some people have a hard time understanding at first. So visited with my CPA friend and we talked about his client, which had been one of my clients. I said, “Well, it may be a modest volume, but let’s look at it.” So we had lunch with the controller and he brought some foreign exchange data. It showed that their annual volume was only about 2 million a year.
Well, we had done the larger company, which was over 20 million and we were trying to see how low we could go. So we said, “Well, let’s give this a look. Let’s see if we can help this company that’s only doing 2 million a year.” And modest trades, but 2 million a year in our eyes is significant. And I think in your business as well. I mean, if you can save somebody’s taxes on a couple of million, I mean, that adds up. So we at first saw a month’s worth of data and we said, “Yes, we’d like to help you.” We put an agreement in front of them. It’s a simple five page agreement. I believe we were paid a couple of thousand dollars upfront to be mandated and to go forward. And then our agreement was to earn a share of what we proved we saved them going forward over the next year.
And it took us a while to get to that arrangement, kind of learned that that was a good way to do it, but that was the deal. So then we studied nine months or a year of data, and this is what we call our backtesting process where we look and see what they have been paying in terms of markups. We definitively state what that is. And in this case, it was about 3.2% that the company was paying in markups. Now, this is notable, because over the sample period, they had done about 65 trades and they paid $15 for each one of those foreign exchange wire transfers. So disclose to them 65 times 15 is roughly around $1,000. And so disclosed was about $1,000 in fees. But on 2 million times the markup that the bank was taking, or the bank was earning, or that the company was paying 3.2 times 2 million is 64,000. So their real cost was 65,000, a thousand in fees, plus 64,000 markup.
And as we saw this, we explained, “This is high.” And for that volume, it is meaningful for a bank, but 3% or over 3% was simply too high. So the next step is along with Jack Borland, we put our heads together, he did a report, and we went and saw the company. We gave them a recommendation on how to approach the bank with the data and with the report, and basically asked for a better arrangement. In some cases there will be break points, like we’ll have a markup for up to 100,000 trades between 100 and half million or a trade over $1 million will be even lower. And so we gave them several options, like an A, B, C, D, actually like four different options of how they might do their break points and how they might do it, but they averaged around 50 basis points.
So we gave them the information, we coached them, we counseled them and we were going to stay in the back background. And interestingly they went to their bank and the bank immediately or fairly readily said, “Yeah, we can do better.” And they agreed to go to 50 basis points about what we had suggested. So we explained, “Gosh, that’s a good deal. Take that deal.” And that’s what we imagine. And so the savings was over two and a half a percent on 2 million, that’s a cool $50,000 a year savings. And this was for a middle market company only doing 2 million. And in this case, the CPA was really pleased because they generated Goodwill. In some cases, we pay revenue sharing to people that help generate business, but CPAs are our friends. And they say that their acting as fiduciary.
So they didn’t look for any kind of sharing of what we earned on this deal, but they generated a lot of Goodwill. And my guess is for this CPA firm, they may be earned 100,000 a year on auditing and tax work for this company, but here they helped the company save 50,000 in this one year on their foreign exchange markups. And so a real good deal. But there’s even more to this story, which is really kind of telling … can I keep going on this story?

Dave: Yeah, absolutely.

Bob: I got some others as well.

Dave: This is what this is all about.

Bob: But if you’re following this …

Dave: This is all about you telling stories and me listening.

Bob: And hopefully this is … I think you’re tracking with this and you understand, and you’ve listened to me before, but what’s really interesting here is this was the early days, so there was an understanding that the bank would charge 50 basis points. So what we did was on a monthly basis, the company would send in their data, and we would check it, and we would see that it was a 50 basis points. So we did that for the first month, second month, third month. And it was right there at 50. And what’s interesting is Jack Borland and I, and our team now understands that these trades are being done through a computer and through a formula or what we call algorithms. And it was notable that the rates were like right at 50, the markups were right at like 50 basis points. It’d be like 50.2 49.7, 50.5, but the average would come out and right at 50. So it was real notable. And we could tell from our days on the banking side, we’d know that the bank would set an algorithm to put them at markups of like 50 basis points.
But after the first three months we decided, “Okay, let’s just go to looking at this quarterly because this is going okay.” So we later got the data for the fourth, fifth, and sixth month. And I’ll never forget, Jack would do the data from backtesting and looking at the interbank market rates on Bloomberg. And he came to my office and he said, “Bob, look at this.” And it was notable that the bank had gone off the grid. Instead of 50, within the last few trades of that period, they went up to over 270 basis points. And so, wow, this was a teaching moment. So we called the client, we said, we needed to go see them. So we went to see the client.
I’ll never forget this, Jack Borland who’s one of the foremost authorities on foreign exchange in the Southwest basically said, “See the data. You had an understanding of 50 basis points, but it was verbal. And we need to get it in writing because that was always our intention, but we’re reviewing the data for the year so we thought we would see how things go. And then towards the end of the year, get it in writing. But we need to do it now, and you’ll need to talk to the bank, and you’ll need to confront them and explain your agreement was 50. But in these recent trades, they went to 270.” Then Jack advised the client. And this is what I’ll never forget. He said, “The bank may share with you that they made a mistake because they had your algorithm attached to perhaps another client and they changed the other client’s formula or algorithm. So they accidentally changed yours, but not to worry, they’ll change you back.”
And so this is what we shared that they might hear. The following week, the client called me said, “Gosh, Bob, you wouldn’t believe, but the bank shared with us basically what Jack said, that they made a mistake. They accidentally changed it, but they’ll change it back and they’ll put it there.” And we had been on the banking side, so we’d kind of seen that and likely what happened was they had a good deal. Maybe a manager came through and said, “Let’s change all these. Let’s up these.” Whatever. And just innocently raised the markups. But the Foreign Exchange Rate Integrity service caught that. Then we helped them get an agreement in writing such that the bank agreed to stay at 50 and let them know if they go off that. And that’s the way it stayed at 50 basis points for the rest of the year.
Notably that client, after they finished the one year period, what we call our advisory service where we basically earn a fee based on proven results or what we might call like a success fee. But after the 12 months they’re done. And so some months went by and we went back to him and explained for a real small fee, a real nominal fee we can actually audit their account. And they became our first audit client. So on a quarterly basis, we get their rates and we audit it, and they have an assurance that they have ongoing rate integrity. So one of our early stories and a real success story.

Dave: Those are great stories. And I’m guessing that audit fee is probably average out to be less than 200 basis points. Huh? The difference between-

Bob: Oh, well, in this case, no. And we don’t even put it into basis points. It’s interesting. But in this case, the company may do … maybe they do 80. I think it’s less than $150 a quarter. It may be only $600 a year or so for this company.

Dave: Oh, wow. That’s cheap

Bob: So it’s real low. And it’s interesting. And I’m glad you kind of bring this up, David, because at first we wondered about audit, but we want to stay in touch with these companies. We really don’t make money on our audit product if you take into account what we do and staying in touch with the client, but it’s important for us. And in fact, we’ve now developed audit and later I want to tell you a little bit more about the automation side, but can I tell you another story that I think would want to-

Dave: Sure.

Bob: Another company, an out of state public company, manufacturer, mainly domestic, but they do Canadian business. And so I actually got to know the company and that’s another CFO in bringing up our business and Foreign Exchange Rate Integrity was kind of an aside, but they do about 10 million a year in foreign exchange. So we looked at their markups and we saw that they were at 200 basis points. And for a $10 million flow, that was way high. In this case, I’d actually not met the company. This was all over the phone, but we told them it was high. And similar to the story I told earlier, they basically came back and said they talked to their bank and their bank agreed to lower the markups. And at first, I believe they went to 50 basis points, but then they talked to their second bank and the second bank said they would do a lower. They actually went down to 25 basis points, from 200 to 25, but this was a company-

Dave: I would say almost a couple hundred thousand dollars a year.

Bob: Oh, yeah. Yeah. And you’re right. And that’s a big savings. But this was over the phone, brief discussions, getting to know somebody. Well, again, we were not hired because they felt they did it. Well, we stayed in touch. And so later I visited with the company and I decided I wanted to go see them face-to-face. And visiting with them, we talked about some other business. Then we talked about their foreign exchange. And I asked them if they were sure that they were 25 basis points and I asked them if they’re dealing writing. And they said, no, they didn’t really get it in writing. And they really weren’t sure. They’d been busy and rocking along, but they wanted to check.
And so this was on a complimentary basis or a free basis. They shared some more rates with us, but because I told them when the bank had told them they were 25, that might’ve been the case, but over a year had gone by. And I explained well, gee, that 25, it may be up 30, 40, 50 basis points, no telling where it is. And so they agreed. So they shared the data and we do our report, and we go back to them. And it didn’t move from 25 to 30, 40 or 50. It moved from 25 to 105. And so that much, it had quadrupled from what they had been told. But again, it had been verbal. They’d been told, “Don’t worry, we’ll go down.” But over time, over more than a year, during that period, the markups went up. And they just did, they weren’t watched.
That’s when we were hired. So it’s notable that it takes a while sometimes for companies to understand, but we were hired and then we gave the advice, explained. And at first the bank wanted to just go to 50 basis points, but we said, “No, the company needed to stress for that type of volume, for that type of flow and because of the other aspects of the banking relationship that we knew, that they deserved to be at 25 points.” And indeed they got to 25 and they too became one of our FX Rate Integrity audit clients.

Dave: Okay. Wow.

Bob: That’s another good story, another good story.

Dave: Yeah. Yeah. And it’s interesting how your service offering has just kind of followed your client’s challenges and needs. Right?

Bob: Say that again, David.

Dave: Yeah. That your service offerings have expanded as you’ve had client dynamics occurring. That you could see that there was a need for that work.

Bob: Oh, indeed. And along those lines, if I can digress for a second, we also do some LC work and I’d like to go back to the foreign exchange in a second, but I don’t want to be remiss if I didn’t talk about a couple of people on our team. I mentioned Sherry Mama before. Sherry Mama is a letter of credit expert that was with me at Texas Commerce and Chase for years. Then she was at Halliburton for about 10 years. And she helps companies, and we have a special bank relationship where we help them with their LCs, with templates, with writing LCs, advising clients.

Dave: And LCs being letters of credit, right?

Bob: Yeah, letters of credit. Letters of credits, and we’ve also done some letters of credit brokerage work. And then a couple of years ago, a man named Mike Ryan joined us who had been a client of ours from his days at Stewart and Stevenson. So he too is a letter of credit expert. He helps with one of our bank clients and then he helps on the energy service side as well. And is there as a resource to help companies with import and export letters of credits or commercial letters of credits. So there’s that side of the business. And that also compliments what we’re doing to an extent, because one of our top letter or credit clients is one of our good Foreign Exchange Rate Integrity prospects. And as we get to know the company better, we’re better positioned to help. But to go back to foreign exchange, that is the fastest growing part of our business where a lot of time is going. Can I tell you another deal?

Dave: Sure. Sure.

Bob: One of my favorite Foreign Exchange Rate Integrity deals was helping a petrochemical company. And in this case selling about 25 million a year to Europe and getting paid in euros. And they would have their euros directed to their money center bank here in Houston. So this was captive business for the bank. Well, we knew one of the executives involved and he had known of our banking career. So we looked at a month of data and we said, “Yeah, we can help you.” And we gave them an indication that they were paying over 50 basis points and that was high for a $25 million flow. And we knew that we could help. Well, some time went by, a couple of months went by and that prospect was kind of quiet. And we thought, “Well, shucks.” We weren’t sure.
But it took them some time, I think, to realize, to understand. And they eventually came back to us and they said, “Yes, let’s do this.” And of course we were working off of just a one month sample, but then they shared a year’s worth of data. And what we saw was on the roughly 2 million a month that the company was selling to Europe, they would do window forwards to protect against the rates going down. And when they had more money coming in than the window forwards would cover, they would do some spot trades. So the window forwards were a little bit larger and the spot trades that were kind of the surplus over the hedging would be a little bit more expensive. But overall, the whole flow had an average markup of 67 basis points. So that’s around 180,000 or pushing $200,000 a year in markup on this flow of foreign exchange, which was regular, a fairly routine, and for a bank, it was on a risk free basis.
So 67 was the markup. So we helped them. And in this case, the company was a good size where they had a syndicated loan agreement and they had various banks. So we help them do what was as simple as a one page request for a proposal to see what other banks might want to bid for this. So interestingly, the money center bank that was the agent in handling this deal, they came in at something less than 20 basis points, maybe it was 10 or 15 basis points, a huge reduction. And Jack and I were very pleased. But lo and behold, one of their regional banks that was a participant that needed ancillary business, and that wanted ancillary business, and Jack, and I understand how the banks operate, but this other bank was on the outside and they saw that this was risk-free regular business. Banks like this kind of foreign exchange business. So they did not know what the company was paying in markup, but they came in at only three basis points.
This was less than 10,000 a year. So instead of paying 180,000 in markup, it was a 95% reduction. One of the best deals I’ve ever done anywhere. And we were tickled and we have good relationships with that regional bank that does it at three basis points. Jack and I, we were blown away. We were really surprised because we thought it might be 10 or 15, but the market took it all the way down to three, and just very compelling. And our client was kind of a tough guy to satisfy, but clearly we exceeded his expectations and he explained that he still had a relationship with that money center bank that was his agent, but he explained to them that they were high and another bank that was in their syndicate won the business. So that’s the way it can work in this market.

Dave: Wow. Those are great stories.

Bob: Well, should we keep going with questions or can I tell you about the technology aspects, one of the technology things we’re working on or what…

Dave: Yeah. I’ll tell you what, why don’t you why don’t you tell me about the technology. Well, actually, before you do that, let me just ask you another two questions real quick. One is, are you focused just on the Houston market or do you have clients outside of Houston and outside of Texas?

Bob: We do have clients outside of Texas. So we have a global business. And in fact, one of my colleagues, a woman named Paola Gasca is on the line. She’s listening in as we do this. She joined us last year. She did some real good work. She and another woman on our team named Marissa Lara are helping us. They’re both helping us with a prospect in Monterrey, and we’ve done other business for companies in Mexico, but we’re in discussions, and we hope that we can help this company in Monterrey. And then one of the examples that I talked about earlier was in Georgia, a public company that’s out of Texas. And then some of the companies we’ve helped are here in Texas, but have foreign ownership. So indeed our focus is here. A lot of prospects here, a lot of companies here and that’s where our roots are, but we hope to do more out of state and more global. And we’re working with a software company that’s out of state to try to do some more with our product on the technology side.

Dave: Okay. It does. Yeah. Let’s talk a bit more about that and then let’s talk about how people can best reach you.

Bob: Well, on the technology side, it’s interesting. Six years ago, this was just an idea and Jack and I spent a lot of time, and we’re getting better at how we do this, but it is still a chore for people to understand because it’s new and it’s innovative. But we keep making inroads. But for clients, they need to pull that data and give us that foreign exchange data. And we need to know the date and the timestamp. We need to know the dollar amount that they paid the bank and then the foreign currency amount that they got or that was paid. And in some cases it can be pulled fairly readily. But in some cases we get it in an Excel worksheet, or most cases, and that’s the best, but sometimes we get a one page PDF where it is a confirmation of a trade. And from that we can pick up the details and importantly, that timestamp.
But one of our largest clients has a person that’ll spend about a half day a month to share data. And this is this was one of our clients where the FX annual volume may be over a hundred million and it’s a real good deal. But to enhance the service and to make it easier for them to go into the audit phase, we’ve established what we call Foreign Exchange Rate Integrity auto audit. And earlier I talked to you about how we have audit clients, but now we’re working on what we call auto audit. And we have a software company and we were just visiting the other day.
And so we’re in the process of writing the software, developing the process so that we can buy automation or a robotic process automation, or an RPA, pull data using an AP, or an applicable programmable interface, directly to our website, to our database. And we believe if we do this for one of our large clients, that instead of it taking somebody a half day, it’ll come through robotics and we’ll get the data analytics so much easier that it’ll make sense for them to do this and the cost comes way down on the audit for a long, long time. And we hope that’ll be an example and they’ll be able to show other people. So for us you, I think often you talk about misconceptions that people might have about products.
And in here people that we work with have a hard time understanding exactly what we’re doing at first. And then maybe they don’t quite understand how important the data is. We’ve got to get the right data and specifically the timestamp. And now we were hopeful in the coming weeks or months, we will do our first auto audit with software and take this to a higher level from a technology standpoint. And that’s important because we’re in this age of data analytics and algorithms, and people in college today are taking classes in data analytics. And we talked to our CPA friends. And they tell me how it used to be. When you and I were coming out of University of Texas, it would be that if you had a hundred transactions maybe to do the audit, you would test 10 transactions. But my CPA friends tell me with technology, you can audit all 100 of those transactions and that’s similar to what we’re doing with FX Rate Integrity, and backtesting, we can look and see exactly what those markups are.
And so last year we read an article in The Association of Financial Professionals website, and it talked about how artificial intelligence is coming. In fact, Paola and I, and Jeff Borland visited one of our clients the other day. And we learned how they were using artificial intelligence, very, very sophisticated, major global company. And we explained that what we wanted to do was simply use a robotic process automation or APIs to simply pull data. And for a company like that, that’s not too hard. And so we believe that in treasury that more and more will be done by robotics. In fact, it makes me think of your IC-DISC business. I know that you need certain documentation. And I wonder if maybe this is something that you’ve thought about in terms of automating, but it had been on our mind for some time.
And at first we were thinking, “Well, gee, we’re going to have to get the information directly from the banks.” And there is a movement called open banking to where third party vendors like Blades International, Inc can maybe get information. But banks obviously have to be very secure. And so that’s going to be maybe a while in coming, but there’s big efforts. But when we looked into robotic process automation and APIs and what is being done, we realized, shucks, the best thing to do is just work with our client. Let our client pull their data perhaps to an Oracle database or an SAP database, which they may already be doing. And then with our new software, we hope to be able to pull it from that Oracle or SAP database and efficiently, robotically get it to us, which will enable us to significantly lower our cost of audit and make our business a lot more efficient.
And along the technology side, if I can, if I’m not going on too long, I mean, we see-

Dave: No, that’s fine.

Bob: We see that there’s going to be a grind for years and it’s happened, but we see that these foreign exchange markups will come down and the market will get a lot more efficient because so much of the trading is done electronically. It used to be a lot was done over the phone, and used to see trading rooms being kind of loud, and traders with a phone in each ear. But the reality of it is now so much of it has moved electronically and we’ve evolved into being brokers for foreign exchange arrangements when clients are doing their foreign exchange over their internet banking systems.
It’s also interesting, a current event is how Schwab and TD Ameritrade, Fidelity and these other companies in the equity world have said zero commissions. I mean, it’s really interesting, but if you read some of the articles about that, those companies are sometimes selling those trades or they’re making money off the deposit accounts or they’re making money off of margin loans. But these equity brokers are doing trades for almost zero commission because they make money elsewhere. And it’s been a huge compression in the commissions for equity trades. But that market as we see it is way ahead of the global foreign exchange market where there still is a lack of transparency and the market is still opaque to an extent. But with the technology, like some of the things that we’ve just talked about, we believe, and we’re doing it now, that companies are going to get a lot more visibility, more transparency, and they will be able to better negotiate their foreign exchange arrangements. And it will be more efficient for the clients.

Dave: That is really interesting. And I appreciate that parallel, that with the equity trades those spreads going all the way to zero now and that the foreign exchange business may kind of mirror that, but with a lag. Well, this has really been been exciting. What if somebody is listening to this podcast and they say, “Boy, this foreign exchange is really interesting. I didn’t really understand all this. I’d like to learn more about this.” Are you receptive to somebody just giving you a call or shoot you an email and talking about their situation?

Bob: Indeed, indeed. And a lot of times some people might say, “Well, gee, he’s talking about some big companies, some big public companies.” But if a company has a million dollars a year in foreign exchange flow, or maybe if it’s even down to around six or $700,000 a year, we’re interested in talking to him and seeing a sample of their foreign exchange trades. And we like to think our proposition is pretty compelling. For free, no charge, complimentary we’ll talk to somebody and we’ll look at their foreign exchange data.
And it happens that we will see data and we’ll say, “Well, it looks like you are getting okay markups, maybe a little bit high, but they’re okay. And we’d like to stay in touch, but you’re doing okay.” We see that sometimes. But if we see that they’re high and we believe we can help, then we’ll go to a full proposal and share our agreement, and see if it is appropriate for us to be mandated to help somebody realize that foreign exchange savings, but for free. It’s easy for somebody to contact us and share the data. They can see and read about the process. They can see some of our samples from our website and we’re Blades International Inc, so there’s a Blade’s International website out there. There’s a way you can actually send us information through the website, but most people will send us an email.

Dave: What is the website? What is the website exactly?

Bob: It is www.bladesintl.com. So it’s blades I-N-T-L, of course, INTL is the abbreviation for international. But we are fortunate.

Dave: Go ahead.

Bob: Go ahead.

Dave: No, I was just going to say, and if they want to just call you up, what number should they call?

Bob: (713) 977-7400. And they could ask for me, they could ask for Jack Borland, they could ask for Paola Gasca or Marissa Lara. And on the LC side, they could ask for Sherry Mama or Mike Ryan.

Dave: Okay. Well, that’s great. Well, I can’t believe how fast the time has flown by. Well, I tell you, I certainly know a lot more about foreign exchange than I did an hour ago. Well, is there … go ahead.

Bob: I really appreciate that. I just looked at the clock and I appreciate this. And I think I told you, David, that maybe I could talk for 20 minutes or so, but I think we’ve gone 40 plus minutes. I have thoroughly enjoyed this. I can’t tell you how much I appreciate you listening and letting us be part of one of your podcast. I remember some time ago when you told me about this idea. So I think it’s a great idea. And because I’ve known you for a while now I’m hopeful that we can further collaborate because I hope that we can further help each other because we both have that passion for international business and exporters.

Dave: That’s absolutely right. Well, again, thank you so much for taking the time on a late afternoon on a Friday to talk to me and I look forward to further conversations in the future.

Bob: And we’re going to see you next week. I look forward introducing you to Paola and others on the team because we look forward to seeing you next week. Right?

Dave: That sounds great. You sure will. All right. Thanks a lot, Bob.

Bob: Thanks so much, David, take care. Bye-bye.

Dave: All right, bye.

Dave: So, this is a very special episode for several reasons. One, it’s the first time we’ve had a guest on the show a second time, and that would be Neal Block of Baker & McKenzie. This is his second time to be on The IC-DISC Show. Additionally, this is also the first time we’ve had two guests at the same time. Neal will be joined today by his colleague, Dave Berek. And are you there, Dave?

David: I am. Hello.

Dave: Awesome. And then the third thing that’s unique about this: it’s with mixed feelings that I’m announcing that one of my all-time favorite IC-DISC experts is retiring at the end of this month. You want to just talk a bit more about that, Neal?

Neal: Sure. Well, I’d say 50 years at the same firm is probably about enough time to say that I’ve had a full legal of career, and so I’m going to be retiring. It’s been the only law firm I’ve worked for since I got out of law school. I spent two-and-a-half years in the tax court before that, but once I joined Baker & McKenzie in 1969, I’ve been there ever since. So, as all good things come to an end, it’s about time that we do so now.

Dave: Okay. Well, thank, you again, for your dedication to the profession these last 50 years.
So Neal was on episode 4 of The IC-DISC Show. Anybody that wants to reference that and go back to some of the background of the IC-DISC, they can do so. Since we’ve already covered on that episode, we will skip that for this time. What I wanted to talk about… Well, really several things. I wanted to talk about, with Neal, a bit of different IC-DISC structure types, and then I want to hear more about Dave’s practice and some of the ways that dovetails with the IC-DISC. Now, Neal, my understanding is that Dave is effectively your successor to the IC-DISC practice. Is that accurate?

Neal: That’s correct. He’ll be the contact for Baker & McKenzie on IC-DISC questions in a general nature. We have two other people that will be involved. One is Maura Ann McBreen, who’s our ERISA expert, and she specializes in the Roth IRA structure. At least knows everything about ERISA regarding Roth IRAs.

Dave: Okay.

Neal: And then David would be the contact for the … the wealth building aspect of the IC-DISC structures.

Dave: Okay, so that sounds good, and in fact, pardon the fact I seem to be kind of bouncing around, like I said, this is the first time we’ve had two guests on the show. Why don’t we switch gears to Dave, and Dave, why don’t you just share a bit of your background, where you went to undergrad, law school, how long you’ve been at Baker and McKenzie, and just talk a bit about your practice, because I know it encompasses more than IC-DISC.

David: Sure, so I started off as an accountant. I went to DePaul University here in Chicago, and I’m an accounting major. I’m a CPA. I worked in public accounting for about ten years, specializing in tax, and then I went to law school at night at John Marshall Law School. I’ve got an LoM in employee benefits, and I focus my tax practice in wealth management, which at Baker McKenzie means really like trusts and estates.
So I deal a lot with wealthy, multi-generational family groups, and I’ll do the planning from a wealth transfer perspective. And that’s one of the ways that Neal and I started working together more and more, because many of his clients that put in place a DISC happen to be family businesses, and they tended to be multi-generational, so this just one aspect of their over all planning. So the DISC kind of fit nicely into the, my perspective, the general wealth planning for a family owned business group.

Dave: Okay, well that sounds great.

Neal: Let me just interject.

Dave: Yeah, go ahead.

Neal: Basically, Maura Ann of course knows everything about ERISA, and David would know structuring and how to maximize the use of the Roth IRA, for example, in getting ownership just outside of any strict Roth IRA structure somebody might have, but expanding it to using other members of the family to own the Roth IRA, other companies that would be involved, and so it’s sort of a building block on a structure that’s become successful up to now in its own right.

David: Another way to put that is, as Neal retires, we basically have a whole team coming in to back support what his practice has been for the past 50 years, because he’s really incorporated a number of different practices.

Dave: Or said another way, perhaps, is that what Neal was able to do by himself, it’s going to take a whole team of people to replace him, is that one one way to look at it?

David: Exactly.

Dave: Okay, so with that, why don’t we just dive into the Roth IRA? We spoke some on episode four, Neal did, as far as kind of the history of the Roth and its winding its way through the courts, but the bottom line is that it’s a structure that has withstood IRS challenge, and the comfort level with using this structure seems to be higher than it was several years ago. Is that a fair characterization, or how would you … would either of you characterize the Roth IRA structure?

Neal: I would say that that’s a very fair characterization. There’s still one case involving a FSC which could have an impact on the legal aspects of the Roth IRA, but at this point, we have now had the Roth IRA structure, which is the … basically, it’s a disproportionate ownership structure whereby the Roth IRA ownership is disproportionate to the ownership of the related supplier, which is a normal case, whereas the DISC is owned by the same person or persons that own the related supplier.
So, in and of itself, the structure itself is an estate planning vehicle, in that it’s a shifting process, of shifting wealth from the owner of a corporation to the sons, daughters, etc. with no gift tax or estate tax consequences. So it’s become a fairly good estate planning vehicle. The reason it’s stronger now than it was before, is because we’ve now survived quite a few court cases. The most recent one was Summa holdings, where actually the tax courts stepped in and tried to put a stop to the structure, but then we appealed the case to three separate circuits because of the residency of the taxpayers, and as a result, we’ve gotten opinions from the first, second, and sixth circuit upholding the Roth IRA structure, and we got eight out of nine possible votes in the court of appeals.
So, having the only outstanding authority being the US Court of Appeals cases, we feel fairly comfortable that, without any congressional action, this is a good structure.

Dave: Okay, and then, Dave, do you want to just maybe add to, from your perspective, on this structure, on some of what makes it appealing to your clients?

David: Sure, yeah, sure. I think as a general premise, wealthy clients don’t typically have large holdings in IRAs or, therefore, Roth IRAs, just because a lot of it is inherited wealth, but the benefit of a Roth IRA, is that you can pay the tax to get the Roth funded, and then as the earnings accrue on the underlying assets in that Roth, they’re not subject to tax, and when they come out, they’re not subject to income tax, and they’re just distributed to the beneficiary. So, from my perspective, although Roth IRAs I think were targeted at the rank and file, they really probably were used more so by the wealthier employees, because they were the ones that could afford to pay the tax up front to convert to a Roth IRA.
So you take that concept, that you’ve got a tax … no-tax wrapper for a period of time, and if I can fund … if I can have one of the investments as a DISC, that’s potentially highly successful, it’s a nice match of two techniques. So that’s why I think that it was a unique utilization of the two at the time, when Neal came up with the idea.

Dave: Okay, well that’s … yeah, that’s great. And why don’t we just walk through the mechanics, because this is a question I get a lot, when I’ve brought this idea up with our clients, and their first comment is, “Well, none of my children have any IRAs”, and they sort of feel like they’re stuck there. So can one of you kind of sort of go through the mechanics, starting at the beginning? Like, in theory, if someone does not currently have an IRA, how might they go about getting the ball rolling to make this structure work?

David: Let me start off and have Neal kind of fill in, because what you just said, David, is really what I just said a moment ago, is that a lot of clients, wealthy clients, don’t have IRAs, necessarily, and so it’s important to recognize that the DISC Roth IRA is not a precursor that you have to have an IRA. So Neal, why don’t you take it from there.

Neal: Okay, what I was going to say is, during my lectures, I commonly point out that the Roth IRA is a good estate planning vehicle for children, grandchildren, and sometimes even the unborn, and people say, “Well, how is a three month old infant going to get an IRA when they have to earn income?” And the answer is, in many cases, you just take a picture of the child, and you pay them a modeling fee, and that starts you off with enough money to fund an IRA, and then convert that IRA into a Roth IRA, so basically, even though you might not have the income to qualify for a Roth IRA initially, you may have enough earned income to get an IRA, and then convert it into a Roth IRA, which can be done almost immediately. It’s called a back-door Roth IRA, but that’s how you get the thing in place.
Basically, you have to have a custodian that will be the custodian for a Roth IRA, and most brokerage houses qualify. Getting some to be custodian for a Roth IRA which owns a DISC has been a challenge, because they don’t understand DISC, and they don’t understand that they have to form the DISC themselves in order to get the ball rolling. So you have to choose, and we’ve got some custodians that will do the job with a Roth IRA owning a DISC, and we sort of recommend that, because the ones that we use don’t charge a lot of time for their own education and trying to figure out what’s going on.
Once they get the Roth IRA, the Roth IRA will form a DISC, and that basically is the way the business starts. The DISC can … the reason this has been successful is there’s … it’s avoided prohibited transactions, in that the Roth IRA does not use any of its assets in order to earn income from the DISC. The DISC is basically a device, as you’ve already pointed in numerous broadcasts, the DISC does not have to do anything. It’s a paper corporation that only has to exist receive commission income, and then distribute that income out.
So, basically the function is that by having the DISC and having qualified exports, the profit on those exports in part is paid into the DISC, the DISC pays a dividend to the Roth IRA, or to a holding company which pays a dividend to the Roth IRA, and now you’re in business and accumulating wealth. There is a tax, an up front tax on the distribution of the DISC dividends to an IRA or to a holding company, so that tax has to be paid at normal corporate rates, but once that tax is paid, and the funds are in the Roth IRA, they become reinvested tax free until withdrawal.

Dave: And that corporate tax rate being the 21% current corporate tax rate, correct?

Neal: Yeah. Incidentally, that’s something that the instructions for the form 992 for the UBIT tax says to use the trust rate, but we’ve got the service convinced that it’s the corporate rate that’s used, and they were supposed to change the instructions, but they have changed their computer programs so that when you pay at the corporate rate, you’re not questioned anymore.

Dave: Okay, and so then once the dividends are paid to the Roth, and the Roth pays the tax, then that money can be invested in any vehicle that the custodian is comfortable with, correct, like mutual funds or such, correct?

Neal: Well, the way we’ve set it up is, in many cases, the clients aren’t interested in using the custodian, so what we do is have the Roth IRAs establish an account with a brokerage firm of the client’s choice, so that the fund will then, after they’re paid out as a dividend into the Roth IRA, the Roth IRA will then invest as directed by the beneficiaries into an account which is … it can be any account. It could be Merrill Lynch, it could be Morgan Stanley, it could be any one of those companies, Schwab for example, and as long as they accept the Roth IRA account, they can now invest as they wish with the advice and experience of the brokerage houses they want.

Dave: Okay, and so just to show the magnitude of this, let’s just assume that you had a company that had a DISC that was producing a million dollars a year of IC-DISC commissions, and there were two children whose Roth they wanted to own it, so you get the IRAs established, convert them to the Roths, and then those Roths would actually purchase the initial stock to capitalize the DISC, correct?

Neal: Yes, although if you want to follow the cases that we tried, the Summa cases, what happened there was that the Roth IRAs formed the DISC, and then they formed a holding company, a C-corporation holding company, and dropped the DISC into the holding company, so that as the DISC commissions were earned, the DISC paid a dividend to a holding company, and that way the Roth IRA did not have to pay any tax on the DISC distribution. The corporation did, and that was all under the control of the client and its accounts. Then, when the tax was paid at the corporate level, the balance was paid out as a dividend to the Roth IRA, and since dividend income normally is tax free to a Roth IRA, these dividends from the C-corporation were tax free because of the tax already having been paid up front at the corporate level.
And this is all pointed out in the court opinions and blessed by them, so that structure works quite well. You don’t have to have the holding company. You can have the dividends paid into the Roth IRA, but then the Roth IRA pays the tax on the dividends at the corporate rate, and some taxpayers find a little messy to have to rely on the Roth IRA to pay the tax, and so that’s why they use the holding company.

Dave: Sure, so that makes sense, and then when you just look at the magnitude of this, on this example, there was a million dollars being paid to the holding company, or holding companies. Let’s assume that there was just a single Roth for this point, and so they’re paying $210,000 for the UBIT tax, and then the remaining $790,000 is being distributed to the DISC, and then, again, that money grows tax free, so if you would imagine, like if somebody had just a five year old child, let’s say, and they did this for 10 years, you’re talking about 7.9 million dollars going into the Roth, and then because of the time value of money and compounding, that number over 30, 40, 50 years, could grow to 10s and even 100 million dollars, right?

Neal: In the cases that we tried, I believe, I can’t remember how many years were involved, but it got a lot of play, because they say a $2,500 investment got converted into 3 million dollars a year for each of the two children of the owner of the company, so it can grow quite rapidly, but remember, you’re not saving … you may be saving some tax, because the corporate rate’s a bit lower than the individual rate, but the savings is not from the payment of the DISC commission and then the commission dividend into the Roth IRA, the savings is the tax free growth in the Roth IRA.

Dave: Right, and then the other … go ahead.

Neal: In the case we had, even though there was 6 million dollars between the two Roth IRAs, that all came from the DISC commissions. There was no, really, income that was earned by the Roth IRA or any basic tax savings, because tax was paid up front in that case.

Dave: Right, that makes sense. And then another benefit that we didn’t mention, I know that in … is my understanding correct, that in some states, qualified retirement assets are effectively creditor proof, and would the Roth fall under that umbrella?

David: Yeah, that’s correct.

Dave: So that’s another kind of perk to it. Okay, well that is very helpful. So, let’s switch gears a little bit and go to Dave. So, Dave, maybe give kind of a typical example of how you’re seeing the Roth used as part of an overall wealth transfer strategy, and just kind of speaking generically. Could you maybe give an example of how this might be one of several elements that you might help a client with?

David: Sure. I’ll give you kind of a typical profile of a client that we work with, and I found this working with Neal, as I met the clients, when they start asking me other questions outside of the DISC area, their profile looks very much like my typical client profile. It’s just that not all my clients have DISCs, for example. So the concept is this: if you build a family business, you start accumulating wealth in the business, and now you’re looking for ways to minimize income taxes and potentially pull money out of the company and get it to the right individuals in the family.
And so, a DISC can be one of those techniques. You can bifurcate where the wealth is generated. If you generate it solely in the business, then that owner upon death is going to transfer it to whoever, the descendants, and pay an estate tax. If you can bifurcate some of it to an ownership in a DISC, gather some wealth, pull some money out of a company through a DISC strategy, now you can have different owners of that DISC, and you can transfer some wealth that way.
If you take your ownership of the business, and you transfer it to your children, that’s another way to transfer some of the wealth, but we’re limited, each taxpayer, as to how much they can actually give for free, and so this year it’s roughly 11.6 million dollars. Indexed for inflation, it was doubled under the 2017 tax act, and potentially that goes back down to roughly 7 million in 2026, if Congress doesn’t extend the law.
So families that have businesses are kind of struggling with, “I spend my whole life building up the wealth in this business, and then, upon my death, the government’s going to get 40% of it, and my family only get 60%, even though I’ve been paying income tax all the way along to build the new plant expansion and so on and so on.” And so, we look at different strategies that we can utilize to minimize the transfer tax to families, to get the wealth spread out amongst the right buckets, so to speak, or generations or descendants, and of those different techniques, the DISC is just one of our tools. It’s one that we can add to a family that’s got exports, so …

Dave: Okay.

Neal: And the point with the DISC, of course, in the Summa cases, remember, we have the father and the two children. Basically, all of the income in the Roth IRAs represented a transfer of wealth from the father’s ownership, to the children without any gift tax, and also, when he dies, it will be without any estate tax. So that’s the … for the wealthy, so to speak, that’s the advantage.
Can we just switch now to a couple of other planning techniques that you can use with a DISC?

Dave: Sure.

Neal: One is, in addition to using it to create wealth for the children and the grandchildren, what have you, the DISC can be used to transfer wealth to key employees, and what we’ve found is, in lieu of a bonus, we have key employees own stock in a DISC, and as a result, the income from the DISC becomes capital gains income, or the employees can establish their own Roth IRAs and have the DISC earn income and then pay it as a dividend to the Roth IRAs, and that again, will avoid any … actually, avoid any tax to the employees. That’s another way of shifting wealth, and it was the topic of the conversation with the Sixth circuit, which when he was trying to point out that it wasn’t only the very wealthy that could be advantaged by this structure, but the less wealthy, the employees for example.

Dave: Yeah, and as I understand it, one of … there’s several benefits through effectively paying the bonuses, or having DISC commission income in lieu of bonuses, and that is that the payroll taxes would be less by the employer, less by the employee’s share, and then you have the lower tax rate on the dividend income versus if it came out as ordinary income.

Neal: That’s right. There’s no employment taxes, and capital gains tax on the DISC dividends, whether to the Roth IRA or to the shareholder himself. The structure is used not only for Roth IRAs, for example, it’s just used as additional compensation to the key employees.
We actually have structured it so that the owner of the company can almost determine how much of the DISC income goes to the specific employees or to himself, because in many cases, he’s one of the owners of the DISC, so there’s a fair amount of flexibility in the structure.

Dave: Yeah, and so with that, we’ve seen this scenario, and one of them is to have two DISCs, like one owned by the related supplier, and then one owned by like the key employees, and then to first pay out the kind of bonus portion, and then the remainder to be paid to the DISC owned by the related supplier. Is that similar to some of the structures you’ve seen?

Neal: Yes, and there is a possibility of having just employees own the DISC, and then basically have their commission not be part of the portion that’s allowable, because there’s a ruling that says that might be an arm’s-length commission, not a safe harbor commission, so … We don’t recommend it, because it looks a little bit too greedy, but basically what we do is we take the normal DISC commission that’s allowable if the owner of the company received it, and then use that same amount to be in part the bonus for the employees.

Dave: Okay, and do you normally … like, what do you do if there’s like, say, five or six people on that management team that’s receiving the bonuses? Do you end up with separate DISCs for each, or how do you handle like if an employee leaves or is fired, how do you handle that sort of turnover at the executive ranks?

Neal: That’s a good question, and what we usually do, is we don’t have the DISC owned by the employees, we usually have a limited liability company own the DISC, and then have the employees be members of the limited liability company. And then we would have the owner of the related supplier be the manager of the LLC, and he would determine what the DISC benefits were to the individual employees.

Dave: Right, and I’ve seen that language, that you give that manager … I think the term is “broad discretion” on how the funds are distributed from the LLC to the recipients.

Neal: Yeah, and we have been involved … one of the things we do is we can do the management agreement for the LLCs to accommodate how it’s going to be distributed out, and that’s, Bob Wilson is the person that generally will draft those documents. So, as I was saying before, we have a team that can handle all the aspects of the thing, from planning to implementation.

Dave: Okay, so that’s on the employee ownership of the DISC, but I sense that there are some other structures you had in mind.

Neal: One of the other important uses of the DISC, and this is one that has not been challenged in court, or there’s no court decisions, but to the extent that we have a US company that does exporting, and that US company is owned in part or solely by a foreign corporation, if that foreign corporation is in a country that has a treaty with the United States, then if the treaty is later in time to the DISC provisions, but these days, almost all of them are, because the last DISC provision was in about 1989 or ’90, in that case, the treaty provisions will prevail over the DISC provisions. So, under the code, DISC dividends to a foreign shareholder are taxed as unrelated business taxable income. Or, I’m sorry, effectively connected with US trade or business, subject to tax at ordinary rates.
But under the treaty, you cannot do that unless you have a permanent establishment in the United States, and ownership of a US subsidiary does not create a permanent establishment. So, because of the treaty provisions, and you have to read each treaty very carefully, but because of the treaty provisions, the DISC dividends do not get taxed at ordinary income rates, but at the withholding tax rates on the treaties. So that’s another structure that’s been in place, and benefits foreign shareholders, and they can be large or small.

Dave: So, just to have an illustration of that, let’s just say that a foreign company has a wholly owned US subsidiary, and the DISC is established, would the shareholder of the DISC be the foreign corporation?

Neal: It would be the foreign corporation or a subsidiary of it in the same country.

Dave: Okay, and then let’s just say that there was a million dollars of commission paid in a year, can you walk me through kind of the mechanics, let’s say it was England, let’s say, is where the company was based, or just a country that you’re kind of familiar with the treaty specific rates, and just see how that million dollars ends up flowing through to the ultimate foreign corporation?

Neal: Sure, let’s just say we had a million dollars of DISC commission. There’s some confusion sometimes as to what the DISC … the DISC isn’t allowed to earn the entire commission, just the portion of it that’s in the rules, but let’s assume there’s a two million dollar profit, and the million dollars goes into the DISC, and the DISC now is owned by a UK corporation, and the treaty now applies, and so we take the position that the DISC dividends to the UK corporation … well, the million dollars of commission to the DISC is deductible by the US company.
The million dollars of income to the DISC is tax free to the DISC, because the DISC is a tax-exempt entity. The DISC dividends then become … would normally be taxed as effectively connected income, but under the treaty, we’d apply the treaty withholding rate, and for dividends out of the US to the UK, the rate is either … I think generally 5% or 0, depending on the holding of the company and how long it’s been held, and other factors.
In any event, we’ve not got a deduction at say 21% or even higher, if the company is not paying at corporate rates, and the income going into the UK company is taxed at 5% or 0, and under UK provisions, there’s no tax in the UK.

Dave: Wow, that’s really … can be really powerful. I’ve also seen where under that same structure, they’ll do kind of a blending, like we talked about earlier, with the employee owned DISC, where they might structure that where they’ll have some of the employees in the US be either a part owner of the DISC, or the owner of a second DISC, and so you’re kind of combining the two strategies there.

Neal: Well, I think the point that you’re raising is that there is no limit to the number of DISCs that can be created in what they call a controlled group, so if you want to use a DISC for one purpose, and other DISC for a different purpose, and a third DISC for even a different purpose, there’s no prohibition.

Dave: Okay, so Dave, I know you’re listening quietly. What thoughts has that prompted in your mind, based on some of these conversations, that you’d like to add some commentary to?

David: Yeah, I guess the first thought is that the DISC has survived a number of years and is still thriving. I think Neal can probably add a little history to that, but that is something that we’ve constantly been looking at to see if, well, is there going to be a change in the law that eliminates the ability to do a DISC, and I think our opinion is not that we know of, although you never know. And then the second point is that it’s … many times, it’s highly treaty sensitive, and so I think maybe we’ve been fortunate to have a kind of a hold on new treaties, recently, but that’s always something that impacts the analysis, and I think that’s something that Neal brings kind of a deep history of how this has all worked out over the years. Neal, do you want to comment on that?

Neal: Yeah. I think one of the caveats, if I can use the legal word, in the use of the treaty, is you have to look to see what the country that you’re dealing with is going to do with the DISC commissions, and in some countries, such as Japan or France, you might have difficulty under local taxing provisions, because they’ll treat the DISC dividends or the DISC income the same for US purposes, in other words, you won’t get the benefit the normal corporation might get in the treaty country, because of the fact that the DISC is tax exempt.

Dave: Yeah. I can see why that is so country specific.

David: So it’s important on the structuring on the front end, to determine where the right set up is. Neal, do you want to just talk about your experience over the past 50 years with legislation?

Neal: Yes, well, over the past 50 years, the DISC has always been on the way out. It was … I think the DISC came in in the ’70s under the Gerald Ford administration, as a Republican measure to encourage exports and give exporters a tax benefit. A few years later, the Republicans decided they didn’t want the DISC anymore for whatever reason, and the Democrats said, “No, keep it,” because the DISC was being used by small exporters to their advantage, and they didn’t want the small exporters to be disadvantaged.
Subsequently, the DISC was found to be in violation of the General Agreement of Tariffs and Trade, and the foreign sales corporation was organized to replace the DISC. The foreign sales corporation was a foreign corporation in a selected or qualifying jurisdictions, that had the same benefits as the DISC had, and was being used by the larger corporations to reduce their tax rate by about 15%, but rather than getting rid of DISC, they kept the DISC as quote interest charge DISC, and basically, made the DISC more attractive to small exporters, because there’s a 10 million dollar deferral amount that they allowed, and the FSC had unlimited amounts.
So at the same time, the DISC, which was a deferral mechanism at the time, allowed all the Disc income to be repatriated tax free, so that was an encouragement to the larger corporations to go into the FSC, but the DISC survived, and then when the capital gains rates came in, there became an arbitrage advantage to having the DISC pay dividends to shareholders so that the dividends got taxed at capital gains rates while the related supplier got taxed … got ordinary income deductions.
So that moved along, and then, I can’t remember what year it was, but then there was a proposal to eliminate DISC all together, and then because there was such a hue and cry from small exporters, that failed. And then, I think … there’s been a number of attempts to limit this, but the most recent one is, I think tax reform act of 2017, whatever they call it, and which under the Senate bill, this was supposed to be eliminated, but once again, the lobbying groups for the small exporters convinced the one Republican, whose vote was needed to pass the bill to oppose any change in the DISC provisions, and as a result, the DISC provisions remained intact.
So, it’s always had people trying to get rid of it, and the IRS doesn’t like it, because it’s an entity that doesn’t do anything but saves taxes. Presently, as Dave points out, the Congress is so split that they can’t agree on anything, so until that gets resolved, we don’t see any change in DISC.

Dave: Hey, one quick question to go back on the Roth-owned DISC, let’s say you have somebody that owns a business, they export, but let’s just say they have no heirs, if that person was, say, 25 years old, and planned to work for decades, I’m guessing that using the Roth structure would still make sense for them, but maybe if somebody was in their 60’s, it may not make so much sense, you know, if they’re not using an heir strategy, but just a tax saving strategy. Can one of you comment on if you’ve explored that issue, and if there seems to be kind of a rule of thumb of kind of the age of the person, where it starts to be more attractive or less attractive?

David: I’ll take a first crack. I mean, I think it’s a combination of the dollar amount and the age. So, if it’s a deferral mechanism, then it doesn’t really matter how old you are, if you think that you’re going to use the money in the future, then you want to minimize the income tax in the short term. If it’s a dollar amount, like you’ve already … maybe you have heirs, but you’ve already given them enough, and so you might just leave the Roth to charity, for example, you could do that. Most people, as a general premise, when we’re talking about Roths, we’re saying, “I’m going to pay tax on my IRA, and then convert it to a Roth and have it grow tax free.”
And so, by definition, I’m going to leave it to somebody. You wouldn’t pay tax up front and then leave the Roth to charity, for example. With a DISC Roth scenario, you’re not paying … I mean, you don’t … we said this at the beginning, but I think it’s really important to highlight. You don’t need a big IRA to convert to a Roth. You can start up, so long as you can start up an IRA, you can start up a Roth with nominal funding, and then it can be the beneficiary or the recipient of the distributions from the DISC.
So to me, it’s a business planning tool. It’s less of, obviously, a retirement tool. So your example with a 60 year old that doesn’t have descendants, he still may do it just to have like a little nest egg that they will take out after they sell their business or what have you.

Dave: Okay, and I guess another use of it for somebody without the heirs is just the asset protection aspect, if they’re an estate that recognizes that.

David: Totally right.

Dave: Yeah, so let’s just say the person had a $20 million net worth mostly in the business that’s exposed, but over the course of say five years, they’re able to basically transition five million of that 20 million to the Roth-owned DISC, that may have its own appeal just from the asset protection, so …

Neal: Could I interject with-

Dave: Yeah.

Neal: … one case that we have right now, and this is one where actually, there’s a mother, and she’s got I think three or four children, and basically, she’s been transferring the stock to them and suddenly realized she wanted to spend some money, and so she had them establish a DISC owned by her, so that she could get the money in her own hands so that she could spend it and take her own vacations and pamper herself for the rest of her life. So that … this was a reverse estate planning vehicle, where she wanted the money back in her own hands, so that not every person who is dealing with wealth necessarily wants to use it for leaving the money to their heirs, but spending for themselves.

Dave: Okay, that is interesting. Okay … is there any other ownership structures that come to mind, Neal, that we need to talk about?

Neal: Yeah, there’s a number of them. Apart from the IRAs, and the treaty country ownership, there’s another thing too that is overlooked sometimes, and that’s a partnership. In many cases, there’s a company that’s closely held but has a partnership with let’s say a publicly owned company, or a joint venture. And if they form a partnership, the partnership income earned by the closely held company will qualify for DISC benefits, because if the partnership is exporting, each partner is deemed to be an exporter in his own right, and therefore can take advantage of the DISC provisions even though the company that’s doing the exporting is quite large and is mostly held by a C corporation which has no use for the DISC. So that would be one advantage.

Dave: Hm, okay.

Neal: Let me see what else we have here … we have the … as I said before, we use the … for estate planning purposes, you don’t need the IRAs. You can just have the DISC owned by the children or grandchildren of the owner. It’s not necessary to use a Roth IRA or an IRA structure, it’s just simply another way of shifting the wealth, the same as to the employees, but in this case it would be children.

Dave: Yeah, that’s a good point, and I’ve seen … is my understanding correct, I’ve seen situations where folks have gotten in trouble with that, because they’ll take an existing DISC and transfer some of the stock to the children, and then perhaps creating a valuation issue, so that the best practices would be to form a brand new DISC? Is that accurate?

Neal: Well, actually, we have had some difficulty with estate planners when they see the value of the DISC, and the DISC is turning all this income … it’s one of the greatest investments start putting a value on the DISC at a high level, but there is a revenue procedure, Rev-Proc 8154, which is normally a bad ruling, but it does say that the fair market value of DISC stock at any given time is book value.

Dave: Oh, okay, so that reduces that risk of a valuation issue upon transferring it.

Neal: Right. Now, in many cases, we have a DISC owned by an S corporation, which is fine, because the S corporation income flows through to the shareholders, and they pay tax at capital gains rates, but the disadvantage is it takes away planning opportunities for the shareholders to use their own Roth IRA or do their own generation skipping. So, in some cases, rather than using a DISC owned by the S corporation, the shareholders of the S corporation may be better off owning the DISC stock.
Another situation which generally results when we have farming companies … remember that the only benefits that the DISC can take in the normal course are income from exports, but in many cases, if you take a farm for example, the farm is originally found by mom and dad, and they had four or five kids, and then mom and dad got older, and they wanted to keep the kids in the business, so each kid got a little bit of the business. One got the crops, one got the processing facilities, one got the machinery and equipment, one took care of the marketing.
And so, as a result, you might have four or five different companies or entities earning income from the farming operation, but that results in a very small amount of income from the export activities, so one way we’ve gotten around that is to form a partnership of all of the family members, so that the members become, each one of those little businesses, now contributing to the partnership, and the partnership export income is now the entire export profit that would have been the case if mom and dad had still owned the farm.

Dave: Oh, I see, okay.

Neal: So what we do is … and basically, our partnership people get involved in this transaction, and for the most part, they’ve been saying that, really, what they’ve had all along is a partnership any how, they just haven’t … they’ve just divided it up, but in many cases you find that these families sit down and decide how much each person’s going to make anyway.
It’s also possible for unrelated parties, but you have to watch it a little bit more closely so you make sure that the partnership agreement provides what the different partnerships want. When we use an LLC, for example, we’ll use different classes of LLC interests in order to get the parties’ desires the way they want them, and in some cases, it’s used to give one party a greater percentage of the profit, and the other one would have … where you wouldn’t get that with just a straight DISC ownership.

Dave: And speaking of the farming … oh, go ahead, Neal.

Neal: Oh, it’s okay, go ahead.

Dave: So, speaking of the farming operations, I had a question yesterday about a company that … it’s a farming company, and their situation, though, they sell to a co-op, and the co-op exports a portion of what they’re selling them, which on the surface appears to be problematic to qualify for the DISC, because of the co-mingling of the grain. Is that something you’ve had any experience with, co-ops, and is there a way to make that work from a structural perspective or operational perspective that you’ve seen?

Neal: The answer is yes. I’ve been involved in the co-op situation. I’ve actually been involved with trying to get a ruling from the IRS on how the co-op would work, and it’s not been very easy. The service is still refusing to give rulings, as far as I know. One of the problems in the co-op, is how you measure the DISC profit, because what do you do with the expenses of the farmer, and when you sell to the co-op, what is the co-op’s basis, and what’s the farmer’s share of the co-op profits? How is that going to be taxed, and is there going to be an offset for his profits for DISC purposes against his crop growing expenses?
So there’s a number of issues that have to be worked through in terms of the co-op, but basically the co-op structure does lend itself to the DISC benefits, but getting the rulings from the service that would bless this structure have been difficult.

Dave: Oh, okay. Dave, do you have anything to add, since again we’ve kind of kept you out of the conversation for the last 10 minutes?

David: That’s okay. I suppose I just would note that the new SECURE act that’s effective January 1st, changed the stretch out rules for IRAs, which would include Roth IRAs, meaning that you can’t stretch it out over the life expectancy of the beneficiary, it’s got to be paid out 10 years after the death of a participant, essentially. And so, not great, but I don’t think it has much of an impact. It just means that if you do a DISC Roth technique, then once the owner passes away, it’s going to be distributed out of that Roth IRA within 10 years, still not subject to tax, but something to note.

Dave: Okay, well, thank you for that clarification.

Neal: I might weigh in on one thing. It becomes sort of the holy grail of DISC, but if somebody’s new to DISC … is that you want to have the DISC owned by a shareholder who’s going to at least get the capital gains rate on DISC dividends, and the capital gains rate, I’m talking about the 23.8% rate, not the normal, because DISC dividends are taxed as ordinary income, but if you’re an individual, you pay tax at the capital gains rate, so this sort of leaves out corporations owning DISC stock, because the corporations will pay tax on DISC dividends at regular corporate rates, and then the dividends from the corporation to its shareholders would be taxed again, so you’ll have double taxation.

Dave: Right.

Neal: So the theory is that the DISC stock is to be owned by a pass-through entity, or a low tax entity.

Dave: Got you.

Neal: And that’s why, in the foreign shareholder situations, because we get the treaty benefit, we can have the corporation own this stock without suffering the detriment.

Dave: Okay. Wow, well, we have covered a lot, and the time has flown by. Normally, this is where I would ask for your contact information, Neal, but given your retirement, perhaps we should get Dave’s contact information. Dave, could you share your contact information?

David: Sure. I can be contacted at Baker McKenzie, at my e-mail, which is my name, David dot Berek, that’s B as in boy, E-R-E-K, at BakerMckenzie.com. And my telephone number is (312)861-8184.

Dave: Okay, and then the person that … the other attorney Neal mentioned, the female ERISA expert, you would be able to forward the appropriate questions to her, correct?

David: Right. In Neal’s absence, we’re putting together a team, and that would be Maura McBreen, of our benefits, comp and benefits group, Bob Wilson, puts together a lot of the structure, he’s a paralegal in our corporate practice, and then we’d bring in other collaborative attorneys as needed. So we recognize that we have some very big shoes to fill with Neal retiring, and we’re encouraged by the challenge, so …

Neal: I might mention that Maura Ann McBreen is the co-attorney with me, co-counsel, in a case called Swanson Tools, which is an IRA DISC case, and so she was actually on the brief and wrote the ERISA portion, which frankly won the case, and the only other thing is I did publish a B&A portfolio this last year on DISC, so even though I’m not going to be in the office, if anybody wants my learned opinion on the DISC stuff, they can look at the portfolio.

Dave: Okay, that sounds good. With just a couple minutes left, Neal, do you mind retelling one of my favorite stories you tell, about the benefits of specialization, when you were at law school, and the professor talked about the more narrow your focus, the less bright you have to be? Do you mind just kind of retelling that?

Neal: Sure. One of the gems I kept from law school was in my corporations class, the instructor was in private practice, and he said, “A word of advice: you don’t have to be the sharpest tack in the shed, but if you know more about a subject than anybody else, the world will beat a path to your doorstep.” And I took that to heart, so when I came off the tax court and became an attorney with Baker McKenzie, the DISC stuff was just being introduced, and I said what better way to become a specialist, than to get in on the ground floor.

Neal: I didn’t realize there was something called a foreign western hemisphere trade corporation before that, but that’s what I did, so that became my guiding light. And so, 20 years into my practice, I was in the elevator in the Prudential building, where our offices were, and somebody said, “Neal, do you remember this professor from law school?” And I said, “Oh of course. It was Mr. Chaplin.” And they said, “Well, here he is.” And there he was, and so I said, “You said something to me that was my guiding light.” And he said, “What did I say?” And I told him about the sharpest tack in the shed business, and you know what he said? “Did I say that?”

Dave: That is great, and then lastly, I would like to share my other … so that story had a huge … or that comment by your professor had a huge impact on your career, and although he did not make that comment to me directly, I still picked that up somewhere, and that’s why our business is solely focused on the IC-DISC, and to the best of my knowledge, we’re the only firm like ours that’s focused purely on the IC-DISC.
But the other big lesson I learned from you, do you remember about eight years ago, I called you about a question, and you answered the question in like three minutes, and then you started inquiring about my family and the weather and such, and so I quickly interrupted you, because I said, “Hey, Neal, at your billing rates, it’s like 20 dollars a minute for talking to you, so we might need to cut this call short.”
And I don’t know if you remember this call, but you said, “Well, hold on Dave, I mean, you are correct. You’re going to get a bill for our time today, and don’t worry, I won’t charge you for anything past that point,” but you said, “I’m the cheapest attorney you’ll ever have.” And I said, “Why? I mean, your billing rates are, on an hourly basis, are some of the highest of any attorneys we work with.” You said, “Yeah, you’re going to get a bill for this conversation, and it’s going to be a few hundred dollars, but somebody else paid me $10,000 to research this matter before, and thus I had the answer off the top of my head, and that’s why, Dave, that the more expert somebody is, the more specialized they are, the higher their hourly rate must be, because otherwise they cannot capture the full value they’re delivering, because somebody else has already paid for them to get the research.”
And I’ve never forgotten that, and I keep that in mind as I hire experts and professionals in the future, and I’ve seen first hand, when you have a generalist, and you ask them a question, their first response is, “Well, let me start the research on that, because I don’t know that answer off the top of my head.” So anyway, do you remember that story or that conversation?

Neal: I remember you relating it to me, so I think it must be true.

Dave: Okay, so … and is there anything … and Dave, would you agree with Neal’s point that it’s not a bad strategy to use experts?

David: I agree. One of the comments that I make to my clients is, “The more you talk to me, the more money you’re going to save.” So, the more you can spend on … the more that you can invest into specialists or experts, the more profitable you’re going to be. The question for the client is, “When do I need an expert?” When we get to our practice areas, it’s pretty apparent.

Dave: Well, awesome. Gentlemen, I can’t believe the time has flown so quickly. I could listen to Neal Block’s stories for hours upon end, but all things must come to an end. Neal, thank you again for just being such a great resource for my firm and our clients, for the last decade or two, and I just wish you the best of luck in your retirement.

Neal: Well, David, thank you very much. I appreciate it. And I appreciate being able to close off my career by being on your podcast.

Dave: Yeah, all right. If I was smart, I would make this my last podcast and just end on a high note, and just retire the podcast, but we’ll have to think about that. Well, thanks a lot guys. You both have a great day, okay?

David: All right, take care.

Neal: Thank you.

Dave: Good morning, Chris.

Chris: Good morning, David. How are you?

Dave: Hey. I am great. Thank you for joining me today on the IC-DISC show.

Chris: Well, I appreciate you having me, and glad to be here.

Dave: That is great. Well, let’s get started. We are live. Let me just set up the audience, just tell them a little bit about your background. Chris Hanslik is an attorney, and he currently serves as Chairman at the law firm of Boyar and Miller here in Houston. Chris received his Bachelor’s in Business Administration from Southern Methodist University in Dallas, and then, he received his law degree from South Texas College of Law here in Houston. With that, let’s get started.
Welcome to the show. I’ve really been looking forward to having you on the show. I served on a board with your founding partner, Bill Boyar about 15 years ago is how I first came to know the firm. Always been a big fan of it, and we’ve shared some clients through the years. First off, thank you for you, and Bill, and the whole team there at Boyar and Miller being such a great resource for us and our clients.

Chris: Well, it’s our pleasure. We’ve certainly enjoyed the relationship that we’ve had with you and then the clients we’ve shared over the years. Being able to have this opportunity to be on your show means a lot, and look forward to continuing our mutual working relationship going forward.

Dave: That sounds great. How old were you when you first considered becoming an attorney?

Chris: Oh, that’s a good question. I believe it was probably the first thoughts of that were in high school, but I know for certain, it was about this time of year in January, between my fall and spring semester at SMU in college, where the plan hatched in my brain that I was going to major in business as an undergraduate, but then go to law school. And I went to my counselor and rejiggered my coursework for that, and that’s what I did.

Dave: Was that your freshman year or sophomore year?

Chris: It was my freshman year after, in all honesty, after premed biology kicked my rear end in the fall, I decided the medical field was not going to be for me. And I really enjoyed some of the classes I took in economics, and business, and had this infatuation with what the law that started through my uncle, Larry Wadler, and that’s where I decided this is what I think I want to do. And so far, it’s been a pretty good decision.

Dave: Yeah. It would seem like it. You’d mentioned your uncle was an influence on your choice. What else attracted you to the law?

Chris: Yeah, I think it was the… It started really first and foremost watching his practice. My uncle practiced in a small town near Houston called Wharton, Texas, and practiced for over 50 years there, just recently retiring a few years ago, served as a judge for a period of time. And I remember in the summers, when I’d go visit my grandmother, I’d go up to his office some. And as I got older, he would talk to me more about what he did as a lawyer. And what struck me, I think, first and foremost was the opportunity to help people.
Being a small town lawyer, he did a little bit of everything, but I think that’s what really stuck in my brain is it was an opportunity to have, I guess, an education where then, you go out and you’re able to help people with issues that they can’t necessarily help themselves with. So, that started it. Then, as I got more into it, obviously, the challenge of digesting the case law and figuring out the nuances that make one case better for you and your client versus another case that either hurt you or how do you distinguish it away from your situation. That challenge really inspired me.

Dave: Okay. Well, and it’s ironic because from what I know about your practice and some of the other attorneys at Boyar and Miller. It shares elements with your uncle’s practice, right? You’re a resource and a sounding board, and you’re basically just helping your clients navigate any number of business and legal matters, right?

Chris: Yeah. I think that’s a fair characterization. We’ve tried to bring meaning… I think there are attorneys out there, and historically, you may have seen a law firm advertise as attorneys and counselors at law, and we really try to bring definition and meaning to both of those words. And really, that counselor word, when we work with our clients, it’s not just about drafting a piece of paper, or filing a lawsuit, or answering a lawsuit. It’s about gaining a deeper understanding of the client’s business. How can you be an extension of their office and be a partner with them as they try to grow their business, accomplish the goals they’ve set for their business and themselves, and really marry that up so that, again, you’re just an extension of their team.

Chris: We find that when we can approach the way we deal with our clients in that way, everyone benefits. And it really goes to our mission statement of providing counsel beyond expectation, building lasting relationships, and making a meaningful difference in people’s lives. That’s really our focus in everything we do. How can we accomplish those three things when we are asked by a client to do something for them?

Dave: That is a very clear description of how you approach your work. I appreciate that clarity.

Chris: We think it’s important, David, for any business to have clarity about purpose. For us, purpose is your mission statement. Why do you exist. And one of the things that I always tell people is, we don’t view ourselves as a law firm, we view ourselves as a business that provides legal service. And for us, the difference in that is we approach things like a business should approach things and how a good, successful business might attack what it wants to do in the world; and that’s why it starts with what’s your purpose, right? As an organization, what is your purpose?
And we have spent time to get clarity on that. We check in on that mission throughout the year. We reward or praise behavior or critique behavior whether it meets or doesn’t meet our mission, because we have to hold ourselves accountable. That’s kind of our stake in the ground. And everyone up here at BoyarMiller, from our receptionist all the way to me and our co-founders Bill and Gary, are accountable to achieving our mission every day.

Dave: That is great. What year did you join BoyarMiller?

Chris: I joined in 2004.

Dave: Okay, and what year were you elected to the chairmanship?

Chris: I guess it was announced that I was going to be chairman at the end of 2008, and Bill Boyar and I did a two year transition, kind of succession, where I then took over January 1 of 2011 as chairman of the firm.

Dave: Okay. What comes to mind that’s been the best part about being chairman?

Chris: I think the best, kind of most fulfilling part is the obligation that I feel to deliver every day to our people here and to our clients, but really to our employees here at the firm, that I’m doing the best I can to provide each of them an opportunity to be successful, however they define success. And I don’t take that lightly, because everyone wants to be good at what they do. And if the organization you’re in is not providing you those opportunities, they’re going to look somewhere else.
And so the challenge that I kind of have as chairman, at least the one I take on, is to make sure that people feel valued, that they feel like they have an opportunity for growth and advancement. And if we can do those things right, David, then our clients benefit because we have engaged happy employees who are passionate about what they do. And if they’re here at BoyarMiller, that means you’re passionate about that mission statement I described and they will carry that over to how they serve our clients, and then our clients benefit. For me, it really starts here internally at BoyarMiller making sure we’re doing the right things to have the best workforce we can.

Dave: That is great, and it reminds me of something I heard Herb Kelleher say on a podcast, the founder of Southwest Airlines. That was always his philosophy is not that the customers come first, the employees come first. And then if you take care of the employees, they in turn will take care of your customers and clients.

Chris: Yeah, I’ve heard that from him. And again, I’m not smart enough to come up with some of these things on my own know. I do a lot of reading and try to learn from some of the best in the business across the world, and then figure out how can we apply that to what we do here. Herb Kelleher’s one, Jack Welch is one, Jim Collins. There’s lots of people out there that have been successful entrepreneurs. That if you study that, you have the benefit of their knowledge and you try to pick and choose what can work for you.
But we definitely believe it starts internally. And we say our mission statement applies both internally and externally because we want to be great counselors to one another, we want to build lasting relationships with one another here, and we want to make a meaningful difference in the lives of the people that are employed at BoyarMiller. Again, if we can do that, right, we believe our clients benefit in the end.

Dave: No, that makes a lot of sense and I can appreciate that. And I also can appreciate the satisfaction that you derive from building a culture that really encourages your colleagues to be the best they can be and try to remove obstacles in the way of them being able to do a good job.
You talked about your mission statement and we talked a little bit about kind of culture and philosophy at the firm, but I’d like to drill down a little more into that. How would you say that translates into what makes your firm different than other other firms? What would your clients tell you that makes you all different than other firms?

Chris: Yeah. It kind of varies based on the client experience. But ultimately, one of the things we talk about here is what we do, being lawyers, is not necessarily unique because I think the number is over 15,000 licensed attorneys in the Greater Houston area, but how we do it can be different. And it goes back to mission and culture as you described.
I would hope that our clients would say: “That it’s the interaction with the lawyers at BoyarMiller. That I feel like they actually care about my business. They take time to ask questions that aren’t necessarily legal in nature, but to get to know our company better and how they can provide value to help us solve our business challenges. That those lawyers at BoyarMiller are responsive. That they understand our needs. They respond in a timely fashion and we feel that they take our business concerns and challenges on as if they’re their own.”
If we can deliver on that, I think it sets us apart in providing great legal service at an incredible value to our client. We do surveys with our clients. This time last year, we did kind of a fuller effort in getting feedback from clients and how we were living true to our mission and our culture. And the feedback was, I’m proud to report, very positive.
One of the challenges, right, is you think you’re delivering on your mission and values, but unless you ask the person you’re delivering those services to what they think, then you don’t know. And so it was nice to hear that what we thought we were delivering was in fact being delivered in the feedback we got from clients. And so you learn from that and you learn what you do well and that you should keep doing that and getting better at it. But you also learn, you know what you’re not doing well, where do you need to improve and/or maybe something that is not necessarily a value that maybe you should stop doing. And so, there’s always learning and I tell our people here we can certainly learn from our failures and those are going to happen, but we can also learn from our successes because sometimes you may achieve a good result, but may be not because you did your best work, but, and where’s the learning in that? So, we’re always trying learn from what we did, review what happened, be critical about our performance, and then commit to getting better.

Dave: No, that makes a lot of sense. And I know that’s really gratifying when you think you’re delivering a service that is valued and then actually hear that confirmation from your clients. I know from my own experience, that’s very gratifying and satisfying, isn’t it?

Chris: Yeah, absolutely. And we took it a step further because once we got the feedback from the clients, we realized that what we don’t want to be, what the survey told us, you have really happy clients and they value the services you’re providing. That was awesome. But then it occurred to me that if we’re not delivering the same experience to our people internally, then we kind of looked like a Jekyll and Hyde. And so, the way we started the survey process was what is it like to experience BoyarMiller, however you experience us. And so, we turned that survey, after we did the client survey, internal and asked our people at all levels, what is it like to experience BoyarMiller, because we want the experience to be the same. That if we have really good clients that are satisfied and feel that they’re getting good value, as I mentioned before, we definitely want our employees to feel the same.
And again, that resulted in good feedback. We were delivering internally like we hoped we certainly learned from some things that we could do better, and we went to work on that, and started looking at some of the feedback we got internally to see, okay, what can we learn and what things can we start doing internally to make this firm as good as it can be. And I’ll give you an easy example out of that is we never had, until last year, we’d never had a formal work remote policy at this firm.

Dave: Okay.

Chris: But the internal feedback from our employee survey, we learned that would be valuable to our people. So we implemented one. Now, I know we’re not the first company in America to implement a work remote policy, but by listening to our people we got there, and that was appreciated. So we may have gotten there eventually at some point, but we would not have gotten there as soon as we did without asking.

Dave: Sure. That makes a lot of sense because you don’t know. If you don’t ask, you’re just guessing on what matters. So, that kind of takes me to my next topic that I wanted to touch on, which is my understanding is that for a lot of your clients, both your clients, specifically, and the firm’s, in general, that you all serve in a lot of ways, like an outsource general counsel. Is that right? And what does that look like?

Chris: Sure, no. That is accurate. It starts with a good percentage of our client base are entrepreneurs, privately held companies. Those companies can be from startup size to close to a billion dollars in revenue, but the founders are still in there every day, driving that business forward. It’s their life’s work, et cetera. And where we come into play in that kind of outsource general counsel role as you described, and I’ve used that term as well, is given the full service of our firm, we’re able to be the legal resource for a privately held company that doesn’t have an in-house lawyer. With the relationships we develop, they know they can pick up the phone, they’re not going to get nickeled and dimed on things, but we bring this breadth of service because we practice in really every industry that’s out there and I use the term we’re industry agnostic.
We obviously do a lot of energy-related work for clients being here in Houston, but the industries we serve go from technology, industry, real estate, private equity, healthcare. So when you do that, you see a lot of different things that even though, for example, maybe in the healthcare space, might be relevant to an energy company in some way, in some issue they’re dealing with. Whatever that may be. And then we have the depth of a team behind us to provide responsive, quick service to help that business owner, whether it’s an employee issue or a vendor issue that, it could be a potential dispute, or it’s something that they’re looking to acquire and trying to make a strategic decision about Do they do that acquisition or not? We can be that resource for that C-suite owner. And then we have some clients that grow to where they might hire a general counsel, but it’s just a law department of one and then we help serve as a kind of a counterpart to the general counsel and provide that kind of back office support for the ongoing kind of daily legal needs that the company may have.

Dave: Yeah. I’ve seen firsthand how valuable that role can be, because there’s a couple problems with trying to have that in-house attorney, right? One is that they may not be cost-effective for the company to have a full-time in-house person when they don’t really have a full-time amount of work to do. And the other problem is how talented of a person could they actually hire if they’re going to be the sole department and they’re going to be not real busy. It’s not a great career path really is it, versus somebody who’s serving as that de facto general counsel role for a half dozen or a dozen different companies? They are able to get the variety and other professional challenge and still make it cost effective to the client right?

Chris: Yeah. I think that’s right. What we see probably more times than not it’s the cost issue, and whether the client says, “Does it really justify bringing someone onto our payroll, full-time benefits, et cetera, versus buying it by the hour from BoyarMiller, knowing we’re going to need it? Knowing that each year they budget, and then they can look back historically, and we know we spend about X in legal, but does it makes sense from a cost perspective to move that, and would we really move all of those costs into the person we hired?” I think I see that being the issue more times than not. And on the, I think, the skill set of who a company might hire as general counsel somewhat depends on the industry, right? They may then say, “This particular issue seems to come up more times than not, maybe we bring someone in that really understands that and we can bring that in-house, but then we’ll still outsource the other things.” So we’ve seen it in both of those domains, I think, with various clients.

Dave: Yeah. No, I can see that. So when you think about some of your favorite clients that you work with, what would you say are some of the characteristics, or maybe more importantly, the mindsets that those founders and owners have that make them particularly attractive to you as a client or makes for a really good fit with the firm?

Chris: I’ve got a couple, I guess, thoughts on that. I’m going to start with saying, and this may be too generic, so I’ll try to bring some definition to it. But I would start that answer by saying the characteristic of an entrepreneur, very general, but it’s that can-do attitude that you see in these business owner entrepreneurs that aren’t scared to take risks, have an idea, see a path forward.
Maybe it’s an area of the world that just they view as not being served or not being served well enough, and they’ve got an idea of how to attack it. They just live and breathe it and they grow a business from it. They’re creative about it, they take full ownership of making it happen or not, and trying to make a difference in the world. So, those are some of the characteristics.
When I think about our client base and what maybe transcends all of our entrepreneurial type clients that run these privately held businesses, it’s just this passion about some idea they had or some difference they think they can make, and then going for it, and letting us enjoy the journey with them.

Dave: Right. Yeah, and I know that from conversations with Bill through the years, one of his messages that I hear repeatedly, just like you touched on at the start of the show, is that he doesn’t view himself as an attorney, he views himself as a fellow entrepreneur who just happens to practice law. It seems like that mindset by you all makes it easier for you all to relate to the challenges that that particular client may be having.

Chris: That’s absolutely right. I tell people all the time, I’m really an entrepreneur, but I pursue my entrepreneurship through the practice of law. I mean, we run a business, we have a P&L, we do a budget each year. We have a strategic plan and strategic teams that meet on a regular basis to pursue different strategic initiatives that we believe are necessary for this company to be successful over whatever particular horizon we decided. Usually it’s a two-year horizon and we reset strategy.
So, when we are talking to clients or prospective clients, I think we’re at our best when we don’t sound like lawyers. When we’re asking them about their business and what their concerns are, where they see opportunity. Because what’s important is to understand their business, and you’re not going to do that by talking, you do that by listening and asking questions.
Then we can figure out, based on what they think their challenges are, where they see opportunity, if there’s an intersection with services we provide, then we might be able to have a relationship with that particular business owner, and they become a client. If all goes well, a happy client and a long-term client.
But for us, it really starts with, we’re out here running a business, a small business with 50 employees and providing for, I guess, all those families, and we take a lot of pride in that. There’s a lot of obligation, because success isn’t guaranteed and the business isn’t guaranteed to come in the door, unless you’re out there really thinking thoughtfully about what it’s going to take to put yourself in position to be successful.

Dave: No, I agree completely. Well, since this is the IC-DISC Show, we probably should talk a little bit about IC-DISC. So, although we’ve served clients together who have IC-DISCs, my sense is that IC-DISC is not necessarily a primary focus of your firm, like it is, for example, of Neal Block from an attorney who was on one of our earlier podcasts, who really is hyperfocused on the IC-DISC. Is that accurate? Is that not necessarily a primary focus of your firm because it is such a niche?

Chris: That is accurate. We don’t hold ourself out as having that specialty. I think the way I would describe it, we are more focused on general corporate M&A, corporate finance as it relates to that. I think having worked with you over the years, we can understand the issue and spot it, but we bring in the specialists like yourself to help our clients with that, or evaluate whether it’s something they can take advantage of or not. But we are certainly not a specialist, nor will we hold ourself out as such in that field.

Dave: Yeah. No, I understand. How do you decide what practices to really focus on and which ones to be more of a generalist on in pulling specific expertise? What drives that decision? Because I know as the firm has grown, there have been more practice areas that you all have developed more of an expertise around.

Chris: Yeah, so we strategically made the decision to focus on certain areas and they’re fairly general, there can be some specialties within that, but it’s corporate, corporate M&A and corporate finance, real estate, employment law, and litigation. Litigation is business and commercial litigation, it’s employment litigation, it’s real estate related litigation. January of 2019, we added probate litigation.

Dave: Okay.

Chris: So probate litigation is a new one for us, but if you look at the others I described, from the corporate work, M&A, finance, real estate, employment and litigation, 90% to 95% of the legal issues a business faces fall within those camps. When you think back to what we talked about previously about being that outsource general counsel etcetera for a company. We can bring to bear the skills and expertise needed to cover the breadth of that. Now sometimes there might be what I refer to as the super specialty that may be an issue that pops up. So for an example, in an M&A transaction, there’s going to be a tax issue.
Well, we partner with a couple of really good tax lawyers in Houston to work with us on that. And our client just, we buy their time by the hour, but we don’t have that specialty in house. It could be maybe a very specialized, a IP issue. So a client wants to pursue patenting a technology. We work with a couple of really good IP boutique firms here in town to pursue that patent for the client or the trademark or whatever it may be, so that’s really how we manage those situations.
We’re always involved. So we introduce the client and kind of manage the process, but we don’t mark up that third party’s time or anything. Our client gets the benefit of our network in that situation, is we’ve worked to develop a good network with some of those boutiques, and then they don’t do what we do. So when one of their clients might have a corporate issue or a real estate issue, they’ll send them our way. And it works as a nice kind of balanced referral system in the end. And we’ve seen that work very well for us. Everyone has their own system, but that’s a system that is our system and it has worked really well in what is now our 30th year as a firm. We’re celebrating 30 years in 2020.

Dave: And by the way, congratulations on that. It’s amazing how fast the time goes by. It seems like just not that long ago, I remember when Bill and Gary started the firm and the time goes by. What I’d like to talk about next is maybe a real life example of a company that you’ve worked with for a long period of time. I mean, there’s one that I’m familiar with that recently did an exit, a client that we share, but it doesn’t have to be that one.
It could be just another client where you all have worked or you’ve worked with the client for some period of time, 10, 15, maybe 20 years. And maybe just kind of give the story and an example of where maybe you were involved, maybe from the founding of the business all the way through an exit, or just something where you can give kind of a real life example and some of the things you did along the way to be of value to that client. Does a client come to mind that we could talk about? I mean, obviously anonymously.

Chris: Sure. Absolutely. I’ve got one I think would fit all the things you asked about. So this particular client is in the hospitality industry. It’s a 12 plus, 13, probably 13 plus year relationship. And they came to us initially with kind of a potential landlord dispute. We helped them with that and the relationship grew from there and they were two locations, but they had dreams of growing. It’s just had one of those things you just remember vividly, even though it happened a long time ago, because the relationship has developed to be so strong, and that was one of the kind of, I think, a pivotal moment, even the client has referred to, as being meaningful in the growth of their company.
And what happened, they came in for a meeting with Bill Boyer and I, and they had a plan they wanted to execute on how to grow the company, multiple locations, multiple cities, et cetera. And we listened. And I think where the real value was created, at least, and I say that is I think what I’ve heard the clients say, where the real value was created for them in that meeting, was we didn’t just blindly listen to their plan and say, “Great, we’ll go pay for this for you. Good luck.”
Drawing on our prior experience, we started asking questions about the plan, namely with what were their real goals and what was their purpose in pursuing this plan? Where did they want to end up? And as the conversations unfolded, the client, kind of just through that kind of dialogue, determined on their own, that the plan they came with that day, wasn’t going to accomplish their goals, in fact.
And the meeting ended after an hour, hour and a half, and they say, “We have some more thinking to do.” And they came back three months later with a new plan. And we had conversation about that and it was a good plan. And we then helped them execute that plan to grow as they dreamed to grow. And that company is thriving and doing well. And along the way, we’ve been able to do corporate work for them as they brought in some investors or clean up their corporate documents and their structure. We’ve done real estate work as they done new leases on new locations and/or renegotiated with landlords or had potential lease disputes.
We’ve done employment related work for them because again, the hospitality industry, there’s always employment issues and we’ve helped them navigate those. And we’ve done other commercial litigation where they’d gotten involved in other disputes. And so it’s a really good example of, I think, delivering on our mission and values, making a difference for a client, developing that long-term relationship and being able to use every aspect of the firm in doing so. We have many others, that’s not the only one, but we asked the question that one came immediately to mind and I’m proud to say, they’re not the only one that I could give a story about.

Dave: Yeah it is, that is awesome. I know that’s really what I love most about what I do is serving the clients, being a resource and being able to marvel at the entrepreneurial vision and capabilities that these entrepreneur clients exhibit is, it’s really a blast, because I have this court side seat, if you will, of these really successful entrepreneurs doing their craft. And it’s really a lot of fun, isn’t it?

Chris: It is. I mean, I’m sure you’ll agree. I mean, being that close to the action, if you will, with those entrepreneurs, it serves as an inspiration for me and then what I bring back to the firm trying to do for our business. And knowing that, seeing the risks they’ve taken, the enjoyment fulfillment they get out of pursuing their dreams. And then, inspires me to say, I can do the same or should try to do the same here with our people. And so I think, with some of my better clients, they’re no longer just clients, they’re friends. And they serve as a resource that when we get together, we can talk about what’s going on in our respective businesses and learn from each other. And that’s why I do what I do. The relationships that I’ve been fortunate to make in this career of mine so far, have made everything worthwhile. And it’s really why I do what I do. It’s about the people.

Dave: Yep. I completely agree. So, we’ve talked about this, having this court side seat. What are some of the biggest mistakes you see entrepreneurial companies make when it comes to legal matters?

Chris: David, I think the first thing that comes to mind for me in that question is going to cheap on legal in the beginning. That starting a new company, rightfully concerned about expenses, trying to get the company off the ground. So obviously when they started, they don’t have any revenues, so everything’s just money going out the door. That some unfortunately make what I believe to be a mistake to think, well, I can save on legal, because I can go on a website and pull down a form or do something.
And so I think not getting a good legal team engaged sooner rather than later, because what happens is usually those entrepreneurs aren’t just the only… There’s not just one person, right? It’s a couple, three, four, maybe get together to form a company. If those initial documents aren’t set up right, they can cause problems down the road. And the legal spend, if you were to spend the money up front to kind of think through some of the issues that could come up later, if you don’t do that, it ends up costing 10X, when things go wrong and the documents don’t say what you thought they said, or don’t provide for a certain situation.
Now, we can’t necessarily… Well, I know this. We absolutely cannot predict the future, so we can’t necessarily draft the agreement to cover all scenarios. But we can think through most of them. And unfortunately we’ve seen time and time again, on the beginning, three or four people get together, arms locked, ready to conquer the world with their new business. And at some point down the road, one or more gets sideways and there’s a dispute. And that’s when you really want those documents to have been well-written and well-thought out.
It’s also important, and early on, you’re going to be contracting for your services with other parties, that you have a document that protects you. And so I think it’s that investing in the right legal services upfront and thinking of it as an investment in your business, as opposed to an expense is the mindset I would encourage entrepreneurs and business owners to think about; investment versus expense.

Dave: That is great advice. I guess, as we’re kind of nearing the end of our time together, what are some misconceptions that you think people have about either law firms in general or your firm in particular, or misconceptions that are perhaps true about the broader industry that are not necessarily true about your firm? So what comes to mind when I talk about misconceptions that folks may have?

Chris: Well, we’re always dealing with being the brunt of the lawyer jokes. There are no CPA jokes out there. It’s just lawyer jokes. So I think from a macro standpoint, the industry, there is some cynicism or skepticism about lawyers in general. So we certainly deal with that. I certainly would hope, based on some of the things we’ve talked about previously today, that the way we go about our business, our firm has dispelled those misconceptions as it relates to working with Boyer Miller.
Generally, I do think there’s a misperception, and it kind of goes to the last question you and I discussed here, is that some people think that they either can’t afford good legal service or legal service at all, or they don’t need it. And I think that’s another kind of misconception that one, if you’re starting a business, you do, I believe, need some good legal counsel to get it off the ground right, for reasons I previously discussed. And I think a starting business can afford it, again from the mindset of it’s an investment. And you should take time to meet more than one lawyer and figure out what drives the person that you’re going to hire because you’re forming a relationship with that person. And make sure do they really have the skill and expertise that you need?
Some of that dovetails into some people are scared off by a lawyer’s hourly rate. Well sometimes, someone that may charge a little bit higher hourly rate than the other person you interviewed, they may be able to do it more efficiently and more effectively. So I would say a misperception is sometimes the consumer of legal service gets caught up on the rate versus what is the value delivered. So, someone may charge a couple hundred dollars less, but they may spend five more hours, and you end up spending the same or more, and maybe not getting as good a product as you would have gotten with the person with a little bit higher rate.

Dave: Yeah, I witnessed that.

Chris: Yeah. So at the end of the day, I think it’s about delivering value to the client and the client feeling like they got something of value in return.

Dave: Yep. I agree. Well, I tell you what, why don’t I see if I can summarize and recap our conversation. We’ve covered a lot of stuff. I’ve made some notes here, and so please confirm or correct. I would say my biggest takeaway from our conversation today is that you and your colleagues are really entrepreneurs who scratch their entrepreneurial itch, if you will, through serving clients as it relates primarily to their legal matters, but also in other types of counseling. Your primary focus is on your employees and your colleagues, with the idea that southwest approach, if you’re your team is happy then they’ll go take good care of your clients. You have a passion and enthusiasm for serving entrepreneurial clients, and to try to be a longterm resource, and have more of a relationship focus than a onetime transactional focus. And you really enjoy what you do. Did that summarize it accurately?

Chris: I think so. The only thing I might add somewhere kind of, I think it fits between entrepreneurs in the legal industry and focusing on our people and passion is that we’re committed to our mission and values that of the firm, which but I think that’s an overarching view. And I think the four points you summarize here kind of details under that.

Dave: Okay. Yeah. Thank you for clarifying that. So if an entrepreneur is listening to this podcast and he thinks, “Hey, Chris, and these folks at BoyarMiller sound like someone I should talk to,” what’s your process if somebody is interested in exploring a relationship with you all? How does the process work? How would you suggest people reach out to you? Do they get a bill starting at the first minute of the first call? How do you guys work in that way?

Chris: So they don’t get a bill in the first minute of the first call.

Dave: Okay.

Chris: Let me get that out there really clear is that if people were, if they were listening, then that may be something they were interested in knowing. It does. It starts with some outreach to someone at our firm. So sometimes it’s an email. A lot of times it’s a phone call. Obviously, people find us through our website at boyarmiller.com, and it’s B-O-Y-A-R-M-I-L-L-E-R.com. And it’s a conversation about what it is, why they’re seeking legal service. It’s usually a conversation on the phone. I always try to set up an in person meeting so we can go further to hear the issues, explain how we work. And then the client decides whether they want to retain us or not. And they’ll sign an engagement letter if they decide to. And then we start doing the work. I tell clients all the time, we only do work that you ask us to do. So we’re not going to do anything you don’t ask us to do.
So you sign the engagement, and we move forward on a particular project. And then yes, invoices follow from there, et cetera for work that’s performed. And we expect payment, but I think the best way to find us if you’re not familiar with us is to go to our website and you’ll find my bio as well as every other lawyer here. And there’s contact information, direct line email, et cetera. And we do a lot through LinkedIn as well. We’re both on our website and LinkedIn. We have a firm page. We’re continually updating the content on those two sites with information that we believe business owners might find useful. And so people can learn more about us, certainly on our website about who we are, what we do, and how to contact us.

Dave: Well, that sounds great. Well, like I said, I’ve enjoyed the relationship with the firm, and I would encourage any entrepreneur, especially a Texas based company who has an interest in exploring the relationship to reach out to you, or one of your colleagues. Well, thank you again for being on the show, Chris. I really appreciate it.

Chris: Well, it was my pleasure. I really appreciate the opportunity. And as I’ve said before, we at BoyarMiller definitely value the relationship we have with you, and look forward to that continuing in 2020 and beyond.

Dave: That sounds great. Hey, you have a great day, Chris.

Chris: You as well. Take care.

Dave: Hi, Johnny, how’s it going?

John: How are you, David?

Dave: I am doing great, thank you. I appreciate you being a guest on the IC-DISC Show.

John: Well, I thank you for having me.

Dave: Well, let’s get started. We are recording. So I’d like to introduce John Ryan. He’s the former CEO of Alexander/Ryan Marine. And Johnny’s also been a longtime client of ours and also a good friend for more than a decade. So first, I want to thank you for being on the show. But more importantly, thank you for being one of our very first clients and entrusting us to help you out with some various tax incentives.

John: Well, it worked well for both of us, David.

Dave: Well, good. So why don’t we get started with … I like to think in terms of chronological order, so let’s start with the beginning. I believe you’re from Louisiana originally, is that right?

John: Born and raised in New Orleans. Went to an all boy Jesuit high school and was fortunate enough to play baseball and football there. And I got a full baseball scholarship to Tulane University there in New Orleans and an opportunity to go to a lot of different colleges to play ball. But the baseball coach made a pitch for my parents and I that you go to school in the town where you’re going to make your living. That worked out until I took a job in Houston, but it sounded good at the time.

Dave: And I’m sure your parents were happy to be able to see many of your home games, they probably liked that too.

John: They’ve got the athletic dorm on campus and everything and it was a home away from home, so it worked out well for everybody.

Dave: That’s great.

John: … my wife there. She went to an all girls Catholic school there, Dominican. And we met back in high school and have been together 43 years now.

Dave: Wow. Well, I’ve seen Janet. You might have been in high school, but based on how much longer she looks than you, she must have been in third grade when you met her.

John: You are absolutely correct, David.

Dave: That’s awesome. So you went off to Tulane, played baseball, and what did you study while you were at Tulane?

John: Blondes. No, I’m only kidding.

Dave: Well, you ended up with one. So I guess you were studying the right thing.

John: I thought at the time, I was in business, and I thought about minoring in history to go be a baseball coach in college or high school.

Dave: Oh really?

John: And I decided that that was not an avenue to take, so I just kept with the business side.

Dave: Okay. So that’s good. And then, so when you graduated, what happened then? What was your first job?

John: What happened was I got ready to graduate in May of 1974 and had a couple of opportunities to go to work with different people. And I had a call from a gentleman who was opening up an office in Houston and an oil and gas sales type position. And so I accepted that job on a Friday and the following Monday went to work to fill out the paper work and learn what to do and who we sold to and what type of products we had. On Tuesday afternoon, Tuesday night, I got a phone call from the Atlanta Braves saying I had been drafted and they wanted me to show up the following Saturday in Atlanta for orientation.

Dave: Wow.

John: I had to make a decision whether I wanted a baseball career or accept the business position that I had. And at that point in my life, I knew some people who were in the minors already and they had been up there for three or four or five years and all of a sudden they would quit baseball at 26, 27, 28 years old looking for their first job. They’d been working since they were 21. So they were behind the curve. And so I decided that baseball got me a college education my parents couldn’t have afforded, couldn’t have come close to affording at Tulane, and that’s all I wanted from it. So that’s turned out to be.

Dave: Okay. Well, I’ve heard that story before and I’ve always found that so impressive. I don’t know many 22 year old young men who have a chance to play professional sports, me included, who would have the maturity and perspective to be able to pass up that opportunity to go into the business world. So my compliments to you for that.

John: I made the right decision looking back.

Dave: Sure. So that is just a great story. So you had a lot that happened in a week’s time in May, didn’t you, or 10 day’s time?

John: A very short period of time that happened.

Dave: So you passed up the opportunity to go to the Braves organization. And so what were you doing with Alexander/Ryan when you first got started? You were in a sales role?

John: When I first got to Houston they had an older gentleman who was the manager of the office and had a secretary here, and then I was the third person in the office. And in the mornings, I’d make outside sales calls. In the afternoon, I would help service inflatable life rafts, which was one of our product lines, and learn the business from the bottom up, from the ground root. Two years later, the older gentleman retired and they gave me an opportunity just to continue running the office as a manager, and then later, they made me vice president of Houston.

Dave: Okay. So yeah, I’m anxious to get to the good part of the story. So just to the listeners, I’ve already heard this story, so that’s how I know where the good parts are. I think you were just about to get there, Johnny. What year was it that you made your fateful decision to become an entrepreneur?

John: I had worked for him for … As you know, the oil and gas has many cycles, high and low. And we had gone through a couple of good times and gone through some bad times. In 1990, we were getting ready to come out of one of the troughs that we had. And Bill Alexander was the gentleman who was the sole owner of the company. He had no heirs, he had no children. He didn’t want to talk about stock ownership, he didn’t want to talk about profit sharing, he didn’t want to talk about certain things. And at that time, I had two young kids, 11 and eight years old. And my goals were different from his goals at that point in my life. So I sat down with him at dinner one night and told him that he had been telling everybody that I had built the Houston office to what it is today, and that I would like to buy the Houston office from him.
And his first comment was, “How are you going to pay for it?” And I said, “Well, the easiest thing is if you would finance it. If not, I’ll have to get a loan.” Well, as thing would be, he said, “Okay. You’ve got 60 days to get a loan. If you don’t have a loan commitment in 60 days, then we forget this conversation ever went on.” On the 58th day, I got an SBA, small business administration commitment for the loan. And when I called him to tell him I got the loan commitment, you could have heard a pin drop.

Dave: I bet.

John: But he followed through, he followed through with what we had talked about and agreed to. In November of 1990 my wife and I bought the Houston office. We changed the name from Alexander Industries Incorporated, to Alexander/Ryan Marine and Safety. And so I felt that Alexander/Ryan Marine and Safety more identified what we did versus Alexander Industries. So in November of ’90 we took over the Houston office. Four and a half years later he turned to me and said, “You’ve proven that you can run a company. It’s only right that you own the New Orleans office also.” So he financed the New Orleans office acquisition for me.

Dave: Wow. What a great story. So let’s take this opportunity, what would you say over that five year period from ’90 to ’95, at the beginning of that period you purchased the Houston operation with an SBA loan until you proved yourself with Mr. Alexander, and then he financed the purchase of the New Orleans office. What would you say in hindsight were some of the biggest lessons you learned from that time in your life?

John: The way I ran the company, David, I would like for people to look at how I did it, I tried to do it as a family both on the customer side, on the employee side, and the vendor side. It was a very, very close association of business and friendship. And sometimes, those got intermingled. But to me, you have to follow through with what you tell a customer. You have to be able to move product for the vendors. And you have to have your own workforce of employees happy and know what direction we’re going in, et cetera. So most of my employees stayed with me for many, many years, 20, 30 years or so.

Dave: Wow, you must have been proud of that high retention tenure.

John: Yes. It was a very, very, very cohesive group and we could count on each other. That’s what counted I guess.

Dave: I heard a story, and I’ve never even mentioned this to you but it just popped into my head and I’d like you to validate whether this is correct or confirm it. I heard a story that at one point the company needed larger facility and you had found a piece of property on the northwest side of town. You were going to move from the southeast side of Houston to the northwest side and it made a lot of business sense and from a personal perspective it was attractive to you, but that your employees did not want to have to make that drive to the northwest side. And that based on their input, you chose not to relocate the company. Is that an accurate story?

John: That is an accurate story. We found a sweetheart deal, a larger facility, everything that we had been looking for. And price wise, it was in our wheelhouse. It was everything that we needed there, facility wise. But some of the employees felt that it was a longer drive, a longer commute, et cetera, et cetera, so we opted to stay where we were.

Dave: Which, is ironic, because I know for one of the employees it would have been a much shorter commute, right? That employee being you.

John: Yeah. That was part of the deal I guess that we had to make a tough decision on.

Dave: Yeah, wow. And do you remember what year that was?

John: I don’t, David. It goes back a while.

Dave: Okay. Thank you for confirming that story. I remember I heard that story. I don’t even remember who told it to me. But it was told in the spirit of evidence of how loyal you are to your employees, and so it’s the second thing that struck me. I mean, how many young men would have passed up their lifelong career of being a professional athlete? And secondarily, how many entrepreneurs would pass up the opportunity to have a better facility closer to their residence and defer to the needs of their employees? So I’ve always thought that story is pretty representative of how you chose to run the company.

John: You’ve got a good group of people and you listen to them.

Dave: Yeah, that is great. So how about if we go back from the time that you … to 1990 when you, with a day and a half left to go, you purchased the Houston location. Could you talk to me about maybe some of the challenges? Or maybe you were such a brilliant entrepreneur, you just had a perfectly smooth line that just had year over year growth really smoothly and you never had any challenges. Which scenario was it?

John: Well, oil and gas has cycles, good stretches and bad stretches. And I felt a gut feeling back in middle of ’90 that we were getting ready to come out of that trough. So that’s when I made my move to try to go ahead and buy the Houston office before that cycle turned back up, so we could take advantage of that if we owned the company. So at that point in ’90, I guess the easiest way to describe it was when you count on yourself, when you bet on yourself, you tend to move a little faster, you tend to try a little harder because it’s your neck on the line and your pocketbook out there versus someone else’s. To me, timing wise, we timed the market comeback to that. In 1995, when we bought the New Orleans office, we also made a very, very, very strategic move. We went over to China and asked them for a lifeboat deal to represent them here in the States exclusively.
So we were laughed at initially. They said, “You’ll never sell Chinese lifeboats in the States,” because Chinese products had a stigma that went with them. So what we did, we used our expertise and the information we had and our relationship with the US Coast Guard and actually had the boats US Coast Guard approved over in China. So that opened up a very, very large market to us. Not that many people were in it. Just a very slight handful of people globally in the lifeboat market. We knew pricing wise where we fit in. So it gave us a big shot in the arm by several million dollars a year in sales.

Dave: Wow, I imagine that was significant in those days.

John: If you remember, David, I think that’s how we got together. We were selling lifeboat systems that were built in China, delivered them to Korea for drill rigs that were being built for US customers. So it was an opportunity for you and us.

Dave: Yeah. Yeah, that it was. So you added that Chinese product and that relationship in ’95 and then just continued the growth trajectory. And I’m trying to remember, when was the next down cycle in oil and gas business, was it like ’01, ’99? Was it somewhere in there?

John: Yeah. We had about a five or seven year run. And the thing about it, David, is that the industry at that particular point were building new rigs like it was going out of style, new drill rigs. And it took a good two years to build some of these large rigs. So even when the industry turned down, they had contracts with the ship yards that were building these drill rigs that were still in place. So if we had business with them, it carried on through a period of time.

Dave: Okay. And I believe that over time, I believe the repair and the maintenance business, I believe the absolute revenue of that grew over time, but as a percentage of the business did that become more significant over time, or did that tend to stay as a pretty consistent ratio?

John: As we sold more boats, life boats and rescue boats and davits and winches, as you increased the amount of inventory you had out in the field, then the service work also picked up.

Dave: Okay. So it tended to just grow in lockstep with your install base if you will.

John: Right, correct.

Dave: Okay. So that was back in the mid ’90s. So now, let’s get into the 2000s. What comes to mind that maybe was one of the next significant changes or events that occurred once we got into the first decade of the new millennium?

John: Well, a lot of things happened back to back. We had a very short period of time where the Deepwater Horizon issue hit, big downturn in the industry. They just stopped. There was a moratorium on all drilling and things. So we actually changed from selling life saving safety equipment to the drill rigs to selling to the cleanup people. So we still had a market, but it was a smaller market.

Dave: And was that 2008 that that happened, 2008 or ‘9, do you remember?

John: I believe that’s correct. And then when the people escaped the rig from the lifeboat, when Deepwater Horizon, a lot of people got off on a lifeboat, we had TV stations do some special reports from our warehouse with some of the boats and models and things that we had on hand because we were one of the local USA groups that were in the lifeboat business. So we got a lot of exposure through that TV special report type thing.

Dave: Okay.

John: Shortly after that, in 2010, someone put us up for entrepreneur of the year for oil and gas for Ernst & Young. And they interviewed us two or three times and came out, and we told the story about where we came from and how we got to where we are. And ironically enough, the other two individuals who were up for the same award were customers of ours.

Dave: Oh really?

John: Yeah. And so it was a very interesting dinner that night when we had won, and we took the award away from two of our customers.

Dave: Did they take that in a grownup fashion, or did they hold that against you, that they won?

John: They were good guys. But of them congratulated me. We were all sitting at the same table.

Dave: And that was 2010?

John: Yes.

Dave: So that then takes us to, now what year was it that you made the decision to sell Alexander/Ryan?

John: Let’s say when they started drilling again after the Deepwater Horizon incident, between then and when I sold the company we had a lot of interest. We were still growing the business. We had gotten to the biggest that we had ever gotten to from a revenue standpoint. And we had several people talking to us about, would I be interested in selling, would I be interested in selling? And I had a couple of health issues at that point. And it was, the timing was right to think about that.
So my wife and I made the decision, “Let’s listen to some of the offers.” And when one of the offers got to a point where we felt it was too good to be true, we told them we would be interested in cutting a deal. So we were supposed to close December of 2012. But because their lawyers didn’t want to work over Christmas or something like that, we had to close in January of ’13. In January of ’13 we sold out to a private equity firm up in New York. And it was a good move for us from a financial standpoint and it was, in hindsight, timing was impeccable because the industry shortly after that had a downturn a couple years later in ’15 I think and we would have never gotten what we got for the company had we waited.

Dave: Timing is everything, isn’t it?

John: Timing is everything.

Dave: So then when you sold to them, I believe it was mutually decided for you to stay around for some period of time, there was some interest by you and them.

John: I had a contract to continue running the business. And when I turned 65 in January of ’18, we went ahead and severed the relationship.

Dave: Okay. So during that period where you were working for the private equity firm, so if I’m doing my math right that you were there five years, right?

John: That’s correct.

Dave: So what comes to mind as the worst part about no longer running the show? And why don’t we temper that though with, there had to be some benefits to maybe lower stress or less money on the line. What’s an example of one of the best things and maybe one of the worst things about no longer owning everything?

John: The best thing is the money was in the bank, nothing at risk. We had no personal money at risk. So the worst thing was, when you’re a private entrepreneur, if you have to make a decision or make a direction change in business, you sit down at your desk with a group of people that you trust, your confidants in your company. You sit down, you make a decision right then and there and you make a change. When you are part of a private equity firm, you now have another layer or two or three of management that has to say yes before you make a decision. And that was the toughest change to me.

Dave: Sure. I’ve heard that story over and over and over by entrepreneurs, they almost always say the same thing, that it was good to no longer have such a large percentage of their net worth tied up in the company, but it was really frustrating because they had gotten used to making a decision on a Monday morning and by the end of the week having made progress in the first week on implementing that decision, but no longer being able to do that once it was part of a larger enterprise.

John: I can remember sitting in the office with my whiteboard and strategizing on how to handle a bid or OTC setup or whatever. And all of a sudden now, it becomes a committee instead of a decision right there.

Dave: No, believe me, I can understand. Through the years, we’ve had a number of inquiries in telling expert advisors, and I always think of some of the things that I’ve heard from our clients and other people that have sold. And at least up until this point, that trad off has not been that attractive. But someday, it might just be. So you talked a little bit about the culture at Alexander/Ryan. What would you say from like the customer perspective, what are some of the things that you would say that differentiated Alexander/Ryan from your competitors? What are some of the things y’all did real well?

John: We had in house expertise that, when someone called in and wanted to know something about a widget, we had that expertise on hand.

Dave: Okay.

John: And be it a lifeboat, be it a life raft, be it a case of life saving equipment, we had that expertise on hand. Someone within our organization had that expertise to be able to answer that question. We had a lot of instances, David, where customers would call us asking us for advice on how to handle something because they trusted that what we told them was correct.

Dave: Okay. I can imagine where that would make you more than just a commodity provider of safety equipment, but more of a strategic partner in their eyes.

John: And the other thing, like I said, globally back then there was only four lifeboat manufacturers in the world of substance and we were one of the four. So you were a player, you had a seat at the table.

Dave: That is great. Okay. I want to shift gears just a little bit. When you think about doing stuff in house versus outsourcing, so I know that you made the choice to outsource some of your strategic tax planning through our firm as it related to the IC-DISC and in some other areas. But what do you think when you’re considering doing something in house or outsourcing it. And the followup, is it different if it’s something that’s just a pure cost, like you’re trying to outsource payroll let’s say, versus something where you’re outsourcing something that has more of an opportunistic element like you did when you worked with us? Do you look at them any differently? So what are your thoughts on how you decided what to do in house and what to outsource?

John: Interesting question, because the life boats, we outsourced those because we had a manufacturer, a plant, a factory in China that built lifeboats for Chinese consumption, and we let them build a boat for us to our specification to meet US Coast Guard. So when we did that, that gave us a … you outsource, we outsourced those lifeboats to China. On the local stuff, most of the stuff we had, we represented manufacturers that were Navy USA or we were in their top 10 distributors worldwide. The other thing, David, that I … entrepreneurs run things differently I guess. I never rented or leased anything in my life.

Dave: Oh really? I didn’t know that. So talk more about that.

John: Lease any vehicle, I did not lease any forklifts or cranes. I did not lease anything. I would go ahead and purchase those items. But there are some people who rent them, who lease them, at the end of three years turn them back in and renew the lease. I just, I was not into that thought pattern.

Dave: And why was that, if I may ask? What did you see that was the flaw in that thinking for your business and how you approach things?

John: I know it’s off the books, on the books type financing. But to me, if I purchased something, at the end of three years when that truck was paid for I still had an asset that was worth something. If you lease something, at the end of three years you turn it back in, you’ve got nothing.

Dave: Sure. Well, did that … Go ahead.

John: I just, I was a believer in acquisition versus leasing.

Dave: And do you think that during the down times in the industry, do you think that benefited as opposed to if you’d had everything leased? Did it give you more kind of downside protection having some equity in those assets?

John: Yeah. When I got ready to sell the company to the private equity firm, all those assets were part of what they bought.

Dave: Right. Yeah, so if you had been leasing all that stuff, the business would have been that much less valuable.

John: That is correct, that is correct.

Dave: Interesting. I did not know that. And so when you are then looking at outsourcing some things, what do you look for in a strategic partner? You had mentioned the lifeboat manufacturer in China, some of the companies that you bought from in Houston, one of whom is a client of ours, has been for a long time, that’s sold certain products to you. So how do you decide the relationships that you want to invest time in, whether it’s a tax consulting firm or a transport provider or a lifeboat manufacturer?

John: Business is a two way street, David.

Dave: Okay.

John: They help you and you help them. And the more you help them, the more they help you and just the opposite. The more product we sold for individuals, the better the relationship was.

Dave: So does that mean that your primary focus in these strategic partnerships was not trying to just negotiate the very best price and treat it like a zero sum game, or were you more concerned with the bigger picture?

John: The much bigger picture, because if you squeeze people, that’s a one way relationship. To me, I know that they’re there to make money, they know that I’m there to try to make money. And if you work together, both of you make money versus squeezing one of them to get the best deal at the time.

Dave: Yeah, that makes sense. I can appreciate that. I don’t know if I’ve told you this before, but one of the most valuable lessons I learned in my business came from, as I mentioned, you were one of our very first clients, and it came from a project that we did that was a refund project where we were able to capture some prior year’s incentives and get a refund. And I remember we had two fee options, one, you would pay us a portion of the fee when we started the work and then you’d pay another portion at a certain milestone, and then you’d pay the remainder when the amended tax returns were submitted. But then we had another option that you would pay a greater percentage of the benefit, but not until after all the work was done. And it was a significant percentage, it was a material difference. Like, I would want to recall that the fee was maybe 20 or 30% higher, and I remember you took the backend one that had the least risk even though you end up paying the most in fees.
And I remember, initially I was disappointed because being one of our first customers, I just assumed we’d get paid sooner than six or nine months later. But that’s what you wanted, so we went with it. And then I remember once we did the work and we were paid, I realized that we ended up making a lot more money because we waited six or nine months to get paid and that was a really valuable lesson. And ever since then, I’ve done everything I can to reduce the financial risk of our clients, because I realized that the more compelling I could make it with backend loading fees and reducing risk, the easier it was for them to say yes. And it’s gotten to the point, we have some clients that we’ll set up an IC-DISC on January first of 2019. We go all the way through ’19, we don’t do the work till the summer of 2020. We don’t invoice them till the fall of 2020, and they pay us 60 days later. So we have clients that two years pass from when we first start doing work until we get paid and everybody I know in our business just says that’s crazy.
CPA firms don’t work that way and they ask me why I do it. And I said, “It’s because that’s what our clients want. They want that risk mitigation, and they’re more concerned about the risk mitigation than they are about the absolute fee that they’re paying.” Anyway, I just wanted to thank you for that lesson, because I don’t know if I ever told you that, but that played a huge part in my strategic pricing over the next 15 or so years.

John: In hindsight, David, looking back, I’d make that same decision today.

Dave: And for the same reasons I imagine, just because of the risk mitigation is why you did that.

John: Yeah.

Dave: Sure, that makes sense. And the other lesson you told me, the first few years we worked together I was actually an employee of another firm. And then I had a chance to purchase the business much like you did, and I also, I just realized this, when I had a chance to purchase the business I had a 21 day window instead of a 60 day window to pull it off. But I remember after I did that, you were the very first existing client I went to to inform of the new situation. And you said that was fine and you’d give me a shot under the new spinoff venture. But you told me something then that also was very influential to me. Do you remember what you told me that day when we were sitting in your office in 2009 and I told you about the change?

John: “Bet on yourself.”

Dave: You did. And the other thing you told me is, “You’ll never work harder than when you work for yourself.”

John: Yep.

Dave: And you told me that. And so basically you said, “If you’re willing to work harder, then it’ll probably work out fine. And if you’re thinking you’re going to work less when it’s your business, then you’re going to have a disappointing outcome.”

John: That is exactly correct.

Dave: I always appreciated that, those two big lessons I learned from you. Speaking of lessons learned, what advice would you have for your younger self like back in 1990? So think back. What do you wish you had known then that you know now? And if you had some magic time machine that you could go back and tell your younger Johnny Ryan, what might you tell your younger self?

John: I’ve got several friends in the industry in different … paint industry and different things. And when we sit down and talk, if there’s one thing … if something happens to me tomorrow and somebody says, “What do you think about how Johnny ran the business,” I’d like for them to say I did it right. I didn’t buy business, I didn’t take people to clubs, I didn’t take people to drinks. I didn’t do all that BS stuff. I’d just like for somebody to say that I did it right in the end. And that was more important to me than a lot of things, David. We had an instance one time where a client bought four lifeboat systems and about a quarter of a million dollars worth of spare parts for lifeboats. And they opted to take care of the shipping from China to Brazil. And so we shipped it, they paid us, everything was fine. And about four weeks later, I get a phone call from this purchasing guy in Houston for Petrobras America, and he called us into a conference room and sat down and told me that we didn’t ship the spare parts.
He basically questioned my integrity. And I stood up, some of my people that were with me had to pull me down. I stood up and I said, “There’s one thing that you will not question. You’re not going to question my integrity.” And he says, “Well, we’ll have your lawyers talk to you.” I said, “Please do.” We walked away. About three days later, their attorney called me and we went through the paperwork. He called me back the next day and said, “Mr. Ryan, I agree with you. We received them. We have no idea where they are, they disappeared. We’re going to reorder them again.” So it went from a bad situation to a good situation.

Dave: Wow, and you even got to sell the parts twice basically-

John: Twice.

Dave: … because they lost them. Well, I know … Go ahead.

John: And the gentleman in purchasing had already fired their logistics people. He didn’t tell me that. But he had already had other problems, so he had fired the logistics people, but he was trying to lay the blame on the vendors. So then he lost his job shortly after that.

Dave: Okay. Well, go ahead.

John: Looking back, if I had to give advice to a younger person, “Do it right. Tell the truth, do it right, and stand your ground. Don’t be pushed around. Stand your ground if you know that you’re correct.”

Dave: That is great advice. And I tell as an example of that as we’re wrapping up, I don’t know if I’ve shared this with you, but I had a person that you’ve done business with for a long time tell me once that sometimes his relationship with you was frustrating, but that if he was ever thrown into a third world jail, that you’d be the first person he’d call. And I was telling that story to another person that knew you, and they concurred. And so basically, I’ve asked two people that know you who the first person they’d call if they got thrown in a jail, and they said it’d be you. So I guess that’s proof that you’ve done some things right that that’s the first call they would make, is to you.

John: Friendships through the years. After retirement, I’ve been retired for two years I guess now, a year and a half, and I miss the people. I miss the customers, I miss the vendors, I miss the employees. I just, I miss that game, that competitive game that’s out there.

Dave: No, I can imagine. Well, as we wrap up I want to talk about one more thing. You mentioned that baseball provided you an education at Tulane University that your parents could not have afforded. Based on that comment, is it safe to assume that you did not grow up in affluent surroundings?

John: The most money my dad made was $38000 a year.

Dave: Okay. So y’all were a working family that had to work for everything you got, right?

John: My mom went and taught grammar school to put me through high school.

Dave: Oh, because it was a private high school, right, that had tuition. So with that in mind I believe, and tell me if this is correct, I know that you’re a person who is generous not just with your family and friends and employees, but that you never forget where you came from. And I believe that you made a gift to your … was it your high school that you made the gift to for the baseball field?

John: Yes, the Jesuit high school.

Dave: And was that around the time of the transaction, or was it before that?

John: Actually, before we sold the company. They brought the blueprints over and they showed me the blueprints, and the high school had no facility of its own. It’s an inner city school. It’s been there for 150 years. No extra ground or anywhere to put a stadium or anything. So they found a piece of property and they drew these blueprints up and they were looking for some advice and some money. And the way it worked out is that we made a donation to them and they actually named the stadium after me. It’ll be there for a long time and it’s a very, very, very nice thing to have done over there.

Dave: Sure. And were either of your parents alive at that time?

John: No, they were gone.

Dave: I can only imagine how proud for sure your mother would have been because that school mattered so much for her that she took a job teaching to put you through there. But would you think that both your parents would have been proud that you were able to do that?

John: Oh yeah, pretty heartfelt, yes.

Dave: Yeah, that is great. Well, Johnny, I can’t believe how fast the time has gone. Was there anything else that we need to discuss that we didn’t bring up, anything else that comes to mind?

John: David, I want to thank you for doing this. I think it’s very informative for you and me, and you have always been there. You are a friend and a vendor for us, and I think the friendship comes first. You like to deal with your friends, so we’ve always had that relationship. So thank you.

Dave: Oh well, the pleasure’s all mine, Johnny. I’ve appreciated all the business insight that I’ve received from you through the years and your guidance and mentorship and friendship, the feelings are mutual. Well, thank you again for being on the show. Hey, if anyone wants to reach out to you, if they wanted to reach out to you is that something you’re amenable to?

John: Sure, sure.

Dave: Would your email just be the best way for them to reach you, just have them email you?

John: Sure.

Dave: And what is your personal email

John: ****

Dave: Okay, well, that’s an easy one to remember. Well, awesome. Hopefully, an entrepreneur or two will reach out to you. And again, Johnny, thank you so much for taking the time to be on here, and thank you for your friendship.

John: David, thanks for the opportunity.

Dave: All right, have a great day.

Dave: Good morning, Brannon.

Brannon: Hey, good morning, Dave. How are you?

Dave: I am great. I am great. Welcome to the IC-DISC Show.

Brannon: Well, thank you. I’m so excited to be here.

Dave: Awesome. Well, let’s go ahead and get started. So let me go ahead and read your bio so people have a sense of who you are. Brannon Poe’s the founder of Poe Group Advisors, and has been facilitating successful accounting practice transitions through the US and Canada since 2003. Brannon started his career in public accounting as an auditor with Ernst & Young. He’s the author of Accountant’s Flight Plan: Best Practices for Today’s Firms, published by the AICPA and CPA Canada. And another book he has is On Your Own! How to Start Your Own CPA Firm as well as multiple blogs and the Accountant’s Flight Plan podcast.
So that gives us a good starting point. Why don’t we dive a little bit more into the personal side? Tell us a bit more about you personally. Where do you live? Are you married? Do you have any children?

Brannon: Yes, I live in Charleston, South Carolina and I’m married with three children. And we moved to Charleston 20 years ago, love it out here. And all of my children go to the College of Charleston right now. So we tried to push them out of the nest and get them to go far away, but nobody wants to leave.

Dave: Well, that must be a testament to the appeal of the living near you and your wife or the city of Charleston.

Brannon: Well, I like to think it’s both.

Dave: Okay, that is great. That is great. So tell me how did you make the shift from being an auditor in public accounting, to helping CPA firms transition to new ownership?

Brannon: It’s a good question. It’s an interesting story. So I’ll go back. I’m going to go all the way back to high school when I chose accounting.

Dave: Super.

Brannon: My parents were actually art teachers. And so growing up, I had no business sense or nobody in my family was a business person. And so I always had this interest in business. And when I was, I guess, maybe a junior in high school, I met this local entrepreneur that I looked up to and he said, I told him, “I really want to learn about business.” And he said, “Well, you should become a CPA. So you’ll get to see how people do things in business and you’ll get great ideas and you’ll see what works.” And I don’t know, that makes sense. So that’s what I did. And I went to college and majored in accounting and came out working for Ernst & Young and I enjoyed the school part of it learning the concepts. When I got into practice, I realized pretty quickly that it wasn’t for me. It wasn’t what I was going to want to do long term.
So fast forward, a little bit, I stayed in public accounting for a while, about five years and did some sales work in a small company. And then one day, a friend of mine called me and we went and did some CPE together, and he had just bought a CPA firm. And he said, “You should call this guy that I got my practice through. All he does is broker CPA firms. And you should call him. See if there’s a CPA firm in Charleston.” And so I got up the next morning, and I had forgot the guy’s name, that he told me. And I called the wrong guy. And I called the founder of Accounting Practice Sales which was Howard Holmes and he said, “I don’t have anybody selling firms in South Carolina. Would you like to sell CPA firms?” He was a startup at this point, in 2003. And I’m like, “Yeah, that sounds interesting. Maybe I would like to do that.”
And so, anyway, I started doing that. Howard is up selling the company to his brother, and when he got out, I started wanting to separate. So I separated from Accounting Practice Sales and that’s how Poe Group Advisors came to be.

Dave: Okay. Well, that is a great background description. So why don’t we start to drill into specifically what you do. So although I know a little bit about what you do, let’s assume I don’t know anything. So why is there even a need for you to do what you do?

Brannon: Well, that’s a good question. Why is there a need? I thought the same thing myself, how many firms are actually turning over every year? And if you think about it, what’s the average career of a CPA that owns a practice? At first, I thought, “Well, maybe it’s 30 years.” And I think it’s shorter than that. It’s probably more like 15 or 20 years. Because people get out for various reasons, they might have another opportunity. Not everybody stays as an owner for 30 years. So if you think about it in those number terms, that means if there are 20 CPA practices that are privately owned, one of those out of 20 is probably going to turn over in a year.

Dave: I see.

Brannon: Now a lot of those will turn over internally. But a lot of the owners, they don’t have a family member that’s a CPA that wants to take over, or they just don’t have a staff member that’s really keen on owning. So what are they going to do? So there’s no market for them. So that’s where we step in. We create the market for CPA firms. And our typical firm is anywhere from, yeah, anywhere from 500,000 to five million rather. Five million-

Dave: In annual revenues?

Brannon: Yes. That’s our sweet spot. So we have sold one firm to the top 100 firms. I mean, I think we could handle larger practices than that, but that’s our sweet spot.

Dave: Okay. So other than the firms being from 500,000 to five million in size, what are some of the other characteristics or mindsets of these owners that create a particularly good fit with what you all do or who’s that ideal person for you?

Brannon: I’ve got clients for it. Well, I can best help first of all, they need to be really ready to sell. I think that’s one of the biggest obstacles we have to determine, is are they truly ready, is the timing right? And we spend a lot of time with people who are years away from selling, and they’re just not quite ready. So we help them get ready. But before somebody goes into the market, they need to have reached that point where they’re truly ready to move on to something else or to retirement.
So I think that’s probably one of the key things and, obviously, we like firms that are more marketable. The more marketable firms are easier to attract good buyers. And that’s going to mean a variety of things. I’m not sure how much detail you want to go into here, but-

Dave: Sure, let’s go ahead.

Brannon: Sure. So a practice that’s really highly marketable would be one that’s profitable. One with preferably with good staff, preferably with staff that have, they see some longevity in the team. These are the ideal circumstances. And you want someone as a seller, our model is a little different, I think, than most people intuitively would think. A lot of buyers and sellers believe that if the seller stays in the practice for a long time after the sale, that that’s just automatically going to be better for transition. And we have, through experience, we’ve found out that that’s just not true. It’s not the case. That more often than not, that will cause problems in the transition. And if you think about it, it makes sense, if the seller is there… Let me give you a scenario.

Dave: Sure.

Brannon: So suppose you buy a practice. Suppose you’re the buyer and you buy a practice. And you step into a conference with a client. So it’s you, it’s the seller, and it’s the client. Who do you think that client’s going to direct their questions toward in that meeting?

Dave: Probably the seller.

Brannon: The seller.

Dave: Because that’s who they know.

Brannon: That’s who they know. So you as the buyer, are sitting there in this awkward position of being a third wheel in this meeting. And that does not help build that relationship with that client. And so if you’re the buyer, you’re better off not having the seller in that room. And you’re solving client problems, you’re bonding with that client. And the same is true for staff.
Now I’m not saying that doesn’t work sometimes. And there are situations where a seller involvement can be helpful. We find that true in more complex longer larger engagements, like a big audit for example. The seller can still serve in some capacity as an oversight on an audit and things like that. And I think that does give the client more comfort. But, yeah from a da-

Dave: That’s really interesting. Because one of the podcasts I really enjoy is one by John Warrillow, called Built to Sell and every week he has somebody who has sold their business. And it seems like in the non accounting realm, that anytime there’s a service business being sold, they almost always want the owner to stay around for two or three years, and the owner doesn’t want to stay around. And in that world, it seems like it’s oftentimes one of the biggest sticking points. And so what John recommends, he’s got this value builder scorecard thing, is that he said, the way you avoid that is you make yourself unnecessary in the business as the owner, you have a really great team that really runs the business. And so that they don’t really need you, that that’s how you get the maximum value, and you decrease how long the buyer’s going to make you stay. So would that apply to some extent, in a CPA firm as well? Is a CPA firm more valuable if the owner is less involved in the day-to-day of the business?

Brannon: Absolutely. Absolutely. That’s true. And I think that’s especially true as the firm is larger and larger, that becomes more and more true. But if you got a firm that’s doing between 500,000 or a million dollars a year, it’s hard to have that team that can really take over significant amount of your responsibilities. So-

Dave: Sure.

Brannon: … which is one of the advantages of scaling an accounting practice or any business, is that’s one of the big advantages of scale.

Dave: Interesting. So you’d mentioned that you help them get ready, if they’re not ready to sell for a few years. What does that involve? Or what do you mean by that, by helping them get ready?

Brannon: Well, we help them get clear about what they want. I think that’s probably one of the most important components, is just we consult with him. And we ask them some of the hard questions. And if they don’t have answers to those, then… A lot of times they’ll ponder it. We also have, you mentioned in my bio, Accountant’s Flight Plan, that’s a really good short book that helps people get their practice in the most marketable condition that they can. We do have a succession planning guide that we offer, it’s a free guide that touches on some of the probably some of the most simple things that people can focus on to get their practice in better shape to sell. I think pricing is a good example that a lot of CPAs don’t price their work. They don’t value their work-

Dave: They don’t charge enough?

Brannon: They don’t charge enough. They don’t value their work as much as the clients do. And I think they’re just sometimes too timid to try to push the limits on pricing. So it’s one of the things, “Can we have a chat or an account site plan about pricing and how to do that?” And you don’t have to do that all at once. You can test it, you can take a sample of clients and test out new pricing strategies. And then if it works, great, then you do it in a more widespread fashion. And unless the stuff is pretty simple, it’s just a matter of doing it. And unfortunately for sellers, when you’re at that stage in your career, where are you thinking about getting ready to get out, you don’t always have the drive to improve the practice. There’s not-

Dave: Sure.

Brannon: You’re tired. But sometimes people do get a burst of energy when they know they’re going to put it on the market. And we’ve had situations where a practice was under profitable, and they weren’t getting a lot of market interest. And that can be very motivating for a seller.

Dave: Sure.

Brannon: If you’re not getting the feedback you want for the marketplace. And then you realize, “Oh man, I really got to do something.” It’s obviously better if people are on the front-end of that, and they realize that maybe five or 10 years before they want to put it on the market.

Dave: Sure.

Brannon: Before they put it on the market and then dawn on the reality that, “Oh, man.” I think that’s going to be more of the case going forward because you do have some demographic things going on. You’ve got the baby boomer generation is aging into retirement. And there are going to be a lot of firms probably on the market. But then to counterbalance that, it’s going to be interesting to see how this works. The millennial generation is, I think this year, or next year going to outnumber the boomer generation in terms of total population size. Which I think a lot of people don’t realize that, that the millennial generation is going to be the largest generation.

Dave: Well, that is interesting. I didn’t know that.

Brannon: Yeah. And so I have an interesting tip, I’m actually doing a podcast next month with someone that talks about these generational differences. And my, I guess hunch, is that millennials may not have come of age quite as early as previous generations. They get married later, they have children later. But all these things are going to happen. And so when that happens, I think the demand for practices is going to increase, hopefully pretty substantially. Because-

Dave: That’s-

Brannon: … they’re going to be ready to go, “Okay. I’m not really happy working for someone else. I can go and buy a practice and increase my income and increase my freedom. Why wouldn’t I do that?” So I just think, it goes back to motivation. I think those life circumstances will motivate that generation.

Dave: That’s, I look forward to listening to that podcast. So I want to switch gears a little bit. And so I’m also, my training was also as a CPA in public accounting. So I’m just by chomping it a bit to get into the numbers. So help me understand what’s the typical evaluation for a CPA firm? Is it a multiple of revenues? Is it a multiple of profits? What’s the calculation there and what’s the range as far as the most lucrative, multiple you’ve seen and the worst you’ve seen?

Brannon: Well, it’s a big range. They do trade on a multiple of revenue. I think it’s a pretty widely known rule of thumb in the industry, that accounting practices trade for one times revenue. So that’s the starting point. Now you can’t really talk about price without talking about terms. And there’s a big difference between some sort of a earn-out type of calculation where the buyer says, “I’ll give you 20% now,” my depth is one times revenue, it’s 20% now, 20% next year and then so on for a one time payout over five years, essentially. Versus a cash deal where the buyer just pays for the practice like a normal business.

Dave: Okay. Right.

Brannon: And so typically there is a cash discount. Most of our practices do sell for cash. The nice thing about the CPA industry is there’s really good financing out there for CPA firm acquisitions.

Dave: Oh, okay.

Brannon: 10 year financing is available. And a lot of people don’t realize it but you can get… Typically you can get 90% funding for the deal, if you already-

Dave: Wow.

Brannon: … own a firm. If you already own a firm, you can often get 100% financing. So amortize it over 10 years, that makes the cash flow work a lot better than an earn-out type of formula. Also in terms of the terms earn-out creates a lot of conflict. I did a research project a few years ago, and I don’t know, there’s some really large percentage, it’s over half, there’s some dispute on the earn-out calculation. And then it’s not great for the buyer-seller relationship. And so we actually try to avoid earn-out. I think it’s just… Our philosophy is, “Hey, let’s just have a clean deal.” There’s some price where you’re willing to do a clean deal.

Dave: Right.

Brannon: And let’s keep it simple. And there are definitely circumstances that are unique and the terms have to be created specifically to address those circumstances. But-

Dave: No, I can’t see that.

Brannon: Yeah. So when we talk about price, we’re talking about cash prices. Now I’ve seen, you asked for worst and best, worst case scenario is you’ve got a fire sale where maybe there’s a death. We’ve had situations like that where the practice center just actually dies. And you have to sell it very quickly. And I’ve seen practices go for 50 cents on the dollar in those situations. Now you have, the other end of the spectrum, where you have a highly profitable practice in a major metropolitan area that actually is a hot market. There are hot markets. And in a hot market, I’ve seen them go for 1.3, 1.4 multiple-

Dave: Okay. Wow that’s amazing.

Brannon: … on a cash deal. So-

Dave: It’s interesting, I wasn’t aware of the ability to get financing, and now that you’ve shared that with me, I can see why your deals are mostly cash. Because even if a buyer comes to you and says, “Yeah, we’re willing to pay the price, but we want to pay it out over five years, we’ll put 20% down, and pay the owner out over five years.” I’m guessing you probably said to the buyer, “Well, wouldn’t it be better off for you to put 10% down, borrow the 90% from a bank over 10 years, and you’ll get a more,” I mean, it just seems like if somebody is trying to get a deal done, it seems like that deal is better for everybody. Because in essence, the buyer is getting a discount, by being an all cash deal. The terms he’s going to have with the bank are likely going to be more attractive than the terms he would get from the seller. So I can see where… It seems like in general markets that have a lot of owner financing, or seller financing or markets that don’t have great borrowing options, so out of default, they end up doing that.

Brannon: Yeah and I-

Dave: So that’s it.

Brannon: … started with a banker that just does these type of deals and the experience that they have CPAs is really positive. The failure rate is extremely low in a CPA firm. The default rate on loans is low. So yeah, and not only is it better from a cash flow perspective, from the buyer’s perspective, and this is what really is not always easily recognized, is that if you’re a buyer and you’re buying a firm for cash, it goes back to what I was saying, you don’t need the seller to stick around. And if you’re buying on earn-out, that seller is really not very likely to let go of the practice. They’re going to want to make sure that the buyer is performing the services as they… They’re going to try to control how the service is provided to those clients.

Dave: Yeah, because they have risk. So they’re concerned-

Brannon: Yeah. They have risk and they’re not willing to let go. And so you’ve got some incentives in that deal structure that actually affects the behaviors, both on the buyer side and the seller side that affect those behaviors that aren’t really conducive to a good transition. So we find that the earn-out not only is problematic in terms of cash flow, but it can be very problematic in terms of having control battles over how the practice is operated after the closing.

Dave: Yeah. It’s like the saying that the parent says to the child, “As long as you live under my roof, you’ll follow my rules.”

Brannon: Yep.

Dave: I can imagine the seller’s philosophy is a little bit the same, “As long as you own money, or as long as you owe me money, I’m going to have a say so in how your practice is run.”

Brannon: Right.

Dave: I see.

Brannon: And so it’s frustrating for the, yeah, it’s frustrating for the seller too, because they don’t have full control, but it’s frustrating for the buyer because they don’t really have the flexibility and the freedom to do what they think is best. And everybody’s going to run a practice differently. Just because the seller did it this way, it doesn’t mean that’s the best way. And the buyer may have some really great ideas and have a lot of energy to go in and make some changes, but their hands are tied. So-

Dave: No, that makes sense. Oh, hey, I don’t want to interrupt, I just want to-

Brannon: Sure.

Dave: … I’ve got here, a long list of questions I have for you.

Brannon: Okay.

Dave: So the multiple, as low as half to as high as 1.4X for cash deals. What’s the typical transaction fee that’s charged in the industry? And I’m not asking specifically for your range or your fees, but what’s a typical, is it a percentage of the sales price?

Brannon: Well, our fee is paid by the seller. The seller says, “What’s your fee?” And I say, “Well, you’re asking the wrong question.” And the right question is, what am I going to net after the fee? And that’s really what they-

Dave: Right.

Brannon: That’s what I think people should realize, is we are able to sell for a higher multiple than someone that’s going to sell on their own just because you’re going to-

Dave: Sure.

Brannon: … get a lot more market exposure, you’re going to get the structure, you’re going to get a lot of value. So I don’t know, my fee is 12%. Because that’s the standard fee. I’m not the cheapest in the industry. There’s some cheaper people out there, but that’s what our fee is.

Dave: Okay. Well, no, that’s helpful because I’m imagining, about a quarter of my listening base are CPAs and I’m guessing this podcast is going to be of great interest to that niche of our listener base and probably not so much for the other three quarters. So I’m just trying to anticipate the questions they’re going to have. So thank you for being so-

Brannon: Sure.

Dave: … candid there. What I’d like to do now, I’ll just walk through some typical examples. So I’m guessing you’ve done this long enough. I’m assuming you’ve sold, you’ve probably been involved in, I’m guessing more than 100 transactions or close to 100 transactions. Is that a fair assumption?

Brannon: I actually, I think we surpassed 300 last year.

Dave: Oh, wow.

Brannon: We’re doing over 300.

Dave: Okay.

Brannon: Yeah.

Dave: Okay. Well, that’s great. So let’s think of a deal that’s maybe… So let me just tell you the kinds of deals I want to talk about, I want to talk about several types. So one would be, think of a deal that had the youngest purchaser that you can think of and what did that look like? And then think of, I guess what would be the most typical scenario, as far as maybe the transaction, the characteristics of the seller, the characteristics of the buyer. But let’s just start with those two scenarios. Let’s start with the youngest. And the reason I ask this-

Brannon: Youngest.

Dave: … is you’ve told me a story, a couple of years ago, about somebody who bought a practice. And I think they were in their 20s, and it really surprised me that somebody that young would have the desire and confidence to do that. So I think back to my public accounting days, and if you start at 22 or 23, I mean, you’re barely even having any client management experience before 30. So it struck me that… So I was imagining in my mind, I wouldn’t have felt ready to buy a firm till I was probably 35 or 40. So let’s start with that one. What’s the youngest buyer you can recall? Or an example of a young buyer.

Brannon: Yeah. Well, there was a great example, if people care to listen, I did a podcast this year with a buyer named Jason Ding. And he, I want to say he’s in his late 20s. Now I’ve had have buyers a little younger than that. But this one really stood out because he was so bold in what he did, he bought a practice that was probably what I would consider more of a fixer upper. And he knew that going in, he knew that the practice was… The fees weren’t great. He felt like the systems were outdated and so he went in and massively increased prices.
But he was really smart about it. He went to the clients and said, basically, “Look here, I’m going up on the fee, however, this is what you’re going to get.” And I think he said he lost some really small percentage of his total client list. And he’s pretty much tripled the practice in, of course over a couple of years. So I think-

Dave: I remember this. I listened to that podcast. Yeah, I remember him.

Brannon: Yeah. So I think sometimes you get people that are in their 20s, I know I started my first business in my 20s. And there’s something really cool about that age because there’s that boldness. There’s that, “Well, I don’t see this as a big risk. So I’m just going to do it.” You don’t have any preconceptions of how things are supposed to do. And so there’s buyers that are really young. I think if you’re really young, the smart thing to do is start with a really small practice. Don’t go out and buy a million dollar practice, buy a 250…

Dave: Sure.

Brannon: … practice. And-

Dave: That makes sense. Now I’m curious, I don’t remember, did Jason come straight from public accounting or had he gone into industry? Do you recall?

Brannon: I’m trying to remember. I know he’s parents were CPAs. Yeah, I think he did go into industry initially and then he swore he’d never do public practice because he didn’t like the taxes and hours in his parents work.

Dave: Sure.

Brannon: But I do think he had industry experience. And what I’ve noticed is if someone’s got public and industry, they tend to do a better job of the small business advisory work.

Dave: I can see that.

Brannon: Yeah.

Dave: Yeah, they’ve actually been in the shoes more so, even if they were just in the accounting department of, say, a manufacturing company, they still understand it better than having just advise people. So yeah, that’s really interesting because I can tell you, I started my career at Arthur Andersen here in Houston. And if I had known then, that this concept of you could buy a small practice existed, I would have done everything differently in my career. I mean-

Brannon: Oh, wow.

Dave: … first of all, I would have went into tax instead of audit. And I would have focused on small, tried to be in the part of the practice that focused on small businesses. And then I would have tried to find somebody like you, as soon as I could, and with the idea of buying a practice while I was still in my 20s. So yeah, that’s just really interesting. And I have to think there’s lots of folks like this, in their 20s who have no idea that this is an option and that the financing is there.

Brannon: Yeah.

Dave: Is that been your experience, the most-

Brannon: I think that’s-

Dave: … potential buyers not even know that?

Brannon: I don’t know, because I’m talking to the people who do know that.

Dave: Oh, sure, sure.

Brannon: It’s hard for me to say. I don’t know. You bring up a great question, is it widely known that you can buy a CPA firm? I don’t know how many… I don’t know if that’s on everyone’s radar or not. I think it probably is. There’s a lot of marketing out there for it.

Dave: Okay, well, it takes long.

Brannon: If people do-

Dave: Go ahead.

Brannon: Yeah.

Dave: Go ahead.

Brannon: No, if the people are digging around a little bit, they can find firms for sale.

Dave: Okay. Well, that is interesting. So hopefully, if there are some CPAs that listen to this podcast who weren’t aware of that, or maybe what they’re not aware of is just how young they could buy a practice.

Brannon: Yep.

Dave: Because I’m guessing… So now let’s shift gears to a typical buyer. What would you say is the typical average age for your buyers? Is it somebody in their 30s, in their 40s?

Brannon: So we have buyers fall into two groups, and you have existing firms that are buyers, and those tend to be more mature people. I’d say, in their 40s and maybe early 50s. But individual that, we have a lot of buyers that I would characterize as someone that’s working in a CPA firm, they have 10, 15 years experience. But for whatever reason, they’re not happy where they are. And they don’t see a path to partnership or maybe they just don’t want to be partners with those partners, and they want to do their own thing.

Brannon: And so those people tend to be 35 to 45. So our individual buyers tend to be that age group, 35 to 45, which I think the oldest mill, yeah, the oldest millennials are now 38 years old. So they’re coming into that, back to what I was saying about the demographics, they’re coming into that prime age of practice ownership.

Dave: Then that’s a great stat on the top end of the millennial age there.

Brannon: Yeah.

Dave: Okay. So let’s look at, now let’s look at a typical deal, or maybe a recent deal. And let’s just get into the nitty gritty. And obviously, probably for confidentiality purposes, you won’t want to share specific details. But let’s talk about a practice you’ve sold in the last year, and let’s start with it from start to finish. How much time elapsed from the time you first spoke to this person until the practice was sold? Just walk us through a deal, if you will.

Brannon: Okay. So this one comes to mind, it’s really an interesting case. This gentleman, the first time I ever met him was about 10 years ago. And he clearly wasn’t ready when I first met him. So we just talked about practice management issues and he was keen on growing his practice. I think when I first met him, his practice was probably doing about a million dollars a year. And we just kept in touch, over the years. He’d touch base with me every couple of years and he started reading a lot of my blog, a lot of our blog posts, by the way are practice management related, and he followed us for a while and he was growing and he really wanted to grow the business. And he had this vision that he wanted to stay in front of the quality of the work. So in order to do that, he wanted to be overstaffed rather than understaffed. So he wanted to keep the quality, he wanted to make sure the quality of the work was really good. So that was his strategy.
And in some senses, it worked really well. He had this great team. He had been able to attract larger and larger clients, I think, his largest client was, I don’t know, maybe 100 million in revenue. And so he had this… So when he was ready to sell, he had about a $2 million practice. I think he was doing about two and a half. So he doubled it in that 10 year period. And he had a really great quality of clients, he had great quality of staff. So when he wanted to sell it, I knew those were really two big strengths of his business, but he didn’t really focus on cash flow as much as I think he should have to make his practice really, really marketable.
So it took us a while to sell it. And we had to find a buyer that had significant capital, and would also fit with that culture and saw the potential in the practice. But we did sell it just a couple of months ago. And the interesting thing was, is from the time he put it on the market, it was on the market for a while, till the time he sold, he improved the cash flow about two and a half times. So-

Dave: Wow.

Brannon: … and that was what I’m talking about, about the motivation to improve cash flow. Sometimes when a person puts their practice on the market, they realize, “Oh, man, I really should have been focusing on cash flow, on improving the profitability of the practice.” Because that’s what… I mean, what is a buyer buying when they buy any business? They’re buying an income stream. And if the income stream is not there, it’s problematic. So they’ve either got to… They have to fix it. The seller has to either get the practice profitability to where it needs to be or the buyer has to do it. And so if the buyer has to do it, then it’s going to cause the practice value to go down. So anyway, that was an interesting… Because what he did is, and we gave him a lot of feedback. So when we had buyers who’d give him the feedback, and I think that’s what really motivated him to improve that profitability.

Dave: Well, that is interesting. I cannot believe that time is flying by. So let’s talk about some of the biggest misconceptions people have because I have a friend who was an advisor to a practice in Texas. And that person was a CPA and I think the typical penny wise, pound foolish, he was so focused on the fee he was going to pay the broker. And I remember this guy’s response to my friend was, “I don’t need a broker. I know all the people in town who would have any interest in buying me and I’ve already talked to them and none of them are interested.”
And I remember, I actually talked to you about this a couple of years ago because I thought this could potentially be a practice you could sell. And I remember you told me that this guy had some erroneous assumptions. So why don’t we get into, maybe starting with this scenario of what are some of the misconceptions people have about your service? Versus just trying to do it themselves?

Brannon: Well, I think a lot of CPAs are really smart and they have clients that have sold and so they’re pretty familiar with that process. I had a client last year really sharp, sharp CPA. He had a close to $3 million firm with really excellent cash flow. Probably $1.3 million cash flow. A really incredibly good practice manager. And he was out trying to sell his practice. And he and I spoke and the problem is, is you’re running a business and that’s your business. This is our business. It’s not rocket science, but it’s what we joke and do every day.
And so we’re building a database of interested buyers, we have a process. So our buyers have to go through a process. And to do this on your own, first of all, is inefficient. Most of them don’t do it efficiently. So if you’re not doing this efficiently, it’s going to limit the number of buyers that you can even entertain at the same time.

Dave: I see.

Brannon: And the other thing is, is you’re not doing this every day so you’re not picking up on the little cues that buyers give, and sellers give. And so the way a buyer moves through our process gives us a lot of information about their motivation. And it gives us a lot of information about their capability to buy, their capacity, all of these things. And we can be really objective about these things. So there’s not a… Because it’s your business, I don’t care how smart you are, or how many deals you’ve seen, it’s still your business. So there’s a little bit of bias in your decision making process.
So I tell people, it’s like, “Okay, if you’re going to hire for a position, occasionally you might get really lucky and find a good candidate and hire that person and be a great employee. But typically if you hire the first person you interview, that might not be the best decision. It’s better usually to interview 10 people and pick the best fit out of those 10.” And so what we do is we provide a larger number of options, a process and our objective, experience driven observations about those people.
So we’re able to help that seller make the best fit. And so many sellers are really price driven, like, “What about the price? What about the fee?” You’re focusing on the wrong thing. Because what you should be focusing on is the fit. Because if you get somebody that’s really well suited for your practice, that solves all the problems. Because if they’re well suited, if they know they’re going to do well in that practice, they’re going to be willing to pay fair market value for it, first of all. So-

Dave: Right. Or even a premium.

Brannon: Or even a-

Dave: Even a slight premium, if-

Brannon: … so even a premium.

Dave: … they see that it’s a really great fit.

Brannon: Right. And then, and not only that, but the transition becomes smoother if you got the right person. I mean, this all boils down to getting the right person in there. And quite frankly, I think with our process and with our guidance, I think people are able to find and select the right buyer, not just a buyer.

Dave: That is interesting. Go ahead.

Brannon: Yeah. Well, and two, it’s really hard to negotiate without a competitive environment. So it’s hard to negotiate with one buyer.

Dave: Right. And they know that if the owner is trying to sell the practice themselves through just direct contact with known firms in the market, they probably know that it’s not as competitive of a bidding situation, whereas when you’re involved, they don’t know whether there’s one other interested better or 10 other interested bidders. So let’s go back to this-

Brannon: And we-

Dave: Oh, go ahead. Well, I just wanted to finish the story on this one. So this gentleman had a really profitable, $3 million practice, a million three or so of profit in it. And I believe you said he originally was trying to sell it himself?

Brannon: Right.

Dave: And then, so what happened then when he got… So just quickly, tell me how long did he try, what were his obstacles, and then what was the outcome once he hired you?

Brannon: Well, I think he was trying on his own, probably for four or five months. And I think he got pretty close to a deal. The other thing is, I think he was skeptical that I could really actually get him all cash. And get him a good premium and I think CPAs are naturally skeptical salespersons.

Dave: Sure, sure.

Brannon: I fall into that salesperson category which you is, I understand. So anyway, he talked to somebody that we had sold before. And they, I think he finally came around and talked to maybe two or three prior clients of ours. And then he was like, “Okay, maybe this guy’s really able to do what he says he’s going to do.”
And so he listed and he was also reluctant to build the profile properly. So we do a lot of work on the front-end to really create a nice profile for our practices. And this was a sharp guy. He’s a really smart guy. And he bucked me on how we were going to do the profile and anyway, he finally came around to our process. And once he did that, man, we had a lot of buyers, we had a lot of meetings for him.
The nice thing about this guy is he was willing to talk with everybody. And he was wasn’t really real choosy about who the buyer might be. And he was willing to do a lot of meetings, a lot of phone calls. So that just made… he had a lot of choices, and I always encourage sellers to talk to as many buyers as they can, because they’re going to get insights from each one of those conversations. They’re going to know what they don’t want, they’re just really going to be able to target that perfect fit more exactly. And so we ended up with like three or four offers on that deal, and we got full price for it. So he was happy.

Dave: Awesome. Well, that is a great story. Well, boy, I can’t believe our time is nearly up. So I’d like to wrap up, and then share some next steps with folks who are interested in exploring this further. So as I understand it, to me, the big takeaway from this is that there are a lot of misconceptions out there that cause sellers to make erroneous decisions. And one of the big ones is that there is abundant financing available with great terms such that there really are plenty of cash buyers out there. Or there could be even if just the buyer has to be educated on why they’d be better off borrowing the money from the bank. So to me, that seems like one of the first biggest misconceptions.
And then the next few you touched on recently are things that they can basically save 12% by selling it themselves. They’re not factoring in that you may be able to command a premium because of your process and competitive nature, you may be able to sell the practice for more than 12% more than they can.
And then another one is that because they’ve seen other clients of theirs sell a business, they feel like they understand the process and they can run a process. But it’s not what they do all day long and they have a business to run, so that it ends up probably getting pushed to the back burner and never gets the full attention. Does that summarize some of the biggest misconceptions?

Brannon: I think so. I do. I think the earn-out is a big misconception. And the longer transition involvement is a big misconception. I see a lot of private transitions, we observe deals that are done privately and the transitions in my opinion, are handled the way they are because of that deal structure. And they’re not handled well.

Dave: Yeah. Yeah.

Brannon: So the buyer ends up losing as well. It’s a shared loss, but it’s a loss nonetheless.

Dave: Sure. So let’s talk about, as we wrap up, where people can can reach you. So first off, what’s your web address?

Brannon: It is poegroupadvisors.com. And that’s P-O-E, and advisors is spelled with an O, A-D-V-I-S-O-R-S.

Dave: Okay. And where would you direct, because there’s two types of listeners we’re going to have within the CPA realm, those who are contemplating selling a practice and those who might be considering buying a practice. Do you have a resource for either one of those buyers? And could you share that URL?

Brannon: Sure. So if you go to the website, poegroupadvisors.com, if you’re thinking about selling, we have a free succession planning guide. And that is poegroupadvisors.com\plan. And that’s really good for somebody who’s starting to think about exiting. And for buyers, I would direct you to our FAQ page. So if you go to poegroupadvisors.com and click on the buyer tab, there’s an FAQ page and there are several different resources on that page. So that would give you a smorgasbord of different products that we have that are free. We have a video about buying, we have just numerous resources. Choosing a firm, evaluating a firm. So it just depends on what stage that buyer is in, in their purchasing journey.

Dave: So what if somebody just wanted to cut to the chase and just have a call with you straight away? Are you amenable to that?

Brannon: Well, we have a lot of buyers. So I actually prefer-

Dave: I’m sorry, I’m just talking more on the seller side. Say that a seller was really interested, but he wanted to just call and talk to you first. Or do you really prefer that they-

Brannon: Well, we offer an exit strategy call. But people just need to email us to get that scheduled. I don’t take unscheduled calls.

Dave: Yeah, that makes sense.

Brannon: Yeah. But, we’re, you can just email.

Dave: So when they go to the… Okay, go ahead.

Brannon: Yeah. You can just go to the contact us page. Actually on the sellers page, we do have a place where you can request to consult and yeah, we plan to do an exit, we call it an exit strategy call and happy to do this with people. But we just have to get them on the schedule. They can email me for that, that’s bpoe@poegroupadvisors.com.

Dave: Okay, awesome. Well, Brannon, I really appreciate your time and I think you’ve really shared a lot of valuable information that will be interesting to a lot of our CPA listeners.

Brannon: Well, thank you for having me on. It’s been my pleasure.

Dave: All right. Well, you have a great day, Brannon.

Brannon: Okay, you too.

Dave: Good morning, Cory.

Cory: Good morning, Dave.

Dave: So, how are you doing today?

Cory: It's great. Here at my desk looking outside, it's a bit of a cloudy morning, a little bit of rain so that's nice here in Houston.

Dave: That is. Well, let's go ahead and get started. So today, my guest is Cory Jackson, the president of CTG in Houston, Texas. And CTG is a manufacturer of premium seals and gaskets. Cory was also one of my very first clients when I entered the tax consulting business about 15 years ago. He was introduced to us by their CPA firm. And it's really been fun watching the growth of the business under Cory's stewardship. And I value our business relationship, and really appreciate our friendship too. So, I can't tell you how grateful I am that you made time to be my very first client on the IC-DISC Show.

Cory: Wow, what an honor. Thank you so much for having me this morning, Dave. And likewise, I very much appreciate your input through the years and your team there has helped us make some very good decisions for our business with regards to starting off the R&D tax credits, and then on to the IC-DISC. I didn't know anything about that at all. And you've just made it real easy and very impactful for our business, and I can't say enough great things about you. And you've always been a great sounding board for me. And I tell people all the time, you ended up being one of my very best unpaid salesmen. With your other clients, it's been a very good business opportunity for me as well, too. So, you've just done a great job, and I thank you very much for having me this morning, and thank you for being such a great mentor through the years.

Dave: Well, Cory, jeez, you're going to make me blush. That's that's very nice, and very kind of you. Well, let's get into the heart of things. So, let's talk about CT Gasket. Why don't you start from the beginning? Kind of give the the history and what point you became involved because you're the third generation in the business, I believe, is that right?

Cory: Yes, sir. Three generations, and it's very difficult to transition any business through one generation, much less multiple generations. So, it's been a fun ride and I've been very thankful for having a great staff and team and two great generations before me that sort of laid the groundwork and platform for me to be able to take the business forward. And so, definitely is not something that I did on my own. I had a lot of help, and very thankful for those that surrounded and helped me out through my career. I can give back in some way in the future as well, too.

But yes, so starting out, you have to go back to in 1940s in the gasket business, my grandfather was working for a company here in Houston. And he worked there for a number of years and through the '60s, and was actually part of another gasket company in the '60s. And then through the '80s, he sold out of that business. And he and my dad started this business in 1984. So, CPG, as it exists now has been in business for 35 years. And I was about seven years old when they started that. And so, my knowledge of the business going up through the years was really mostly about when I could get to a point where I could help out it was, "Hey, we need you to come up here, and work in the business."

And they started out back in 1984. for those that have been in the oil and gas business long enough and really lived in Houston, since then that wasn't a very good time to start a business. The old oil and gas business, the savings and loan business had crippled the economy down here. And so, I guess, when you're starting out anything that you get from zero is positive growth. So I guess that that is one good thing. But it was a difficult time to start a business and it started out with just one clicker press in Central Texas, that's what the CT stands for. And through the years, just with my grandfather, and my father having been in the business already for a little while just in the gasket business, in general, cobbled together some accounts and scraped just to make the business run.

It's very difficult to get any business to get off and start going. But that time was very difficult. But they were able to do that and had some good customers. In fact, the very first product that we took an order, for the exact piece and customer, we still have to this day 35 years later. That kind of gives you an idea of the loyalty with our customers.

Dave: Really?

Cory: Yes. And so, that just gives you an idea of we've been at this for a long time, and it gives you an idea of the quality and products that we manufacture. Now, what we were doing back then has changed a lot. The way that I got involved in the business, and I think I have to preface the detail of that by starting off saying that I didn't have any interest in getting in the business at all. In fact, when I was a teenager, I can remember thinking, "Who would want to get in the gasket business?" That doesn't seem enticing at all. And so-

Dave: Nothing sexy about it to you.

Cory: No, not at all. And so, in fact, it was more like, I felt like it was kind of punishment in a way. It's like I had to work. Anytime that I wanted wanted something, "Hey, go out in the shop, and work for it." And what that was doing was building in a work ethic. I probably didn't appreciate that as much back then. And we never do when we start out young like that.

Dave: Sure.

Cory: So, I graduated in the Cypress area, here in Houston, grew up in Houston area. And at that time, it was in the mid '90s, and my grandfather and father had moved the business from Central Texas back to Houston. And we were at that time about 15 employees. And as I was graduating from high school, again, I had no interest in the business. So, I actually went and worked for the restaurant business. Worked for a restaurant chain here in Houston, well known one. And worked up through the ranks while I was going to college. I went to the University of Houston because my future wife decided that's where she wanted to go. We met when I was a senior in high school. So, we both went to the University of Houston. And so I was working on my degree while I was working in the restaurant business. I thought I was going to do that long term.

As I was thinking about marriage and those types of things that have it, I was also getting a degree in Hotel and Restaurant Management. I decided that that probably wasn't going to be my career path, and I changed my degree to Information Systems Technology. And that's what I decided I was going to do was go into the IT business. And so, about 1997, 1998 came along, and I was making that transition out of the restaurant business. And so, I started working at CTG to just make ends meet, have another job, and go through the transition process. It wasn't a long term play for me. And what I was doing then was working in the machine shop. We, again, had about 15 people and two or three manual machines, lathes, and I was working by hand manufacturing Teflon, which we still manufacture to this day. I was machining parts, and you would set these parts up by hand. It was a laborious process. I just remember thinking, sitting there doing this going, "There has got to be an automated way to do this."

Dave: For sure.

Cory: And, of course, I was in the midst of switching my degree to Information Systems Technology, and so I did that part time for a couple of years as I finished my degree. And when I got to the end of my degree I graduated in 1999. That was just about in time for the .com bust. You had Y2K, and shortly thereafter that market melted away. So, what started out as a temporary endeavor in the business ended up being a little bit more permanent. Especially, considering the fact that I got married in 1999. So, I needed to have something as permanent as possible.

Dave: Sure. Makes sense.

Cory: So, the first thing I started doing was really looking at ways we could automate the business. And so, I looked at CNC technologies, which is an automated way to do the manual manufacturing process that I was doing before. And that was a big leap for us at the time to buy one of those machines was about $100,000. And when I went to my dad and said, "Hey, I think we should buy one of these." You might as well have been asking for a million dollars or something. It was a big investment. And he had the courage to do that. Put his faith and trust that we could make that work. And so, we brought that in, and sure enough that particular, those items I was working on, and our team was working on it took, say, three hours do one part. You could do that part in 30 minutes. I mean, so it was a huge savings for labor.

And that would be very significant in the evolution of CTG at that time because there was a trend that was just budding there in the late '90s. And then on into the early 2000s, where you had this offshoring going on where products that were manufactured for years commodity here in the United States, began to be manufactured in all kinds of regions. China ended up being one of the big ones that absorbed a lot of that offshoring. And for a business like ours at the time, that was a big deal because products that we were manufacturing that did take us a long time were being sped up by technology, but we also were competing against these other regions that had not typically had that kind of manufacturing capability.

I didn't know all of that was going on at the time. I was sort of just surviving, if you will. But that technology was a big, big part of CTG evolving into the next step and where we are today. And so, about that time my grandfather was ready to transition out of the business. And as I started working my way through the organization, and automated all of the different manufacturing processes that we were working on. Just tried to take any manual operation, and automate it to the degree that we could. A lot of the processes that we do here are still manual, and laborious, but there were a number of things that we could automate. And so we did that. And I mean we had dot matrix printers back then. And the ledgers were all handwritten, purchase orders were handwritten.

Dave: Sure.

Cory: That was the era that I started in with the business. And so, those were real easy, low hanging fruit for me because I was a technology guy. And so, started just working to automate that as well, too. So you have this offshoring thing that's going on in the background and-

Dave: Hey, Cory.

Cory: Yeah.

Dave: Can I just interject with two questions?

Cory: Sure.

Dave: Just clarify two things. One is CNC, I believe that's an acronym. Do you know what that stands for? As far as CNC...

Cory: Computer numeric control. Yes, sorry. I should have clarified that.

Dave: Yeah, no problem. And then the other question was you mentioned that machine cost $100,000. For context, what would the equivalent manual type machine have cost back then?

Cory: Oh, you could have found Clausing Colchester Manual 8, which I was running. That's just a brand. You could probably find one for four or $5,000 to give you an idea of the difference in cost.

Dave: Okay. Yeah. That really does. Yeah, that does. Okay. Well, thank you for letting me sidebar to clarify that.

Cory: No, no, that's great. No problem.

Dave: All right. So, please continue. This is a great story. I enjoy hearing it.

Cory: So, we sort of have that offshoring thing going on in the background. As I'm making my way through the organization, I'm getting involved in sales and seeing the different products that CTG was capable of selling. I wish I could say there were some brilliant marketing strategy that we deployed, that worked perfectly. And I tell people all the time, especially entrepreneurs. So much of growing a business, especially on the sales side is just grassroots making calls, doing a great job for your customers, and getting referrals. That's still a big part of our business even today. And that's really what we did as a team is just sat down and really just from a grassroots marketing standpoint got on the phone, started making contacts, working with people like Dave spray is a perfect example as I started evolving in the business.

And if you surround yourself with good people, then good things are going to happen both in your organization and outside of your organization. So if you do those two things, that helps a whole lot, your organization that just breeds this culture of success. It's just a grassroots get on the phone, and make things happen or make face-to-face meetings if you can. And so, that was the first step. And then as we started to grow we did find that we were... It was getting difficult to compete with some of the commodities that we'd been manufacturing for. So, what that... And again, this wasn't necessarily a plan that we had. But what that ended up doing was it pushed us into the niche of the products that we excel in, even to this day. And what that is, is being able to take dissimilar materials and put them together. That's kind of the secret sauce, if you will, that makes us unique from our competition.

There's lots of people that do certain manufacturing processes that we have, but there's not that many that put it together like we can. And so, we just worked real hard to grow that niche, and target our customers who were needing products that had multiple materials put together and made that our focus. And that worked out quite well for us. To give you an idea now, we've had as many as 100 people on our business. We're at about 75, 80 right now. And when I started out, it was 15. So, that gives you an idea that the size and growth are under about 60,000 square feet now under roof and started with about 10,000 or so. So we've had a lot of growth through the years, and that's been where that growth has come from.

And so, that took us out of that offshoring mode where competitors could come in and easily steal that business. They could not get to that business quite as easily. And so, even to this day, that's one of our specialties is we can manufacturer items that are high end, that are designed to be used in high pressures, and chemical resistance. And we can do them very quickly and efficiently for our customers, especially when they're doing R&D, new product development. And as those new products are successful, then we're able to reap the rewards on the back end as they move through the supply chains, and then they get used on a recurring basis. And so, the consumable is part of our businesses, still a big part of our business even to this day.

Dave: So, can you give me... So, thank you for that? Can you give me an example of some dissimilar products? What types of commodities or materials are you putting together?

Cory: Sure. So, probably the one that's most recognizable for people, if you think about a valve where you're controlling fluids in a pipeline. We'll manufacturer a seal that will have a metal component that is seated inside of the valve and also a rubber component that will actually do the sealing. The metal provides the stability and backup. The rubber provides the ceiling. And so, and that can be a combination then of plastic and a metal, a metal and say just traditional gasket material. So we can do lots of combinations of all of the metallics, the floor polymers, the plastics, and we can convert those into any shape and size. And we go up to very large sizes now, up to 60 inches in diameter to give you an idea.

Dave: Oh, wow.

Cory: Some of these seals... Yeah, they get quite large. And one seal might weigh two, 300 pounds to give you an idea.

Dave: Oh, really. Wow.

Cory: And so, but again, it's all centered around putting those different materials together in a way that the customers can solve harsh problems in their business. And so, and we can do that quickly and efficiently. We also do our own metal machining, so we can manufacture our own molds in-house. That gives us another competitive advantage as well too. So that if a customer does have a new product that they're after that they want us to combine, say a metal and a plastic, we can put all of that together in house and we don't have to worry about interfacing with a third party. So that's kind of one of the things that helps us out as well too. Again, it's all about exploiting that niche where we got being able to put those dissimilar materials together in a quick way.

Dave: So, as I understand it, the decision was made that rather than trying to be the low cost provider of just a pure commodity product that you knew you could never win that game against outsourced low cost competitors. So, you decided to focus on niches that you had a competitive advantage in that were not commodity like. That were mission critical that people would be willing to pay a premium for your capabilities. Does that about summarize it?

Cory: That does a perfect summary. Good. That's exactly right. And so, the markets that we serve, it's quite highly varied in the oil and gas space. And that's another key component is we're not just selling to, for instance, the oilfield service suppliers. We do, and that's kind of the upstream part of our business. But we also sell to the midstream, the pipeline distribution companies, and then also the downstream, the chemical plants and the refinery. So we've got a number of different companies across the supply chain in the oil and gas business that helps us offset those times where the drillers may not have a whole lot going on. The downstream part of our business usually will pick up during those times, not always, but most of the time, and then vice versa.

And then, of course, you've got the distribution of fluids, the midstream business, those customers are always busy doing repairs. And so, those are... And that's our, Dave you and I, I think originally got working together was through someone had originally recommended you to us, and then also one of our customers you were helping as well, too. And that was a pipeline customer where we were manufacturing seals to help them do the pipeline repairs. So, you can sort of get the vision there that we've got these dissimilar products. We've got our specialties. We've got our niche. And then you combine that with being very diversified in the industry that we serve. That just gives you a good platform to be able to grow the business. And so, that's how we've done that.

Dave: I was going to just say, I believe you've also through the years have diversified to some extent from the oil and gas business, is that correct?

Cory: That's our key initiative right now, and our future growth model really looks like where there may be some acquisitions. We had our first acquisition a couple of years ago, but we're looking for those opportunities as well that are maybe not necessarily the mainstream oil and gas business. We've had all through the years a part of our business, about 10% or so that is a combination of semiconductor business or computer chips manufacturer. There's a number of our last American plastic products that are used in that business. And so, we've started to exploit some of those opportunities as well, too.

And then also general industrial applications. There's a lot of electrical applications that need injection molded plastic materials, which we do now in-house as well. And so, those are where our growth opportunities are moving forward. And the oil and gas business is here to stay. And I think we will continue to grow that organically. But I think through the mode of acquisitions, and also exploiting some of those other industries outside of the oil and gas like the semiconductor market. I think that's where our growth is going to be as we move forward.

Dave: Okay, that is helpful. So what are some of the biggest challenges you've... Oh, by the way, and so when did you... I believe you said that your grandfather exited the business in 1999. Is that correct?

Cory: Yeah. It was the early 2000s. And then, so my father and I bought him out of the business then. And then I bought my father out of the business in 2012, that gives you the timeline there. He still comes in and helps and works on projects. And he enjoys doing that, and still loves to come in and be part of the team. He's very helpful and I'm very thankful for him. So, yeah, that gives you the timeline of transferring the business between the two generations. That's a challenge and it wasn't easy to do. That's the thing about small businesses is there's not like there's... Even when they grow and are successful, there's not typically... It's not like a big business that can go out and just raise funds very easily to transition a generation from one to the next.

So, you have to be able to work together as you pass to this generation. Number one, the preceding generation has to be willing to let go. That's number one. Yeah, I heard it said once that it's very romantic to think about riding off into the sunset on your horse, and dying on your horse as you ride off into the sunset, but it's really hard on the horse. And so, you got to be willing to let go. And I've been very fortunate to have both generations who want to see the business go to the next generation and be successful. And that is so key no matter what duration like I am. So in order to make that happen there's... I mean, it goes without saying that there will be sacrifices that will have to be made for both generations.

We were able to structure it in a way that we were able to move to the next generation through basically some self funding. It was combination of self funding, and then a payout over time through salary. And so, I mean, there's ways that you can do it. It was very helpful in doing that and helped structuring the deal. That's our accountants. That's another key too is having good consultants that can help you navigate through that process. So, that was probably the biggest challenge in my career was actually going through those two generations. And that's why most businesses don't succeed into the multiple generations because number one, you have to have this new generation being willing to take on the business, and the preceding generation being willing to let go.

That is just two monumental things that are very difficult to happen anyway, regardless of whether you make the transaction happen in a way that the business can afford it. And thankfully, I was in a position to be able to do that, and sort of lay the groundwork to be able to go in, and be successful. And again, it's not me. It's definitely a team. That's been the other critical thing to our success is putting together our management team. Without my management team being as strong as they are now we would not be able to do half of what we do. And so that's also the thing that if I can relay that to others.

If you're transitioning generations make sure that you run the business as a meritocracy, the new generation has the capability, the older generation needs to be willing to let go, to get past that hump then you need to surround yourself with a good management team. And then you need to have good third party, have people outside of your business like Dave Spray, and your accountant. And those need to be solid as well too. If you that, you'll at least give yourself the best chance because business is difficult no matter what. So those would, I'd say the biggest challenges.

The secondary was probably the offshoring. Early in my career because we had to transition the business into doing these more difficult, complicated items. And so, you got two things. Number one, you have to be able to develop the manufacturing processes to do that, and we did that. And then number two, really, the more difficult thing is the marketing part of that how do you exploit your customers? How do you get the visibility? And again, that was a grassroots campaign looking back on it. And even to this day, we track very closely through our CRM how our new customers are coming to us. And it's still majority of word of mouth, people that have heard about us or left and gone on to new organizations. And that still drives our business even to this day. So very, very important, critical piece of business, especially for small businesses as they're growing into bigger businesses.

And so, the offshoring part was the difficult thing. And that's where you really came in and helped us a lot with say, the R&D tax credit because to... And people in business know this intrinsically. It's not getting more friendly to run a business. It's getting less friendly. It's getting more difficult the tax burden. Until here recently, it was sort of this just escalating thing, the burden that a company has to take on, environmental burdens. And some of these things are good things, but they do make it more difficult to run the business and to be profitable.

You couple that with other countries that have a little bit different viewpoint on how to support businesses through subsidies, and you've got things like dumping, for example. Companies that have a lot of surplus in one, or countries that have a lot of surplus will come and then just sell those products into... And plastics are notorious for that. Plastics, and rubber, and steel as well, too. And so, you can imagine, you've got this heavy regulation burden that business owners are having to deal with and work within. And you've also got these new competitors in the early 2000s as they developed in their other countries that you're competing with.

And so, you felt like you're getting surrounded. So, to have the R&D tax credit, and the offshore IC-DISC, those were two ways that would help, especially smaller businesses at least have something working for us to be able to be more competitive. Research and development, we do a lot of that every year. Especially when you consider the fact that sometimes we have no idea whether something is going to work. We're just putting the two manufacturing processes together and hoping that that works. And I think as a society, we all benefit from doing that. And I think that that's a great thing to make available, especially to manufacturers because manufacturing is important to this country.

I would challenge anybody who doesn't think that that's the case. It's very important. I know it's not sexy. But so much of the products that we rely on today are manufactured from products and processes that we do even in this business. So, it's very critically important. And I think the R&D was a big one, the IC-DISC disk as well, too. Now, you've got this opportunity to sell product into markets outside of the US. And, again, that's helping level the playing field, if you will for manufacturers here who are having to compete with these other countries. I think I'm going to... I need to make sure that this comes across, and I think all of my fellow manufacturers in the industry would feel the same way. None of us are afraid of competition. I mean, we deal with competition every day. There's no issue with that. If somebody is better than me at making a particular product or whatever, well, then that's okay. We'll either get better ourselves, or we'll say we're not going to do that and concede.

The challenge is when you're almost fighting a whole other country. That's subsidizing in a way that is really making it difficult for you to even make the product at all. I mean, no matter if you had zero costs. And so, we're not afraid of competition. We're perfectly good with that. The question is, how can we run our businesses in a way that's on a level playing field? And so, I feel like at least I'm thankful for our congressmen and women that have looked at this and said, "Well, maybe there are some ways that we can incentivize businesses." And if it weren't for people like you, Dave, that are actually out, and trying to inform business owners like myself.

We're busy working in the business every day. We're not necessarily saying, "Hey, what is the next best strategy to help us be... For our R&D tax credits." We're not thinking that way. We're thinking about, "Hey, how can we make our next payroll?" Kind of thing and make sure that we've got opportunities for our people in the future. And so, I'm very thankful that there's great advice and people that know how to do that, and can help you go through that process and take advantage of it. I know that's a business opportunity for you as well too. But though, that has been very significant. If a business has not looked at those opportunities then they really need to. Does it work for everybody? No. Even within the manufacturing space, the IC-DISC, the R&D tax credits, some may work for you, and some may not. But you really need to look at everything because if you can deploy those things, it's going to help you be more competitive, no matter what space that you're in.

Dave: Sure. That's an excellent point. You've talked about some of the challenges of the business, and boy, they seem pretty daunting. Is there anything about the business that you enjoy or things that are... Let me rephrase this. What are some of the parts of the business that you are more excited about, and you find more satisfying and fulfilling?

Cory: Well, the people is number one. I love my people and love our customers. And I think that comes through in our culture here. I mean, I think anybody that does business with us knows that we really do try and make an effort to make things right for our customers, and make this a better place for everyone involved. And so, that's the part that I enjoy the most, with the employees, with the management team, now with the customers.

And then the technology is still something that I really thrive on. I enjoy learning and deploying new manufacturing processes. 3D printing comes to mind. You've got all kinds of new technologies and materials, nano materials that are coming out now. And I think that those opportunities... You've got artificial intelligence that's making the robotics become a reality. And so, I'm very excited about how technology is going to continue to evolve and make manufacturing even... I think sometimes people are a little bit afraid of that, but there's really no need to be because those manufacturing technologies are going to be what will make our society advanced and our economies advanced as well, too.

And so, now the risks that business owners are willing to take deploy those things are only going to benefit society at large. And so I enjoy this. The people and the technology are the things that keep me going on a daily basis. If I just had to worry about the tax part of the business. It's important, and I'm very thankful that we've done a good job, and you've helped us do that. But yeah, every day I wake up, I'm very thankful to get to work with my team every day and my customers.

Dave: That is awesome, and I've seen that firsthand through the years, your passion around your coworkers and your customers. So, one of the questions I was going to ask you about was 3D printing. And so, my question was going to be 3D printing, is it a risk or an opportunity, or both for your business?

Cory: It's both. From my perspective, where I stand at the moment, I think that technology is going to grow and it will become more integral with just your standard everyday manufacturing processes, say a lathe and a mill is sort of that standard. Now a CNC lathe and mill, like we talked about earlier.

Dave: By the way, hey, Cory, could you just help explain what 3D printing is for people who aren't familiar with it?

Cory: Sure. So it's a material additive process where instead of... So, traditionally, you would take a solid piece of material, and you would work it either on a lathe or a mill or some combination of those two, and you would whittle it away until you get the final product. In 3D printing, what you're doing is you're actually layering. You're depositing those materials a little bit at a time in four to five accesses all at the same time. So, if you think about a hollow sphere. Well, traditionally, in a manufacturing process the way you would make a hollow sphere is to have two half pieces that you would weld together. So, you have two shells, kind of a broken egg, if you will, putting it together.

Well, you don't need to do that in a 3D printing process. You can just print the egg, deposit those layers a little bit at a time starting from the very bottom of the egg to the very top of the egg and got a hollow egg. So that is probably the best way to describe how 3D printing is actually done.

Dave: Okay. Thank you. That's-

Cory: So, it's a risk from the standpoint of there may be products that were manufacturing now traditionally that a competitor could use 3D printing in the future to manufacture. We could too, and we already have 3D printers that we're manufacturing products. Now, the challenge is that the speed and the materials that the 3D printers utilize are not quite as good as the traditional manufacturing. I think they will evolve. How long that takes is a series of debates. You'll hear some people, the materials are already there. It's just expensive. I haven't really seen that to be the case. I just think that technology is going to take a little while to develop and that's okay. I think it'll definitely at some point be economical, but it definitely has to compete with the traditional manufacturing processes, which are when you consider injection molding now. You've got five axis machining. We've got a lot of really fast ways to produce things, traditionally.

Dave: I see.

Cory: 3D printing has a ways to go till it catches up because those things are advancing with technology as well, too. So it's not like the 3D printing is on an island on its own. It's still having to compete with the technology that's being put into your traditional manufacturing processes.

Dave: That's awesome.

Cory: Yeah, I think it will take time.

Dave: Yeah, that is awesome. So what I'd like to do now, I can't believe how quickly the time is going by. I'd like to talk about one or two customer success stories in the last few years, and just really walk us through it. What was the nature of the client's issue? How were you able to really save the day for them? So, could you just talk through one or two examples like that to give some context?

Cory: Sure. I think the two that jumped out at me the most. The first one is our trademark Energizer Gasket, which is a product that solved a whole host of problems in the oil and gas industry as it transitioned from some of the traditional metallic materials that were being used for flanges and valves and such to the plastic materials. You can't use the same sealing technology on a plastic product as you can on a metal product. So pipelines, for example, were made for years and still are to this day out of metallic products, metallic flanges, metallic pipelines. But as especially on the processing side of things, the chemical plants and refineries started to use more fiberglass, PVC, other plastic materials.

The seals that join those components together had to change with it, and our Energizer Gasket has solved a tremendous amount of problems and issues. And the reason that it does that is because we worked really hard to develop a sealing technology that is integrated into the seal. Here we go different materials. We've got a plastic material and our rubber material that we bond together. And it's got some ribbed seals on the outside of the seal, so that it reduces the total surface area that has made it together whenever these plastic pieces come together. And what that does is you can imagine a plastic flange or valve has a lot less stress capability than a metal, metallic one. It just makes sense. You can crash, just break a piece of plastic so much easier than a metallic piece of material.

And so this gasket reduces the surface area that is required in order to get the seal to set. And so that the people using the plastic valves and pipelines can then bolt those things together with a lot less force and still get a positive seal. And we can put them together with different materials so that they can use different fluids and temperatures and whatever. So I think the Energizer Gasket is sort of the one product that embodies everything we do, and we sell a lot of those. And that's been a real success product, a real success for us. I'd say probably the second thing that's here in recent times has been our combination of floor elastomers, and also Kevlar. You're probably familiar with the bulletproof material.

Dave: Sure.

Cory: And the reason that that has been so successful is because we had a specific application where a customer was using a product in steam and the traditional astrometric materials that were being used just failed all the time. And so, what we did is we developed a material, it's called Aflas, and also Kevlar, which is the fabric material that we're using. And we've developed a technique to be able to bond those two together in a way that whenever they go into the steam applications now that Kevlar helps hold the seal together while it's in service, and so that it doesn't fall apart. And that's what the problem that the customer was having in the past. And that's been something we were able to patent, and it's been a very great success story for us over the last couple of years.

A unique thing about Kevlar is that it's a little bit different than almost all materials known to man. And there's just a handful of materials that behave this way. Water is one of them. But when it gets cold, it actually expands, when it gets hot, it actually shrinks. And so, that was one of the unique characteristics that helped the material work the way that we want it to. I'm steam, it's actually shrinking a little bit instead of expanding. So, it's pretty neat material that we were able to put that in our manufacturing processes. Been a real success story, and now those customers can go in and do those steam applications much more reliably now than they were able to do before and that's been a big win.

Dave: Okay. That is great. Is there another specific success story you can think of or like a customer had some major issue that you basically were able to solve for them and make them very happy?

Cory: Well, I think the one that comes to mind was probably the Macondo. We had the oil spill a few years back. We were actually involved in helping manufacturers, some of the seals that were used to help eventually stop the flow of the oil. And some of our customers were deployed to help come up with solutions for that. And so, it was really a neat thing to be right in the middle of that and help manufacture the seals that solved that. That was a pretty big problem.

Dave: Yeah. And that's where your rapid turnaround really helped, right? Because you were able to iterate quickly.

Cory: Yes, exactly. And so, yeah. No, those are the ones that jump out at me, but the culture of our business has really been about solving problems for customers. I mean, that's really where our niche is. As soon as it becomes a high volume commodity, you still have that opportunity for other competitors to come in. And so, on a daily basis that's, hey, we've got this particular application where we've got to have this combination of chemical resistance and temperature resistance can you help us out. And so yes, like you mentioned earlier, being able to deploy that quickly is where we shine.

Dave: Well, there's one more customer success story, and this is unique. I've never asked this question where I could provide, I could answer my own question.

Cory: Oh, yeah.

Dave: And so, I would like to share because to me it was a huge customer success story just for the listeners. Cory was kind enough to mention that customer I introduced to them. But I think the backstory is interesting. So this client was a pipeline connector manufacturer. Is that technically what they did?

Cory: That's it.

Dave: Or what they do. And I was having lunch with them one day. We had done some work for them. And I said, "Hey, what's your biggest business challenge?" And they said, "Ah, gaskets, they're the bane of our existence. We might have a 50 cent part or a two dollar part, meaning kind of a disposable type gasket, I guess, that'll slow a whole project down for one or two days. A million dollar project, and it's costing the driller hundreds of thousands of dollars a day, and the whole thing's because of one stupid gasket." And I'm like, "Oh, wow, that's terrible. How do you address that?" They said, "Well, we have to have a whole gasket inventory." I'm like, "Wow." And they're like, "We hate it. It takes up all this space. And no matter how many gaskets we have, we never seem to have the exact one we need at the exact time." And I said, "Wow."

Dave: And of course, while we're talking, their offices were only about at the time, I think one or two miles from yours. And I just said, "Hey, I've got a client that's in the seal and gasket business. Why don't we have lunch, and you can chat and see if they can help you?" And they said, "Sure." So we had lunch, and you were great at just trying to assess the problem. I don't know what they were thinking you would do, but your solution was just brilliant. You just said, "Why don't you outsource that inventory, those gaskets to us?" We will, and I believe, and correct me if I don't remember the story correctly, but I believe that you literally started inventorying certain disposable gasket sizes that you might not normally have stocked, right? Just to-

Cory: Yeah, no. I mean, you've essentially got the story right. I mean, it was... Actually, just one step further than that. What we did is we just set an agreement with them that, "Look, just don't worry about that inventory anymore. We'll guarantee that you'll have the seals in two days. And we'll have our manufacturing inventory set at a place." And that's kind of where you were thinking there with the inventory set to where we can respond that way. And that eliminates the inventory carrying cost on your side.

Dave: Oh, wow.

Cory: We got a little bit…

Dave: You didn't actually carry it. You just developed the capability to just produce whatever they would need within two days.

Cory: That's right.

Dave: Oh, wow.

Cory: And so, what we did is we were able to charge a little bit of a premium for that. And they were able to offset that premium with the adherent cost of the inventory disappearing. And so, that was just a win-win situation for everybody. That's the epitome of what we do on a daily basis. Thanks for bringing that up.

Dave: Oh, yeah. It was fun to see. And the funniest part of the whole story was I think the next time I had lunch with you, you were so grateful. You insisted on buying lunch, and then the next time I had lunch with them they were so grateful, they insisted on buying lunch. So, it was like both of you looked at the other one as the hero. For you it was a new customer, and for them you solved this major pain point for them.

Cory: Well, Dave, there you go. There's your other business. You put people together right there.

Dave: Sure, sure. Well, and of course, it was easy to do since I knew you'd take good care of them and every time you refer a client to somebody, you're very cautious about that. So, I have one more question for you then we can wrap up. What advice would you have for your younger self? From, say, 10 or 20 years ago? What do you wish you had known then about the business or life that you wish you knew them? What advice would you give to your younger self?

Cory: Well, it's one that people hear a lot, and until you go through it I still don't even know that the advice that I would be giving my younger self would really stick, but don't let fear be a motivator for you. I mean, that's... I have so many risks that I've been willing to take. It kept me up at night, and really looking back on it, that really didn't need to be the case. You want to be wise and you want to get... Surround yourself with people that have been there, done that, and have a good success track record. Bounce it off of them and get their advice. Surround yourself with people.

I did do that and let that be enough because a lot of the things that you worry about, what I have found to be a truth is typically the things you're worried about are not the things that end up being an issue. And so, just be willing to still take those risks and that's even a challenge for you as you go through your career. And even where I'm at now, you become a little bit more risk averse the older you get, and the more you establish yourself. I don't really ever want to be that way because it's really that willingness to take risk is what drives our economy and what drives our society.

And so, I would tell my younger self don't be afraid. That goes all the way from hiring, right? Don't be afraid to go out and hire that A player because if you have a player, take care of them, and let them go out and perform. Same thing with customers. Don't be afraid of that customer you think that's just out of reach. Don't let fear drive you on that. Go out, and go do that. And surround yourself with people that have been there and done that and are good sources of information like Dave Spray. There's a number of people out there that can do that.

I would tell myself, "Just go out there and do that, and be confident in that." Don't let worry drive you, drive too much of your decision making. That's just a tough thing to go through no matter what in your career. But looking back on it, that definitely... There's probably a few things I didn't do that looking back on I think, "Wow, I probably should have done that where I probably would have been fine." And other things that I've done that I thought, "Hey, we're going to be super, super success stories." Oh, maybe they worked out marginally, but it could have been done in some other way. So you just try to work within the framework that you have as best of your ability and just let it ride, you'll be fine.

Dave: Yeah, you make me think of, I think it was a quote by Mark Twain, and he said, "I am an old man, and I've known a great many troubles, most of which never happened." I think that summarizes it that we spend all this energy worrying about stuff that ends up not even being an issue. So with that, so if people want to reach out to you. Say just an entrepreneur who would love to pick the brain of another entrepreneur or somebody who would be a potential customer of yours, what would be the best way for them to reach out to you?

Cory: Probably my email address is the number one. So, it's Jackson_Cory@ctgasket.com. And that's probably the very best way, and you can visit our website as well too. There's contact information, which is www.ctgasket.com.

Dave: That is awesome. Well, is there anything else you want to add before we wrap this up?

Cory: No, Dave. I appreciate you taking the time to have a conversation with me. And as always, it's a pleasure. Thanks again for all of the great advice through the years. It's been very helpful, and I appreciate it.

Dave: Well, it's mutual. Thanks for being such a great client to work with. Well, you have a great day, and I will catch up with you another time.

Cory: Okay, you too, Dave. Talk to you later. Bye-bye.

Dave: Hi Julio.

Julio: Oh hey.

Dave: Well, thank you for joining me today on the IC-DISC show.

Julio: I'm looking forward to it.

Dave: So well, let's get started. so let me just give you a little quick intro. So Julio Gonzalez is the CEO of Engineered Tax Services located in West Palm beach, Florida. And so rather than just reading some long boring bio, I thought I would just ask you some questions. So why don't we just talk about your background? I don't know if I knew, where you grew up, I know where you went to college, but where did you grow up?

Julio: I grew up in Miami, in a very Latino community and a community where three generations live in a household and it's a wonderful culture and community to grow up in. And so it was a wonderful ... I live in Palm beach now, so I'm not too far from where I grew up in Miami and that's still just a great and charming community down here.

Dave: That is awesome. But what prompted you to want to leave the warm balmy climate and go to Colorado for college?

Julio: I think when you grow up in the Hispanic community in Miami, you don't know anything about the country, you just don't know anything really about outside of your own little world. And I just wanted to explore and I wanted to see other parts of the country, and I felt that Colorado was about as far away as I could go. And so I just want to take advantage of that and see snow and see the country and get a chance to be exposed to different cultures.

Dave: Oh, that is great. And then while you're there, I believe you studied engineering, is that correct?

Julio: Engineering and tax as well.

Dave: Okay. So that's probably a perfect background for what you do now.

Julio: I think so. I mean, we have a niche, we're a licensed engineering firm. We do federal and state tax work, but all the tax work we do is really associated with engineering based sciences and medical and doctor research and R&D. So yeah, we have this unique niche of scientists, engineers, and tax professionals.

Dave: That's great. And I look forward to going into that in a bit more detail. So when did you get into this business? Was it right out of college or when you started the firm? Tell me about that.

Julio: Yeah, I think I went to one of the big accounting firms after college. And at that time, this was back in the 80s, there were more and more tax law associated with engineering specifically with real estate and how we write off and depreciate buildings and how we do research and development tax credits here in the United States. So, yeah, it was a niche where there wasn't a lot of competition within a big firm. So I went down that path and it kind of just took off and evolved from there.

Dave: Okay. And then what year did you start Engineered Tax services? You are the founder, correct?

Julio: I'm the founder. So this company started ... I started in 2001 and that means I'm getting old, right?

Dave: Well, we're all getting old, Julio. So 2001, so nearly two decades, you've been doing this?

Julio: Yeah. Nearly two decades and it's been a tremendous ride from being one person to over 100 people and and evolving, and really the goal was to bring these types of tax benefits to mainstream United States. So it's been a wonderful ride.

Dave: That is awesome. So when you first got started, what was your primary service then? Was it a cost Seg?

Julio: It's cost segregation because, David cost segregation was always available to the Fortune 500 public companies so the blow was back then the big eight accounting firms. And beyond that, no one else had access to our knowledge and we didn't really have the internet back then. So there wasn't much information about it, but cost segregation is the ability to determine what from a building is structural versus non-structural that's giving us the ability to write off the non-structural components of the building immediately. And obviously that's a big advantage for many businesses, but no businesses had access to that two decades ago. It was only the Fortune 500 companies. And obviously, back then CPA firms, weren't going to have an engineering department to satisfy a few clients.

And so, the goal really was to make this mainstream USA by providing that partnership to CPA firms so that they can have someone in the engineering science that can help the clients with buildings and better depreciation structures. And I think that's what we set off to do in 2001.

Dave: That is great. And since then, not only have you grown over 100 employees, but I believe you have more than a dozen different services now, don't you?

Julio: We do. I mean, the core one really is cost segregation, which we work with the CPA firms and their clients to go back on buildings their clients have owned or buildings that they're purchasing or building. And basically again, giving the IRS a detailed engineering study that shows what parts of the building are non-structural that really don't have a 39, 40 year life as most parts of the building are depreciated.

So depreciation for buildings is either between 30 to 40 years here in the United States. And, it's great because real estate is one of those few investments that you actually get to expense or write off. However, it's over a slow period of time. And basically cost segregation came about because Fortune 500 companies were complaining that writing off a building over 40 years was not ... it didn't match up with the timing because a lot of the components of the buildings were wearing out much sooner than that, and they were replacing a lot of components much sooner. And so they sued the IRS and they won in tax court. And ultimately the IRS came out with a methodology to have engineers that are experts in building construction determine what is, non-structural, what exhausts much quicker. So that the timing that's much better. And that's how it all started.

Dave: Yeah. And as I understand, really hit a bottom line what cost segregation does is it really just lets accompany accelerate that depreciation. And so with bonus and other accelerated appreciation, they basically is it correct that they ended up being able to really write off the majority of the building, almost immediately upon purchasing it. Is that correct?

Julio: Yeah. I think on average probably about 50% of the building can be expensed immediately now through our current tax laws. And it does apply to people that have owned buildings and chose to go over depreciation using the traditional methods. So they can change that one time and change to a cost segregation based depreciation method. But you're right. I mean, it writes off a lot of the building quickly, which is great for wealth preservation or preserving cash and for investing in a company. So it's a big deal.

Dave: Yeah, no, I've got clients who've benefited from that. So, besides the cost segregation is there a second service that's also kind of ... that we might want to talk about? It appears that the research and development tax credit might be another one of the significant services you offer.

Julio: Yes. So, our core second business is research and development tax credits. I think one of the most important credits in our country because it's a credit to help keep jobs and create jobs here in the United States. And really what it is, is a refund on labor for any labor done with the US employments that is involved in innovation and innovation of a product, a service, a widget, can be growing agriculture. It could be technology, but anyway, if we have that US labor working on the improvements, research and development of those core assets, we have an R&D tax credit that helps refund some of that labor. There's states that match some of that refund as well. And why is that important? Because it's hard to compete many of the companies here in the United States with technology in India or China at much lower labor rates.

So to be competitive, we've created the research and development tax credit, and we have scientists and engineers. We go into the companies with their CPA blessing and basically determine what are the labor associated with innovation. And for this company, we make sure they get that payroll refunded and hopefully get some stay refunds as well, so that we can keep jobs here in the United States. We don't have to continue to outsource those jobs overseas, where the labor is cheaper. And, so I think one of the most important tax credits and ... We're grateful to be a resource to the country with being that partner to the CPAs and making sure that they have the information, they have the knowledge so they can make sure their clients are getting these benefits.

Dave: Yeah, no, I know of CPA firms that have used your services and they say it's been a very positive experience. So let's kind of drill down a little bit. So what are the types of companies who most benefit from your work in terms of revenue size, employee size, industry, any other characteristics, just try to help give us a sense of ... I know you'd said that you help bring this to companies other than the fortune 500. But obviously a company that's some guy, working out of the trunk of his car selling baseball caps. It's probably too small, but what's kind of the minimum sized company ... that size that it makes sense for you all to take a look at?

Julio: Yeah, David, that's a good question. I think that we are the resource to CPA firms and in cost segregation we're doing studies for stadiums, high rises, we're doing it for their client, that's a doctor and has a small build out within his building or a company that has a computer store in half a million dollar building. So I think where it starts to make sense on the cost segregation side is when you have over a half million dollars in either building renovations improvements or actual building costs. And at that point, I think the cost versus the benefit makes sense. But again, we start at that level and go all the way up to a billion dollar stadiums. So there's a wide range there.

On the R&D tax credit, we're so fortunate because before you had to have really a company that was paying in taxes to get the tax credits, returned the tax credits. But a couple of years ago, the government extended the lawmakers, extended R&D tax credits to a refund payroll taxes. So now, we're doing research and development tax credits for startups that are in that incubation stage. And they're not paying in taxes yet, but they're paying payroll taxes and can offset their payroll taxes.

So yeah, we start there, but we work our way up to big pharmaceutical companies that have millions of dollars in R&D spend, agricultural companies that have millions of dollars in R&D spend, a local manufacturer that's just making a widget. So in both areas, there's kind of a wide range. We do what we can for the CPA firms and their clients, and hopefully, bring value to a wide range of companies here in the United States.

Dave: That makes sense. So, just to be clear, you're not so much focused on specific companies or industries and specific sizes, rather you're focused on being a resource for the CPA firms that have entrusted you to assist them in that if the CPA firm believes it's worth looking at for the client you're willing to take a look at, is that right? Really? That no client's too small if a CPA firm partner of yours wants you to look at it?

Julio: I think that's true. I've learned over the years, David that, we may take on projects that aren't profitable, but it's important to the CPA firm. It's important to the client. And I think that always comes back tenfold in terms of return. Whether it's the CPA, keeping you in the fold for other projects or that client actually, referring you to someone else. I think that goodwill always comes back in terms of return on investment. So we do work with firms across the spectrum. Not all of them to make sense from a profit standpoint, but from a capital standpoint, social capital, I think it does make sense.

Dave: Sure. No, I get it. Let me just drill down just a bit further. So like for the cost segregation, could we maybe just talk about a specific example, maybe a client you've recently worked on that you could discuss anonymously, to just kind of give an illustration of like what the impact could be of a cost segregation study?

Julio: Yeah, I think, in terms of an example, we just finished a hotel project. That hotel was one of those traditional hotels you would see and stay in if you're a business traveler, moderate priced hotel. But they, spent four million in building the hotel, obviously under a traditional depreciation, they would take that four million and, expense it or depreciate over a 40 year period. So they would take a little bit every month, a couple of 100,000 every year. And that would be used to offset their taxes.

Under the study we qualified of that four million, 1.8 million of non-structural expenses that could be immediately expensed. So, for them, instead of taking a little bit over a long period of time, we were able to take 1.8 million, which was obviously helpful for them. And in terms of lowering their tax liabilities, preserving their wealth and being able to use that cash to invest in other hotels and in employment. And so I think for us, it was important, for them, it was important. And yeah, I love what we do, which is keeping jobs here in the United States and helping companies invest in themselves.

Dave: Oh, that's awesome. Well, let me make sure I that I understand the numbers here. So if it was $4 million building, let's say for easy math, they could have depreciate over 40 years. So that would have been, I believe, $100,000 per year that they would have had a depreciation. So that first year they would have had roughly 100,000, but instead they had 18 times that with the 1.8 million you mentioned, is that right? Is that the jest of it?

Julio: That's the perfect math.

Dave: Okay. And then you mentioned the nonstructural things. So what would be the things that would make that ... what would be some of the components?

Julio: When we do a study, so on cost segregation, what would be some of the non-structural components.

Dave: Like HVAC?

Julio: That would be ... what's that?

Dave: Like HVAC?

Julio: Like HVAC. Sure. All the finishes, all the finance, all the land improvements, all the landscaping, the pools in the hotel, flooring, some of the fixtures, the plumbing associated with the fixtures in the restaurant.

Dave: I see.

Julio: Executive finishes. So there's a lot and it adds up quickly and it's much better to expense that upfront versus, taking so long to write it off for a lot of reasons.

Dave: Sure.

Julio: One because they don't last 40 years, but two, obviously for net income and tax liability purposes.

Dave: Yeah. No, that makes sense. So that's a good example there. And now, so I think that's really helpful. I think, most people could follow that. What are some of the biggest misconceptions around the cost segregation studies? Because I'm sure people have misunderstandings.

Julio: Oh yeah. I think the biggest one has always been, will I be audited? Will it trigger an audit? Will this create any issues with the IRS? It sounds too good to be true. Those are always the main issues. I think the main misconceptions, the main concern, but obviously, fortunately this is tax law and the IRS has issued guidance on it, and we have really the blueprint for what the IRS looks at when they're reviewing these projects. And as long as you follow the blueprint for what the IRS wants done, the reviews go well. And we don't see that big of an audit rate. In fact, the audit rate we see is very minimal because I think the agents are quickly looking through to see if they have everything they're revealing, what the IRS requires for that. And as long as that all matches them, things go well.

We have a few audits from time to time that tend to be on much larger projects. And, we typically at that point get with the engineers at the IRS reveal it, typically there's no changes. And so, as long as you're following the rules, right, David? With the IRS there's no issues.

Dave: It's true.

Julio: I guess the question comes, what if you work with a provider that has an experience, doesn't have the engineering licenses and then you can run into problems.

So you want to make sure and the CPAs want to make sure that they're working with a provider and they've done their due diligence because that's where the problems come in. That's why you see audits. That's why you see court cases where people have lost is because they're getting with providers that are not experts, that really have kind of just jumped in to make a quick profit.

Julio: You see that in any business, right, David? But-

Dave: Sure.

Julio: ... it's so important when you're dealing with the IRS that you make sure those CPA firms are doing their due diligence on firms like us to make sure they have the licenses, have the experience, have the professionals. And for CPA firms, that client is their annuity. And we understand that. And we understand if we do anything to mess up that annuity for them, that could be 30 years of revenue loss, right?

Dave: True.

Julio: So that's real important that we understand customer service. We understand ultimately that we're representative that CPA firm. We have to do our best job to make sure we do that well.

Dave: Mm-hmm (affirmative). No, I can certainly appreciate that. That's our perspective and attitude as well. Well, let's turn to the research and development tax credit now. Kind of the similar questions, let's get into a little bit of detail and maybe, let's look at an example that might be easier to understand it. And then let's talk about some of the misconceptions around R&D because it's not just a scientists and white lab coats. I understand. Is that right? That covers more than just what you think of as just like pure scientific R&D in a lab setting. Is that right?

Julio: I think so. I mean, I think people think of R&D of lab coats, certainly. And then obviously it does include the lab coats, but it includes agriculture. It includes technology. So a lot of tech firms that are making apps, tech firms that are doing software. So it obviously ... it's the local manufacturer making any type of widget as well. And so it's a wide spectrum across the United States, it's architects and engineers that are designing buildings to new standards, new hurricane standards, to new earthquake standards, to new fire standards. So anything that we do in the United States that we're have to improve on whether that's a service or a product or a drug or some type of a tool and die.

So again, a wide spectrum, it's good just to make sure that if you have employees that are doing something that's new to that company, and they're figuring out the processes and procedures and coming up with new and innovative ways that they're getting that refund to labor. Because what I hear all the time, David, is that the firms would have this R& D tax credit can't compete nationally, globally with Indias of the world Chinas of the world, where people can go off and have these products or services made over there for much lower labor costs.

So this helps our local companies, our companies here in the United States, our employees in the United States compete at a better level. And so I think it's one of the most important credits we have. We've had it for over 30 years and the Congress, the lawmakers in DC continue to support it. You know, hopefully we can make it even stronger. We're not as competitive that's countries like Ireland or Australia or Canada where their R&D tax credit is much higher. So we do have that risk and exposure, and certainly the bigger companies can take advantage of the arbitrage on the R&D tax credit rates over there.

So, I continued to go up to DC all the time, David, to make sure the lawmakers know what's going on in the industry, make sure that they understand that we're at risk to losing these jobs and that it is, money that goes away from the treasury, right? And goes into these companies.

Dave: Mm-hmm (affirmative).

Julio: But ultimately that investment comes back in terms of payroll tax and labor tax. And hopefully that's a good investment.

Dave: True.

Julio: So, we have to think of it as a good investment or do we want to lose these jobs overseas.

Dave: Yeah, no, I understand. Well, let's look at an example and maybe let's pick one that would seem not as obvious to the casual observer, like you may be a manufacturing or sort of a blue collar type industry where the average person on the street would say what, that's not research and development. There's no light lab coats. could you think of a recent example you've done, that's more of like a blue collar type industry that you could kind of share the details on?

Julio: Sure. We have a local manufacturer here in Florida that makes bras and underwear and manufacturers those products here in the United States. They're the last company that makes bras and underwear is in the United States. Most of that has gone overseas to China, and they continue to make higher end undergarments here in the United States using US labor and without the R&D tax credits, they simply couldn't compete any longer.

And it's become more and more difficult to compete with the overseas labor, but the R&D tax credits help us keep their prices in a range that they can continue to sell here in the United States and prosper. So, that's a local-

Dave: True.

Julio: ... one, but that's one of the last remaining companies in the United States that's been able to stay here with these credits.

Dave: Sure. Sure. No, I appreciate that. Well, I'm wondering now if maybe we could kind of ... maybe on another company that would be ... it would have more anonymity where there might be hundreds or thousands in their industry that we could actually maybe drill into the numbers on one, like maybe the ... roughly the size of the company employees and what the process entailed. And then maybe what kind of accredited ended up with does a study come to mind off the top of your head that you can recall the numbers, or is there something that you might have at your fingertips we could look at?

Julio: Yeah, I mean, we generate, close to two billion a month and R&D tax credits for our clients.

Dave: Oh, wow.

Julio: So it's obviously pretty significant, we recently had a software company that does software associated with payroll and we generated roughly $15 million in tax credits for them annually. Of course their software development is specific to payroll and other, payroll related services associated with, companies here in the United States. They do that software innovation here in the United States with US labor. And obviously that's a public company with thousands of employees and thousands of offices across the country. But for them, that R&D tax credit is the difference between us losing thousands of jobs overseas to development of software likely in India and those jobs here. And that's significant, but we see a lot of that.

So we have the small manufacturer, we have the large software developer, we have large pharmaceutical companies averaging 20 to 30 million in R&D tax credits. We just did a $5 million tax credit for a perfume maker here in New Jersey. But I can also think of a R&D tax credit, we had just done a couple of million for a manufacturing firm in New Jersey that makes chips out of popcorn. And, so-

Dave: wow.

Julio: ... it's great to see all these companies doing well that taking advantage of this R&D tax credits. So to continue to keep these jobs here.

Dave: Yeah. And so if you're generating credits of, more than a billion dollars per month, I'm guessing that's what thousands of projects or tens of thousands or hundreds, what would be kind of a typical month for how many projects you do?

Julio: Yeah, probably a few hundred projects a month.

Dave: That's awesome. That is awesome. Okay. Well, that is good. What are some unique things about ETS that differentiates it from other firms in the space? I mean, you kind of touched on it, but I'd like to give you just a little more of an opportunity to go into detail. So what are some of the things that really make you unique in the industry?

Julio: Well, I think one thing that makes us the most unique is we're actually the only firm that's a licensed engineering firm. So yeah, that's important because we have to live to the standards of being licensed in the United States, by the federal government. So I think that that's the bar, the standard high, and we have to live to those high standards for being licensed. And I think secondly is we've probably done the most. We've been here the longest, we've done the most projects. We have the most experience with the IRS.

And, I think that speaks well for who we are and our background and we have licensed engineers on staff, licensed CPAs, licensed tax attorneys. And again, we don't take over for the CPA. We only come in and do these reports with the CPA and with the client.

Dave: Sure.

Julio: So again, we're just that resource for them, but I think all those things make us a real unique, niche company here in the country for cost segregation and research and development tax credits. There's other firms out there. And, they're all great peers of ours, so it just comes down to the due diligence, pricing is always a big thing. We try to be price competitive. We compete against the big four, of course. And, we try to say about 50% of their pricing to remain competitive out there. So I would say those are some of the unique differences.

Dave: That is very helpful. And I especially appreciate you mentioning that you're the only license engineering firm in this space to me that would speak volumes, is a differentiator. So what I'd like to do now, we have just a few minutes left. I'd like to just talk about some of the other services you have. And again, don't, don't just like rattle off all of them in 10 seconds, but, let's talk about one or two other services that are either particularly timely or that you have a unique enthusiasm around and maybe even as many as three or four if time allows. So what comes to mind besides R&D and the cost segregation that you're excited about?

Julio: Yeah. So one of our other big services is energy tax services. So, when people make buildings energy efficient, or retrofit buildings energy, there's a lot of federal and state and local incentives associated with making a building energy efficient. And we measure that energy efficiency for those building owners to make sure that they take advantage of those federal tax benefits. A lot of people aren't aware of them, sometimes they take the local benefits, they don't take the federal benefits.

And, so that's one of the big services that we deal with, David. We also work with opportunity zones, which is new out of the 2017 tax reform Act and opportunity zones is basically a tax benefit incentivized businesses and real estate moving into areas that need revitalization. And, so we're heavily involved in helping our businesses take advantage of the opportunity zones and structuring those tax benefits in the right way.

So I think that was a big part of the new tax benefits that came out of tax reform as well. And of course we deal with everything you can think about related with taxes and buildings. So historic tax credits, when we're taking a building that's over 50 years in age here in the United States in a perhaps bad neighborhood, but needs revitalization. We can help them get 30% to 40% of those costs and revitalizing the building back in terms of tax credits, which they can ultimately sell.

And, so I would say of the things we're most involved in and the other services, I would say those are at the very top.

Dave: Yeah. That is exciting. And like on the opportunity zones, again, I like, kind of real life examples. Can you think of an example for a project you've done this year around the opportunity zones, you may be because they're typically in like a economically depressed area, is that right?

Julio: Yeah. So economically depressed area. So, we did a building in St. Louis that was built in 1899 and it was a old shoelace manufacturing company that hasn't manufactured shoelaces since the early 90s. And so the building was 50,000 square feet have become vacant and, really wasn't an economically distressed area, and just needing that extra good tax law to bring capital to it and bring back jobs to that community.

So that building was an opportunity zone and also was historic. So that money finally came in because of the tax codes and, 50,000 square feet of now renovated building that's beautiful. And now tech companies are moving in there because they're also events of being a tech startup in an opportunity zone. So now we see a building that's again, brilliant from despair to brilliant. And now we see, so many jobs and so many companies moving into that building because it's in an opportunity zone.

And why is that important? Because if I go into an opportunity zone and my company does well, then I have a tax advantage because I don't have to pay capital gains after a 10-year period, whether it's the building or the real estate.

Dave: Wow.

Julio: So that's a tremendous example that, David, I see all these examples every day of capital going into these distressed areas because of this new tax laws, new companies taking advantage of it. And these are areas that probably would just be dormant for many, many, many years, and have been. But now we're saying that, good tax law, good tax code and good idea can actually, bring significant jobs and revitalization to communities.

Dave: Well, that is awesome. And thank you for pointing out something that didn't click at first, but that you could have a project that could utilize, a number of your services. Like you mentioned this one, it qualified for both opportunities and the historic tax credits. But I suppose as you're putting in new lighting and stuff, there might've even been some energy tax, credits available as well.

Julio: And there was cost segregation riding off the building renovations and there was R&D for all these tech companies moving into the building.

Dave: Wow, what a great day going?

Julio: David, we try to be the Robin Hood. We try to give back to these small companies and these distressed communities and make sure that the money is staying there for expansion and jobs and renovation, and hopefully all this good tax law is working.

Dave: That is awesome. Well, I can't believe how fast the time has, has flown by. So if it's okay with you, why don't I just take a minute to just see if I can recap the call. I've been making notes here, to just have kind of a summary. So, your firm's nearly two decades old and, one of your key differentiation items is that you're the only licensed engineering firm in this space. You don't really think in terms of minimum sized clients. You think more in terms of the relationships with your CPA firm partners, that if it's a project they're interested in, it's a project you're interested in. Some projects because of how small they are, may not be especially financially attractive. You look at it kind of from a bigger picture that the value of the entire relationship, with the CPA firm. Even though you've got a bunch of different services, the one thing they have all have in common is a need for an engineering component. And, the projects you have will oftentimes be able to use multiple services across your portfolio. Did I do okay at summarizing that or what did I leave out?

Julio: I thought that was perfect. Really, really well done.

Dave: Okay. Well, so let's say somebody is listening to this podcast and they want to learn more explore this. So what would you suggest they do as a next step? Is there a particular place on the website web you want to send them? Do you want them to reach out to you or one of your colleagues and just by phone or email, what would your preference be?

Julio: Yeah, please go to our website. I think there's a lot of great video and educational content that can help you, learn more about these tax benefits for you, your CPA and clients that can take advantage of that. And we're at, EngineeredTaxServices.com and, everything that you could think about that we do is on there from an educational standpoint, you also can, contact us directly from our website.

Dave: That is great. And what is the main phone number just in case they don't make it to the website?

Julio: Sure. Our main phone number is (561) 253-6640. And we always appreciate your calls and consideration. And again, we're here first and foremost as an educational resource.

Dave: That is awesome. Well, Julio, well, thank you so much for making time in your busy schedule to be on the IC-DISC Show. I learned a really, a lot about not only your firm, but really these engineering based services altogether. And I suspect you've done a great job of educating our listeners as well. So thank you very much and keep up the good work.

Julio: Well, thank you for having us. We appreciate all you do out there in the tax world as well. And hopefully you and I are helping companies and people make a difference here in the country and, appreciate what you do as well.

Dave: All right, my pleasure. Thanks again, Julio. Have great day.

Julio: Okay. Thanks. Bye.

Dave: Hello, Brandon.

Brandon: Hey, Dave.

Dave: How are you today?

Brandon: I'm good. How are you?

Dave: I'm doing fine, thank you. Well, thank you for joining me on the IC-DISC show.

Brandon: Wonderful to be here.

Dave: Yeah, so my guest today is Brandon Frenza, with the law firm of Cantrell & Cantrell in Houston, Texas. And I guess to get started, why don't you tell me a bit about your background and where you grew up, where you went to undergrad, and law school, and how you ended up in the tax law world?

Brandon: Okay, well, I'm a bit of a traveler, and growing up my parents were in the military. So we've lived all over the country and overseas. But I typically call Reno, Nevada my home. It's where I went to school. And, my undergrad is in, strangely enough, digital media, which is sort of a computer science and graphics related background. Not really much to do with tax at all.

It's sort of how things go in school. But at some point, my wife and I, when we focused in on law school, we ended up here in Houston for law school. So I went to the South Texas College of Law. And shortly after that-

Dave: Well, hold on, hold on. Wait, hold on, I need to find out when you fell in love with tax. So was that at law school or after law school?

Brandon: Actually, yeah. So when you go to law school, you have these sort of dreams of being the next Perry Mason, or maybe that dates a little bit... I'm not sure if you're-

Dave: I'm familiar with Perry Mason.

Brandon: And South Texas, particularly is very good for trial advocacy. But I found out quickly in law school that I was more interested in the transactional side of law than litigation. And I took my first tax course in a summer class. So that's kind of an accelerated timeline. And it was probably the most feared class. All the students were just dreading it. And the particular instructor that I have is ruthless and focused on really destroying the students. He's very good at it. He's a former LLM tax professor from Florida State University. And he just loves to terrorize the students.

And for the first time in my life, that summer, I actually got strep throat and was very sick. So my first experience with tax was not one that you fall in love with. But somehow, I recognized early on that there's just such a connection with tax to just about everything that we do in this world, especially transactional. And I knew I wanted to get into the business side, and I thought that would be an excellent start for me to better understand the business side of the legal world.

That led me into more tax courses. South Texas is unique that we actually offer quite a lot of tax courses there. And there's a couple of professors that have experienced teaching at the LLM level, which is a masters in tax. And so I took as many of those courses as I could. Just soaked them up. And that led to an internship or an externship with the with a local chief Counsel's Office at the IRS here. And I did that while in school. And really just sort of developed an interest over time, sort of grew a taste for it.

Dave: Okay, so it wasn't love at first sight, but you just kind of warmed up to it overtime?

Brandon: No, no. If you had told me, years before going to law school, that one, I'd go to law school, and two I'd be in tax, there's no way I would have believed it. But now it's the right kind of fit. It's perfect for me. I enjoy it immensely. I find it to be very awarding and challenging at the same time.

Dave: That's great. Well, I'd like to hear a bit more about your IRS experience. What comes to mind that might have been maybe one of the best parts of being there? Or one of the most enjoyable aspects?

Brandon: Well, before I even intended to go over to the IRS, there's kind of this, "They're the enemy," mentality. And so going over to the IRS, I wasn't really sure what I would experience. But I found that, especially here at our local office, the chief counsel's office, that there's a really great team of attorneys there. And I learned from some very competent attorneys, that that their focus is on really trying to come to the best result.

My experience with the Tax Court over there was quite an eye opener. As I mentioned, I didn't really have a desire to be in the traditional litigation field. I wanted to be more transactional. When you're involved in tax, a lot of tax is transactional, but you can't really get away from controversy-related work. And the Tax Court situation is very different from your traditional trial court situation. It's nothing like it.

And because tax is so very technical, the judges that are appointed to the Tax Court, they have a very special understanding, not only of the code and the procedures, but of the taxpayer, and the taxpayer's inability to really understand all the rules. And so that was something that I learned very quickly while being at the IRS, that there's a lot of leeway given to try to help out the taxpayer get through these very complicated situations.

Dave: Wow, that's really interesting. I think most people's just assumption would be that it is a much more adversarial situation where they're trying to kind of find gotchas to trap the taxpayer. But that was not your experience.

Brandon: Well, there certainly may be. And I think now that I'm on the other side of the line, I see that, especially in the initial audit stages, there is a lot of that gotcha kind of mentality. And once you have made it to the level of going to Tax Court to defend your case, now you're dealing with the IRS. And it's not that they're not willing to aggressively pursue their position, but you're dealing with individuals who have a greater command of the tax code itself, and of the procedures and are really just trying to come to a result that is supposed to be the best results.

So I think that it is shocking to a lot of taxpayers. And I've seen many times when the taxpayer will show up in the Tax Court, and they're scared out of their mind. They look like they're afraid that they're going to be thrown in jail over a tax issue, only to find out that they can actually resolve it, in many cases, right there. Most tax cases don't actually go to the full extent of being tried. Most of them are settled, because there usually is a resolution.

Dave: Okay. Well, are there some examples of things that you learned during your externship that you find yourself using today?

Brandon: That's a good question. Tax issues are so encompassing and just complicated for not only the general individual or business, but even for tax professionals and lawyers. And I think one of the things that I've learned most was that you have to really be very careful when you go through a tax situation.

I also learned and I find this a lot in my practice now, that you cannot ignore a notice that comes from the IRS, when it comes to the tax issue. That you just can't ignore them, because that's really your opportunity to correct or defend a situation. You don't want to find out sometime later that you could have fixed it, and now things are worse and there's very little you can do about it.

Dave: Okay. So that sounds like a good general tax advice, really, for anybody, which is, when you receive a notice from the IRS, to take action promptly. Either responding directly oneself or retaining outside counsel such as your firm.

Brandon: Absolutely. Absolutely. And the other is, when the issues become very complicated... Even before I mentioned that, what I see a lot, both at the IRS, and now, when people get into trouble is, they get into some sort of a business transaction, and then they ask the tax question later. And I know I'm a little biased towards tax, because that's industry that I'm in, but I do a lot of business related work. And it is always better to ask the tax question first, and then get into the business transaction or into the whatever direction you're going. Because it's better to plan for the tax issue upfront than to try to deal with it later.

Dave: More wise advice. So it seems like our first two lessons for the day are, one, never ignore a notice and B, make sure that the tax consequences of a potential transaction and are really at the forefront.

Brandon: Yeah. Yeah.

Dave: Okay. Well, any other thoughts on the IRS that you want to share or any interesting stories or experiences from your time there?

Brandon: I think just in line with the idea that the IRS isn't necessarily always the bad guy, although I would tell you should never rely on what they say as the word, you should always challenge their position. They don't get it right all the time, most of the time in my case. But one positive note for the IRS is that, we had a case while I was working there with Chief Counsel where the taxpayer devolved a basis their cost on a house, and I noticed while digging through the reports from the revenue agent, that they hadn't even taken into consideration some of the transfer rules that applied to this particular transaction.

I pointed that out to the counsel involved at the time. And the end result we came up with was that there was no tax due to the taxpayer. But they had already made it through audit level and appeals level, and now they were at Tax Court. And we'd come up with a resolution that there wasn't actually a tax issue. And just the joy that the taxpayer had at the time, I think that's probably what really sealed for me that I wanted to be involved in tax, but more so on the other side, so that I could help my clients get to that resolution and not have to deal with that stress if we could help them avoid it. Because oftentimes, there is a simple solution and a way to resolve it.

Dave: Well, very interesting. Well, that then brings us to, so tell me about the firm that you joined. What made you want to join them? And just tell us a bit about the firm and some of the things they do.

Brandon: The firm is... We're a very unique, boutique law firm. It's Cantrell & Cantrell. And there's several unique features about the firm but I think the first one is that the managing and founder partners are husband and wife, Pat and Carol Cantrell. And what's unique is it's rare to find a husband and wife team in the legal field that work so well together, and Pat and Carol just complement each other and in every way, professionally and intellectually.

And they make the firm really a good place. It feels like a like working with family here. It's a wonderful environment. But I first met Carrol Cantrell while I was working at the IRS chief Counsel's Office. She and another associate of hers were handling an estate related case. And after we concluded our meeting, the attorney at the time was a senior attorney over there at the chief Counsel's Office, and very well respected. She told me aside that if I ever got the chance to work with Pat and Carol Cantrell, I should absolutely take it because they were highly respected as a community and very good at their job and very knowledgeable.

And it was a short time later when we were in tax court that I ran into Carol again. And I remembered that comment, and she offered me an opportunity to come over to the firm. So I couldn't pass it up. But that's how I met them initially.

Dave: Okay. Is my understanding correct that another unique thing about Pat and Carol is that not only are they both attorneys, but are they also both CPAs as well?

Brandon: They are. In fact Pat was a revenue officer with the Internal Revenue Service before that. They're both CPAs. Pat and Carol are both certified in tax. And believe Pat has 52 years in tax, and Carol almost about the same. And there's a third partner Derek Matta, he's our head of controversy. He's a former IRS Chief Counsel here out of Houston and out of the office in Louisiana, I believe. The combined experience is just immense.

Carol's even double board certified. She's got her state planning certifications as well. And their abilities are incredible. And they're both writing and publishing and often coordinating with other larger companies or larger firm who need someone with specialized tax ability. And Cantrell & Cantrell is unique because although we're a boutique firm, we are entirely tax focused. And we have seven tax focused attorneys just here at this firm. And we do large firm work but at a small firm atmosphere.

So it is a wonderful place to work and, and the work here is quite unique and exciting. Because we're covering just about everything that you can imagine in tax, from estate and business planning, as well as individual and corporate or partnership tax. We also covered administrative and controversy related issues. We'll even take it to Tax Court if necessary.

Dave: Okay. And I understand that the IC-DISC is part of your practice area, that you don't limit your practice IC-DISC. Is that correct?

Brandon: Correct. Yeah. We do cover a wide variety of topics. I, myself focus primarily on business and partnership related tax, and the DISC itself falls within that business category. Houston is just such a wonderful area because we have local and international business. Just it's a hub here. So there's a lot of export activity here which ties directly into the need for the IC-DISC.

Dave: Okay. So tell us a bit about IC-DISC; what's it stands for, how long has it been around, just some things for the listener who's maybe not an expert on IC-DISC.

Brandon: Yeah the IC-DISC is itself a complicated acronym. It's an interest charge, that's the IC, and domestic international sales Corporation, and that's where the term DISC comes from. So the DISC itself is something that was instituted by Congress in the '70s to address export activity.

It is called a domestic international sales Corporation because it's a US corporation that is involved in export products outside of the US. There's the international part. And as I'm sure we'll get into, there's a couple of ways that a DISC can be involved in exports, and the primary method involves the DISC receiving a commission for its involvement in the export of the export product.

Dave: Okay, well, why don't we just take a step back, so the DISC is like a S-corp, or C-Corp or LLC, what's the structure of the DISC?

Brandon: There are some very specific requirements for a DISC, moreso than just about any kind of entity that can be formed. Their Revenue Code covers this under sections 991 through 997. But in 992, specifically, the requirements for DISC are that it be a corporation. It has to be formed in the United States, and that actually has to be within the 50 states of the United States, it can't be a territory. So, it does have to be a corporation. It has to have at a minimum of $2500 worth of value in the company. So the way we handle that is issuing $2500 worth of shares at minimum so that its shareholders can meet that requirement.

Dave: Okay. And the... I'm sorry, I just kind of was thinking of something else. So please continue, you're giving a little background on the DISC?

Brandon: Yeah. There's several requirements for forming a DISC. It's got to have one class of stock, I think that's where I was going with the 2500. So it has to have one class of stock, and that there has to be at least $2500 in value of stock every day of the year for it to remain qualified as a DISC.

The DISC is a special tax election that has to be filed and received. And unlike some other types of entities, like an S corporation. With an S corporation, you can file the election and then you sort of act as though the elections already been approved. With a DISC, the election has to be approved. You can't just assume that it's been approved, although, if you're following the rules, I haven't run into a situation where they don't approve the DISC.

Dave: Okay.

Brandon: They are very specific that it has to be approved first. So if you file a form which is referred to as Form 4876-A with the IRS. And that has to be filed, specifically within 90 days of the beginning of the tax year for that entity if you want the election to take place. And then provided the IRS approves that, and I think even the backup there, the election itself has to be authorized, I guess is the word I'm thinking, by each of the shareholders of the company. And then any spouses of a shareholder that might be in a community property situation which we find here in Texas.

So if you have community property spouses, and they're not both necessarily shareholders of this DISC, the spouses of each shareholder and the shareholder have to sign the election in order for it to be valid. So that is very specific rules on electing for the DISC itself.

Dave: Okay. I know that the DISC is not your sole practice, but can you give us a sense of your the amount of DISCs you've been involved in? Is it just a handful? Is it hundreds? Is it dozens? Talk about the breadth of your experience?

Brandon: I'd say dozens. We've had quite a few. It seems that they come in waves. Every year, we have about a dozen or so formations. And then about a dozen or so, just very specific DISC-related research or question related tasks or issues come up so. And then even the occasional controversial related issue on DISCs, which is more rare, but...

Dave: Well, talk to us about some of your controversy experience. What's the typically the nature of those, or maybe give us an example of a particularly interesting one?

Brandon: Well, I don't know what the current number on how many DISCs are active today, but not too many years ago, it was just a little over 2000. So there's not a lot of DISCs when you compare them to, say a different type of entity structure. But even so there's not a lot of direct auditing on a DISC by the Internal Revenue Service.

And partly, and this is just my opinion, is because the requirements for DISC are so complicated that it does require somebody with specialized experience and understanding of the IRS level to even audit the task. What happens where an audit comes up and affects the DISC is that, oftentimes the shareholder or the related supplier or producer that is connected to the DISC because they're providing the export product is audited. And that oftentimes can be either another corporation or a pass through entity like an S Corporation, or some kind of an LLC. And they get audited, because that's more frequently the case or the individual themselves. And that leads the IRS to take a look at the DISC.

And in the cases that we've seen, often is that the agent doesn't understand the DISC, and they just see that there's a tax benefit happening here and they challenge it automatically. So sometimes unfortunately, it starts because the agents aren't really educated well enough on the DISC rules or its purpose.

Dave: So, do you find that you end up having to sometimes have to assist in that education process with a generalist agent?

Brandon: Absolutely. In fact, one case in particular, the agent did just that they were auditing the related supplier company. The supplier company had formed a DISC for its tax benefit, and the agent didn't understand the nature or the purpose. And when the agent looked into it, the agent found that there were specific requirements for export property and what qualified as an export property and they challenged that and said "No, your property doesn't qualify." Fortunately for the DISC, they had good advice before they even formed the DISC to help them prepare their... be prepared for what the qualifications are for export property. And their particular property was a scrap metal type of property or product that is. And the particular issue at hand was whether or not they were manufacturing export product and if scrap metal was export product.

So we walked the agent through, but the agent was so uncomfortable that with the complexity of the issues that they had to run this up the line to Washington DC and get a result back from DC. The end result was that they agreed with our information. And there was no taxable effect on the DISC, where the agent wanted to ignore the DISC.

But it's just an example that the IRS themselves don't know how to handle the DISC because they are not training their agents to do that.

Dave: It sounds like part of the reason is because there's so relatively few DISCs, that perhaps it's not the highest priority training.

Brandon: Yeah.

Dave: Just a relatively small number of them.

Brandon: Though, that's a very good way to highlight that. The IRS really does limit their area of focus to where they can spend the greatest amount of time. So because there are more individual taxpayers, they spend more time on individual audits, because there are more corporations, they spend more time on corporations.

But the area that DISC is not one where the IRS spends a lot of their time on it. So, it is important that when an audit comes up for a DISC, that you have someone who understands the DISC well enough to help educate the IRS and get them out of that situation, because there's often a lot of legitimate tax savings on the table there. And the IRS is happy to take those away if they think they don't apply.

Dave: Sure. Is my understanding correct that another potential area that the IRS may be confused on is it called the form over function or form over substance?

Brandon: Yeah, substance over form doctrine, correct.

Dave: Could you talk a bit more about that and how that applies to the DISC?

Brandon: Yeah, well, so particularly in this case of the manufacturing question, the agent was trying to say that although the form of the DISC was legitimate and follow the rules, that the substance, how they were carrying this out didn't meet the intended effect that the writers of the code desire. That the individual was taking advantage of the tax code, because they were getting a benefit that wasn't intended.

We had to help the IRS see that the actual use of the DISC met the very intention that the writers of the code had provided for. And in this particular case, there are some specific examples on what met the requirements. And we actually are... our export property was an exact replica of the example that was listed even in the code and the regulation.

Dave: So interesting.

Brandon: Yeah.

Dave: Because my understanding is that the IC-DISC is also sometimes referred to as a paper entity. And that it typically has no employees or activities and such that. Is that correct?

Brandon: Yeah, so there's two ways that a DISC can be used. It can be used actively or it can be used I guess, more passively, this idea of being a paper or a shelf company DISC, which is more common. A paper company is really something that is, and this is the substance over form document doctrine, it's formed, but is it really taking on the activities of a regular business.

And fortunately, in the case of a DISC, Congress provided specifically that a DISC does qualify for its activities even if it's not taking on the traditional business activities of having employees and actively having inventory and all of the other typical activities that you find in a business. It's a paper company because you form the DISC, and then its entire job is just to facilitate the tax benefit. And the rest of its activity really just happens on paper.

Dave: And so there's-

Brandon: Pension.

Dave: Yeah, thank you for that. And my understanding is that sometimes we'll kind of confuse the typical agent because this runs, I guess exactly opposite of the normal interpretation of that substance over form argument, right. That if it is a non-DISC business, doesn't really have much activity, that you-

Brandon: Right.

Dave: Could you talk a bit more about that?

Brandon: Yes. And usually a business has a required number of hours or activity that has to be put into it. And there are series of, like a checklist of activities that you could go through. Things that are action items that the business might be doing, that prove that it is in existence, that it's actively conducting business, that the business is legitimate, and so forth. And a DISC itself doesn't need to necessarily be involved in all of those things.

And that's one of the areas where an agent will say, "Well, we don't see that this company is actually performing any of its typical activities." And that's an area where we have to educate them here. According to the section in 992, it explains that the DISC doesn't necessarily have to be involved in regular business activity.

Dave: Okay. Okay. Again, thank you for that clarification. What are maybe some examples of two or three pitfalls that you see that sometimes shareholders will unintentionally fall into with a DISC? It sounds like one of them might be that they perhaps it not filed the election timely? Is that correct? And if so, what other situations Do you see that people get in trouble with a DISC?

Brandon: Yeah, certainly the first one is the elections filing, or actually, one of the first areas that I see is when, not the... the $2500 rule is that the shareholders have $2500 worth of value in the company when it begins. So this seems like a small amount, but oftentimes, entities are formed without any money being put into them. And then money comes as the entity needs it, or it takes out a loan or something. And debt doesn't qualify for this $2500 rule.

And when we're talking about the benefits of a company that would have such extensive gross receipts and revenue, $2500 is such a small amount to forget. So it's a little thing, but it's a requirement. And it's important that companies start out with it's $2500, then that it makes the election and all the shareholders sign that election and it gets filed within the first 90 days of the tax year. Those little rules are very easy to miss. It's easy to miss those deadlines.

And another deadline that is often overlooked, there is a requirement that if the DISC itself utilizes this position where it can be receiving commissions for its income, those commissions that it earns have to be paid to the DISC within 60 days at the end of the tax year. That's something that requires good accounting procedure on the part of the company, whoever's keeping track of accounting for the DISC. You need to have a good CPA or somebody that is keeping track of that. And they need to help remind you that those commissions that are earned have to be paid to that DISC within 60 days or the DISC could be disqualified.

And I think, maybe not a final, but another big one is the DISC itself has the ability to loan some of its income to the related supplier or the producer of export product, which is often necessary. And that specific loan is titled a producer loan. And the producer loan itself needs to be memorialized, it has to be written down, it has to be executed. And it has to have a very specific maturity date within five years. And it needs to be designated as a producer alone at the time that it's made. And so that can't really be an afterthought, it needs to be planned out ahead of time.

Dave: Okay. Well, thank you. Sounds like some useful tips for people who either have a DISC already or who aren't considering the formation of one. Any other sort of pitfalls or landmines that people unintentionally fall into that come to mind with the DISC?

Brandon: I don't know. The DISC being as complex as it is, there's many ways that I think you could misunderstand, if you don't have some good direction ahead of time. Just why I think it's very important to have somebody like yourself, as I understand you do a good job of instructing your clients as to, sort of the general rules of what a DISC is, and then directing them to somebody that can give them really specific answers on the legal questions. But it's a good idea to have that upfront.

One of the things that we do when we form a DISC is, we put together an operating memorandum. This is a document that really in very, as simple as you can get with complex terms and code sections that will lay out the rules, the expectations, areas that you should be aware of, there are very specific distribution requirements, and there are some timing issues. And so we put that down. And we try to help our client understand what some of these are, so that at least they have an expectation ahead of time. It's equally important to have someone who understands the return preparation and the accounting side of it as well.

So just in general, for a company that has a DISC or is planning on having a DISC, they need to really make sure they have somebody in their corner that that understands these rules and can help keep them on track so that they can continue to take benefit of those tax savings that are involved there.

Dave: Okay, well, thank you. That's very insightful and helpful. Well, as we're nearing the end of our talk here today, what do you think the future of the DISC is? It seems like the DISC has been, "going away". It's practically since its inception, or certainly from the '80s. So what are your thoughts? Is that is it? Is it really going away? And maybe another way to answer might be, what are some of the reasons to think that the DISC might last another five-plus years? And conversely, what might be some reasons that it might not last another five years?

Brandon: It is so very difficult to tell. I hear that about a lot of different taxing structures where we think that it might go or it might stay. And on the one sense, it's hard to know what is going to motivate the next tax law change. Certainly, we've seen a huge tax law change that just came through. And, in fact, there was an opportunity for Congress senate put on their changes for the tax cuts and jobs act before it was passed. They actually put the DISC on there to have it repealed. It's not entirely clear why there are some comments, but I personally, I think that in an effort to try to maybe appease the general public and the younger generation, they were putting on items on the block that seem maybe arcane, and in a way to try to retrieve some tax savings from the taxpayers, they put it on there.

But the reality is they had their chance, it was on the chopping block, they took it off specifically. And at the last minute, they remove the DISC from there. So it's still very much in existence and very much a viable option. I guess one could say, it looks like they're considering not using it. But I would argue that the need for the United States to have viable tax options towards export activity is crucial. And it's one that has always been around, the original intention for having a DISC was to incentivize export activity. And especially with the growth in our economy today, the export, despite any of the trade wars that are occurring currently, you're not going to get away from export activity. And if ever, there was something that could help boost jobs and US revenue, the DISC is an excellent incentive for that.

Dave: Okay.

Brandon: I think that's one reason why it will stick around for many years to come.

Dave: Okay, well, thank you for that insight. And thank you also for the context that it's not just the DISC in particular, but really any part of the tax code. It's hard to have a definitive crystal ball as to the future or nature of it, because tax law changes, and sometimes it's maybe not expected. So thank you for that.

Dave: Well, so I think to wrap up, I'm looking at my notes here. So early on, you talked about just in general with tax, you had to two tips that seemed very helpful. One is, do not ignore a tax notice. If you ignore it, it does not necessarily mean it's going to go away. In fact, it sounds like just the opposite. It just gets worse. And then the second one you'd mentioned is when considering a business transaction, really consider the tax consequences and tax structure on the front end. Did I capture your sentiments on those two points?

Brandon: Yeah, absolutely.

Dave: Okay. And then we drilled into the DISC in particular, and you had some tips there around really being careful to follow the rules of the DISC, that there are some very specific timing rules and deadlines that with other corporate structures might be more relaxed, but with the DISC there perhaps more strict, but on the other hand, the substance over form doctrine, on the other hand, is sort of relaxed, that sounds like with the DISC as compared to other structures.

Brandon: Yes, yes. And I realize that it can seem daunting to dive into any tax issue. And maybe that's why I enjoyed it field of tax as I do, because it is challenging, but any business is going to face challenges. And there are regulations in every industry and tax is just one part of it, but it is a big part of it. And any opportunity to maximize your tax savings is definitely worth considering and looking into.

Dave: That's excellent. Well, if any of our listeners want to reach out to you, or they have they're considering a DISC or you have a DISC and have questions, are you generally amenable to receiving a brief communication like that from people if they have an issue or question?

Brandon: Yeah, absolutely. We're certainly very happy to receive questions and calls from anyone.

Dave: So what's the one phone number should somebody use to reach you?

Brandon: Yeah, we can be reached... the number for Cantrell & Cantrell is (713)-333-0555. And that's our general line. I don't have a direct line out of that, but so someone-

Dave: What's your email? Now go ahead and repeat the number again.

Brandon: Yes. (713)-333-0555. Our web address is, cctaxlaw.com and so our email addresses are all @cctaxlaw.com. And they're typically our first initial and our last name. Mine is bfrenza@cctaxlaw.com.

Dave: That's excellent. Well, thank you for that. And we appreciate your willingness to field inquiries from folks. I mean, obviously, if it turns into a full blown engagement, that's another story. But we appreciate your willingness to feel the preliminary call as it relates to the DISC or really any other tax controversy matters, is that correct?

Brandon: Absolutely, yeah. Well, I appreciate the opportunity to get on and talk a little bit about the subject. Thank you very much for having me.

Dave: All right. Well, thank you, Brandon. And have a great day.

Brandon: You too. Thank you.

Dave: All right. Bye.

Dave: Hi, Hans.

Hans: Hey, Dave. How are you?

Dave: Hey. I'm great. Thank you for being a guest on The IC-DISC Show.

Hans: Of course. My pleasure. Thanks.

Dave: Okay. Well, let's get this started. My guest today is Hans Stronck, and he is Managing Director of Expense Reduction Analysts. Hans grew up in Spain and the Netherlands. After finishing high school in the Netherlands, he immigrated to the US, where he graduated from Southern Methodist University with a degree in economics.

Hans is a nationally recognized professional in the third-party logistics industry. He gained extensive experience in logistics as Senior Vice President of South Central Wholesale in Chicago, as well as Executive Vice President of Sales and Marketing for North America for a global supply chain management company.

He's executed numerous international logistics projects for many Fortune 1000 companies. Early in his career, Hans operated warehouse facilities and ran a truck brokerage division for a major national firm.

Hans joined ERA as a regional licensee in 2006, and became a Managing Director in 2012. Hans is consistently one of the top client acquirers in the United States. Hans lives in Houston and is married, with two children and several dogs.

Hans: Thanks, Dave. Appreciate it.

Dave: Just while I think of it, many of my contacts have enjoyed the podcast, but many of my contacts don't have an IC-DISC. They've requested that I try to add some value for really any company that's say $5 million or larger, whether they have an IC-DISC or not.

I heard you loud and clear, and that's why Hans is on the show today. Hans, how long have we known each other?

Hans: Well, Dave, I would say this was right after I joined ERA. ERA by the way stands for Expense Reduction Analysts. That was 12 years ago or so I would imagine. So we've known each other quite a long time.

Dave: Yeah. That sounds about right. I don't know if you remember when we first met, but I described the IC-DISC to you, and then you described what you do to me. Do you remember what my comment was when you explained about your services?

Hans: Tell me. I don't remember.

Dave: Okay. After you told me what you did, I said, "Hans, that seems too good to be true if you ask me. I just can't believe there's that much money available that companies are just leaving on the table." Your reply to me was, "Well, Dave, the IC-DISC sounds just as devious to me." We kind of both laughed about it and said, "All right. Fair enough."

Since then, I haven't checked the numbers lately, but I know that you and your company have added millions of dollars in value over the last 12 years to my clients. So thank you for taking such good care of my clients.

Hans: Well, thanks for introducing them to me. I appreciate that as well.

Dave: Okay. Also, the last item is in preparation for this call, Hans did something pretty cool. He set up a website called reducedexpenses.com. That domain is just a landing page where you can go get a copy of a presentation, so that if you don't have time to listen to this podcast or you want to learn more, basically it's a presentation where he just walks a company through exactly how to do this work themselves. Is that right, Hans?

Hans: Yeah, essentially. I basically talk about the process we go through and why we are successful. I explain to whoever listens that this is not brain surgery, and any firm can do it. It takes commitment and takes other things, but it can be done. When you asked, I was happy to provide that.

Dave: Well, thank you. And again, that's reducedexpenses.com. Reducedexpenses.com. We'll have that in the show notes too.

Hans, how did you get into this line of work? Because you came from corporate America, where you were very successful. Why did you make the change to ERA?

Hans: Well, a couple of reasons. To your point, I've been in corporate America 15-20 years, and had done enough traveling for a lifetime. Started a family, our boys were just 2 and 3, 3 and 4, something like that, and I just didn't want to be away. So part of the reason was a lifestyle change.

The other reason was that I was somewhat done with corporate America, always chasing the next quarter financials, and go to the next meeting, all the things that people know about corporate America. There are many advantages, but there's some disadvantages as well.

I was ready for a different challenge where I was more my own boss. I think I knew what that meant, higher rewards, high risks, and other things as well. But I was ready for that.

So it was a combination of wanting to do something else away from corporate America and starting a new lifestyle change and become more independent professionally.

Dave: Okay. I can certainly relate to that as a fellow entrepreneur.

Hans: Yes, you can.

Dave: I guess it's been about 13 years now you've been at ERA. Have there been many surprises? Has it been just smooth sailing the whole time? What about it's been easier than maybe you thought? What's been harder than what you thought it would be like?

Hans: When I joined ERA, I had the same reaction that you had when I talked to you first. That is, this sounds too good to be true.

Our model is essentially, where we take a look at the contracts, the agreements that our clients have with suppliers, and through a whole process and the knowledge that we have, we try to improve upon that. If we are successful and if we are saving, then we get paid. Your reaction was similar to my reaction. Once I joined ERA, I thought it was a no-brainer so to speak. But not everybody else does.

So obviously there were challenges. The main challenge I would say is trying to differentiate when they don't know who you are yet. Trying for a busy CFO or a busy CEO to respond to a call or respond to an email, that's easier said than done. That only has gotten worse and harder over time because of LinkedIn and social media and other things that have come in the last 12 years. That was the hard part.

The easy part was once I was in the door, or once I was connected with the top-level people in the organizations, they understand the model. They appreciate the model. They like the model. That part was not as difficult.

Getting in the door was and continues to be a challenge. That's to be understood. In our model, we really have to start at the top because it is a strategic discussion that we need to have, it's a commitment, and really often a culture change that we're asking the company to work on.

Dave: Thank you for that. I'm also assuming that one of your biggest challenges is the same challenge we have that goes back to our conversation 12 years ago. Is that just overcoming the skepticism that people have really left this much money on the table?

Hans: Yeah. Our history, we've been around for 25 years. We say historically, this is how much money we save, and it is between 10 and 30%. That does sound high, and it is high.

Naturally, a CFO or a CEO, his first reaction or her first reaction is, "That sounds too good to be true." Or, they will say, "We're looking at our expenses every day. There's no way you can do that." These are typical responses.

Sometimes we're not able to save them money, but then at least they know about that, and we went through some sort of a due diligence process with them. However, more often than not, there are reasons why are able to find those savings in addition to what they already had done themselves.

Clearly, 100% of our companies that we deal with, 100% of our clients are looking at their expenses every day. It's not that they are not doing it, they are doing it. But for a variety of reasons we can go into, we are able to shave off more than they were able to find.

Dave: Okay. Help me translate that percentage. Let's just think about it as a percentage of revenues. What would the savings be as a percentage of revenues?

Hans: I would say it's probably on the low end 0.5% of revenue, and on the high end 1.5% of revenue. We deal with clients as small as $5 million in annual revenue, and as large as billions.

Dave: Okay. Let's just do the math on that. If we have a company that does $50 million of annual revenue, and we take the midpoint, that would be 1%. 1% of $50 million is what? $500000?

Hans: $500000, yeah.

Dave: That's a lot of money.

Hans: That's net. So that's after any fees we have. That's what's literally going to their bottom line.

Dave: Wow. Okay. That's what they're netting. But they only pay you if you're successful, right?

Hans: That's correct, yeah. If we find savings, and it's apples-to-apples, we all can find savings and go down on quality or service, that's not savings. It's all about value. So the total package. If we find savings one, and two, if the client agrees with those savings or that supplier, then it's considered a successful engagement, or a successful project.

What turns out is that in the majority of time, probably 70% of the time, the client will actually stay with their incumbent supplier, so there is no change.

Dave: Yeah. That is awesome. Why don't we just look at a typical example? Why don't you pick a category that you frequently work in? Let's just do a walk through of a typical scenario.

Hans: Typical, there's no such thing as typical. We have experts in the field, analysts as we call them, that come from industry, in probably close to 50 different what we call cost categories. That can range from something very specific like food, food distribution, or very generic like office consumables.

We deal with all industries, with all size of companies, because all industries use energy, all industries use insurance, all industries use office consumables. Many of these categories overlap no matter what you do.

Then you have obviously specific categories. So medical supplies will not apply to restaurants, but will apply to hospitals. Legal software will only apply to legal companies.

Anyway, that is first of all. We're open to any company, any category. Really what we do is we have the discussion with the client and we try to understand how they procure their goods and services. We ask them, "Where do you think there are pain points?"

They always have certain costs in categories where they have a lot of expertise, where they have put a lot of resources in, and they believe they have good contracts, whether that's the case or not. So we leave that alone.

They will say, "Because we have limited resources, we were not able to spend a lot of time on these seven different categories." So we end up going and analyze those, if that makes sense.

Dave: Yeah, it does. I'll tell you what. Why don't we look at the category that seems to be the most commonly used by my clients, which is small parcel freight?

Hans: Okay.

Dave: Why don't we just look at a typical small parcel freight category? Let's just assume that they currently are using UPS. They say, "Oh, but don't worry, Hans. We've got a great contract with UPS. We have a great rate." What do you say to them? What do you ask them? If they say they have a great rate.

Hans: Well, we say that they may be correct, that there's no way for me to know obviously, and I'm not going to promise them that we will be able to improve upon it. But we won't know until we take a look at it.

If they agree for us to take a look at it, and again, there's no cost to them for us to do that, they send us the contracts that they have and they send us some activities and invoices of the last, let's call it last year. So we understand what kind of activities they have in this category. What they buy, who they buy it from, how often, at what price, et cetera.

With that data, we can then benchmark those contracts that that client has against all the other projects that we have done, and there's about 20000 of them. We use the data that we have to benchmark.

Then we go back to this client in your example with one of two answers. One is, "Mr. Client, you were absolutely correct. Your rates and your services are best in class. Congratulations. Please stay with them and please continue to do what you do," and that's the end of that engagement. Or we say, "Your rates are good and competitive, but I know we can do better," and we'll go from there, we'll take the next step.

Dave: What percentage of the time do they have just world class rates? I'm guessing it's a minority of the time.

Hans: I would say less than 10% of the time.

Dave: Okay.

Hans: What I find is that there's no great correlation between size of clients and let's call it quality level of rates that they negotiated. Often times a large client thinks because they are large, they have good rates. That is definitely not necessarily the case. At least, I haven't seen much of a correlation between those two.

Dave: Okay. Let's say that we've got a category, and let's say they're incumbent. You look at it and you do some initial analysis and you indicate that you think you can save them say 20 to 25% in that category, by benchmarking it with all the other projects you've done in that category, right?

Hans: Right, right.

Dave: Then let's say they say, "All right. Let's go for it. Let's move forward. We don't have any particular loyalty to this vendor. Let's go for it." What happens next then? What do you all do next?

Hans: Well, even if they do have loyalty towards them, sometimes what we do, what we do do next is we create an RFP, a request for proposal. The goal of that is not just to get the lowest price possible, but it's a combination of what we put in there, we ask of the suppliers that obviously they're pricing, but also certain things related to quality and service.

We send out an RFP, we get it okayed by the client, all the requirements that they want in there are in there, and we send it to a number of the suppliers. We get that back, and then we present the responses so to speak to the client.

There's no right or wrong there. The client doesn't have to stay with the incumbent. He doesn't have to stay or choose or go with the lowest priced supplier. It is really the client who decides this solution gives us the best value. That is the next step.

Then as I said, the majority of the time, that is the incumbent. Then the implementation of course is quite simple. But 30% of the time it's not. Then we help them with the implementation and the transfer from one supplier to the other.

Dave: Okay. Then I would imagine another concern companies might have is that they think this is going to take hundreds of hours of time by their accounting department or purchasing department. What's a typical range or metric? Because based on my client's experience, it's a relatively small amount of time, right? I think your team will even come in and actually look through all the invoices at their office, right, and make the copies right there-

Hans: Yeah, if we need to.

Dave: Or conversely, if they have an online system, they can somehow share that information with you electronically, right?

Hans: That's usually how it goes. But to your point, as I said earlier, and when people see the presentation and my comments with that, they will see that this, again, this can be done by any company. However, if you do it yourself, it does require a lot of commitment and a lot of people and resources. But that's maybe the right way to go.

To your point, Dave, we do a lot of the work behind the scenes. We do it away from the client's office. We really only bring them in to the fray when we need to have them make a decision. So when we go from step one to step two, from the baseline report into the RFP, and then from the RFP into deciding who they want as their supplier.

We do the legwork. We do the analysis. We do the monitoring afterwards. All of those things can be done internally, but that's our value proposition. That's what we do.

Dave: Okay.

Hans: To your point, under our model, the amount of time that the client spends with us is really quite minimal.

Dave: So maybe based on my client experience, there'd maybe be like two meetings with somebody at the executive level, like an initial meeting to discuss the ideas, discuss different categories that you might be able to help them.

Hans: Yeah. For sure.

Dave: Then a second meeting to present your findings. Then if they want you to move forward with the RFP, then I guess perhaps a third meeting where you'd present the results of the RFP. Is that-

Hans: Yeah. You got it pretty much right. We want to meet also with the stakeholders involved, people that are involved in this process. With freight, it could be people in operations or in finance or what have you. We want them to understand what our role is, and our role is really to be an extension of their team.

Again, we do all the legwork and all the work work. They as a client make the decision. The stakeholders need to understand who we are, what our role is, and what it is not. We have those meetings as well.

This is for each project. We could do 10 projects for a client, and so obviously then it becomes a little bit more busy, but different stakeholders and different people will get involved. That's essentially how it works.

Dave: Okay. I hate to just pin you down on stuff like this, but I'm going to do it anyway-

Hans: Go ahead.

Dave: Let's just say we're looking at a $50 million company that you end up net saving them $500000. How many projects would that technically entail? Three? Four? Five?

Hans: Well, let's just say it's a blue-collar company that buys a lot of freight, right? A $50 million company can buy $3-4 million of freight. What if we save them on the low side 10%, whatever. You can get there quickly. But they will also have a lot of smaller expenses where they spent $200000 a year on office consumables. It just depends on the categories.

Generally speaking, we really don't want to do more than five projects at a time, just to make it manageable really for them. We have the bench strength, we have the analysts in all these different categories, for us it doesn't matter. But we like to do five at a time. Once they are finalized, then we just add others to it.

Dave: Okay. Let's just say that they did five projects-

Hans: Go ahead, pin me down.

Dave: I don't know, let's not even pick them. Let's just say it's five projects. In total, they net $500000. Let's say each project takes 10 hours of time, between executive team and staff. Is that a reasonable estimate?

Hans: Yeah, I think it is. I absolutely think it is.

Dave: So let me just do the math here. 50 hours of time, that's the investment, and the return is $500000. If I'm doing my math right, that's a $10000 per hour return on their investment.

Hans: That is, but that's if you only look at it from year one. These savings don't end at year one.

Dave: Oh, okay.

Hans: If you look at this moving forward, let's look at it two years, and that ROI doubles. Really, what you have created is now a lower baseline for that client to negotiate come year three, four and five.

Part of what we do is we transfer our knowledge, we transfer our process to our clients so they will now have seen how this works. Ideally, when the contract is called, this freight contract expires in two years, they will now know how to go about this. They can hire us again if they want, but they can do it themselves. But now that baseline is so much lower.

If you think about it, the ROI per hour is much, much higher than what you just mentioned, the $50000.

Dave: That is awesome. Really any company with revenues of $5 million and up you're willing to have a conversation with, right?

Hans: Yeah, yeah. No promises, but we'll have a conversation.

Dave: Okay. So there's really two easy, a couple of easy ways people can reach out to you. One is they can just go to reducedexpenses.com, enter their information to download the guide, and then you'll just automatically follow up with them, you'll have their email address, right, and see if they have any questions?

Hans: Yes. Yeah.

Dave: Then the second way they could just give you a call?

Hans: They can always call me, of course. Yeah, yeah.

Dave: What's your phone number?

Hans: It is (713) 391 - 4746. That's my direct number. (713) 391 - 4746.

Dave: Got you. Then your email is Hstronck, H like Hans and then your last name, S-T-R-O-N-C-K, @expensereduction.com.

Hans: That's correct.

Dave: Okay. That's your contact info. We'll put that in the show notes as well.

Hans: Okay, great.

Dave: Why is your service relevant for almost all companies? Because don't practically every company already watch their expenses carefully?

Hans: Yeah. That is absolutely right. Many of them are doing a very good job. But as I indicated earlier, there are a couple of reasons why it makes sense that we find additional savings.

First of all, this is what we do 24 hours a day. We deal with suppliers every day. Our analysts know the industry that these suppliers are in, which is very important. They know what makes UPS tick and AT&T tick and Office Depot tick. We have industry knowledge.

Secondly, we have the resources. Our clients have limited resources, regardless how big they are, I don't care. Those resources as it pertains to this topic, they're going to spend most of it to their largest expenses. Those are usually labor that we don't deal with, or direct expenses, and sometimes we do, mostly we don't deal with that. That leaves a lot of indirect expenses open and exposed. The lack of resource is another reason why some of these contracts are not as good.

I mentioned the benchmarking aspect, the data we have from 20000 projects. When we have a client in Houston today and we try to work on UPS with them to your example, we go see UPS and we say, "Why are you charging them $10 to go from A to B, when we had this other client last week, you only charged them $9 to go from A to B?" We use our data to benchmark and obviously as leverage when we negotiate on our client's behalf.

So there are a couple of reasons why it makes sense intellectually that we are finding more savings in addition to what our clients had done already.

Dave: Okay. I can speak to that personally from our clients that you've worked with, that it really seems like the knowledge you have of those 20000 projects is really so much of the value you can deliver.

Because if they don't have you and they just call up some vendor and say, "Hey, we think we're paying too much. We think we need a discount," the vendor is just going to say, "No, you already have a great rate. Trust us. You have a great rate." There's really nothing they can do to prove otherwise, right?

Hans: Yeah. How do you know? Often times a client, when I ask them, "How do you know they are good," and they will say, "Because we got a 3% reduction last month compared to last year's contract." Well, again, that doesn't mean anything necessarily. Maybe that is a good deal. But you have no way to compare it, right?

Dave: Sure, sure.

Hans: I had a discussion just a few weeks ago with this one company, they told me what great of a printing, copier and printer contract they received. They said it was 5% lower than it was before. Little did they know that because of the industry and all the advantages there, the cost to the supplier had gone down by about 30% at the same time.

So really, their price had gone up rather than down. It's a matter of understanding the suppliers. And the suppliers know that. A lot of times our clients will say, "Well, I've been with this supplier for 20 years, and they're our best friends and we trust them."

Well, just like there's not necessarily a correlation between the size of a company and the quality of contracts, there's also no correlation in the duration of the relationship. I would almost say that the longer the relationship generally speaking a client has with a supplier, the worse the contracts are. It pays to do the due diligence yourself or let a third party do it from time to time.

Dave: That's great to know. What I'd love is for you to give us one real life example. Just think of a company over the last year or so, and obviously you're not going to share the name of the company, but just tell us a bit about it. What industry they're in, what their approximate revenues are. Tell us about the different cross categories you helped them with?

Hans: Well, we did a large, very large private chemical manufacturer, a billion plus, and with locations all over the country, and with contracts with vendors all over the country. Typically like a large company, they thought they were in good shape. We did about 14 projects for them.

In 5 instances, 5 out of those 14, they were right. They had very good rates, best in class, was very little we could tweak or do. But we did the projects anyway. They were happy to know that they were doing well, they had negotiated good rates.

However, in 9 of the 14, it wasn't so good at all, and we were able to improve. In one instance we did, telecommunications was one of the projects, they had a full-time person whose job was to have that relationship with the telecom companies and negotiate with them. We were able to save in that project the client 38% off of that telecom contract.

Again, they thought they had a good relationship. They thought, because we are big, AT&T or whoever it was is going to give us good rates. Well, that's not how it works.

The vendor has two things in mind when they talk to a prospect. One is for that prospect to become a client, and two is for them to become a client at the highest possible rates that the supplier can get away with. And that makes sense. That's how it works. We understand that. Sometimes companies have great contracts in certain categories and very bad ones in others. It happens.

Dave: Sure, thank you for that example. That's a great example. Just on that telecom, do you remember what the approximate annual spend on that was?

Hans: Well, that was between $1 and $2 million. 38% or so, that added up to quite a bit.

Another thing that I really haven't talked about, Dave, and I'll give you an example here, once the new contracts are implemented with the new or the existing supplier, we will monitor for a number of months, usually two years actually, all the invoices that's come in moving forward. We do that for a variety of reasons.

One of them is obviously we want to make sure that the new rates are actually implemented. A lot of times over time, you see what we call rate increases or rate creep coming back in. We want to make sure that the client is actually buying from that supplier and not from other suppliers. We monitor it on a monthly basis.

Now, recently we had another client, not so big, probably under $100 million. We did freight for them. What we decided, because last year you will remember that it was extremely hard for anybody to buy freight so to speak. There were not enough truck drivers, there was not enough equipment, the economy was going 100 miles an hour. The price of freight was very high.

Now fast forward literally 12 months to today, that has gone 180. Now there's plenty of equipment on the road. You can buy freight much, much cheaper than you could 6, 9, 12 months ago. By us monitoring the invoices, by us understanding what's going on in the freight industry, we went to the client and we said, "Rather than wait two years until the contract is up, why don't we do an RFP on a quarterly basis?"

That is what we have done. It's not typical, but it made sense to us. Sure enough, every quarter the rates have come down, because the situation allows us to negotiate that. That's another example of where we bring value.

Dave: Sure. When you do that, the monthly review of the invoices, you do that for a couple reasons, right? One is because your fee will be tied to the actual savings, right?

Hans: Correct.

Dave: Unless you figure out the actual savings, you don't know how to calculate your fee. Then the other is they get a bonus benefit of having you make sure that there's no mistakes on the invoices.

Hans: Yeah.

Dave: I'm just curious, do you find mistakes on the invoices?

Hans: We find mistakes on invoices all the time.

Dave: So here's my question. What percentage of the time is the mistake to the customer's benefit?

Hans: Yeah, yeah. I think you know the answer. The minority of the time. Isn't that funny how that works?

Dave: Sure. Like less than 5%? Maybe 1%?

Hans: Probably, yeah. I'm not sure if we even track that, but I would imagine it's not very often.

Dave: Even though they're "honest mistakes," they always seem to be honestly-

Hans: Sounds like an oxymoron, yeah.

Dave: Right. Go ahead.

Hans: No, that's one of the reasons why we do it. It's to see patterns, to make sure that the client has stopped buying from the old supplier and has transferred all to the new supplier. So different reasons why we monitor it.

Dave: Excellent.

Hans: Yeah.

Dave: Well, thank you for the example. I think based on my experience of the clients of ours you've worked with, I would say that 95% of the clients we've referred to you, you've been able to add value. Is that typical for your whole portfolio? Or was our clients, was there something unique?

Hans: They were exceptional. No, your clients were just average. Hopefully we bring value to the process even if there are no savings.

Dave: Oh, because you just confirm that they have good rates, right?

Hans: Yeah. Exactly. They basically conducted a due diligence process. They're happy with what we did, and they're obviously happy with what we came back with. It doesn't always necessarily have to be savings, but obviously that's how we exist, and the majority of the time that's actually what happens of course as well. To your point, yeah, 95% is probably a good percentage. It doesn't always work out, but usually it does.

Dave: Yeah. Truly because the deck is really stacked such that it's almost impossible for you not to be able to help, right? Because you have the industry experts who used to work at the companies that they're now negotiating against, you have the database of the 20000+ projects. You know the best rate that a vendor's given anywhere in the country for that service, and so you have that in your back pocket.

You add all of it together, and then the fact that your work's all on a success fee basis, there's almost no drawback to somebody using you. Because again, the worst that happens is you'll validate at no cost to them that they already have great rates.

Hans: Yeah, yeah. No, that's it. This whole process, again, they can do it themselves. As they will see in that presentation, it's a lot of work, but it can be done. As a result, I think their results will go from good to exceptional. That's what we see when we do it.

Dave: Okay. Well, Hans, I really appreciate you taking time out today.

Hans: Sure. My pleasure.

Dave: Yeah, yeah. Thank you. Why don't you just let me summarize, and then correct me when I'm wrong, okay?

Hans: Yeah.

Dave: For any company over $5 million in revenue, that probably 95% of the time you'll be able to help them. The magnitude of the help is around 1% of revenues.

It takes very little time, especially if you discover that you can't help them and they already have great rates, there's probably very little time on their end to get to that point in the process. So there's almost no risk, other than just a few hours of time.

The worst thing that'll happen is that they'll validate they got great rates. What will probably happen is that they will materially increase their bottom line through your services, and you only get paid if you're successful. Even then, you only get paid once the savings have been recognized, right?

Hans: Correct.

Dave: It's not like you're estimating the savings for a year, and then asking them to cut you a check right then before you even start the RFP, right? They're paying you monthly based on the actual savings, right?

Hans: That's exactly right. Yeah. Yeah. Yeah. All of that is correct. One major thing is missing, and that is that throughout this whole process, the client is in charge. We are not in charge. We are not in charge. We do not make any decisions. If the client said, "I do not want UPS on this RFP," then that's what will happen.

Again, we are an extension to their team, to their procurement team. We feed them with the information. We give them advice. But they are always in control of the process, and they're always in control of the decisions that need to be made.

Dave: Yeah. Thank you for mentioning that, because the bottom line, you're not going to make them change vendors just because you find it's a better rate.

Hans: No.

Dave: Yeah. Thank you for reminding me of that. Lastly, if any of your contacts are listening to this podcast, prospective customers of yours or centers of influence like bankers or attorneys or CPAs, Hans has helped dozens of our clients.

If anybody ever needs a reference, feel free to reach out to me. My number is (832) 654 - 9889. (832) 654 - 9889. Again, I'm a huge fan. I can think of only one client that we've ever referred to you that you couldn't help, and they were relatively small and in kind of a unique area where there just weren't... most of their expenses were core expenses.

I'm a huge fan of your work. You always make us look like a hero. I would encourage anybody out there who's listening who has a company with $5 million in revenue or more to reach out to Hans, or even just reach out to me if you want, just an intermediate step. I have a pretty good understanding of their business. If you want to just ask me some questions without having to involve Hans, you can do that as well.

Thank you again for the presentation you put together. That's at www.reducedexpenses.com. Anything else we need to add?

Hans: No, that's it, Dave. I thank you for inviting me on this, and obviously for your continued support. It's been great. I encourage everyone to go see that website and to see the slides and listen to my comments. There's a little bit more meat to that than we discussed today, so there will be a lot of things you heard today and some new stuff as well. With that, thank you very much, Dave.

Dave: Well, thank you Hans. With that, we will sign off.

Hans: Goodbye.

Dave: Goodbye.

Dave: Hi Adam.

Adam: Hi Dave.

Dave: How are you today?

Adam: I'm doing fine, good to talk to you.

Dave: Yeah, likewise. Well, thank you for joining me on the IC-DISC show, and we are live and recording.

Adam: Wonderful.

Dave: Yeah, so just to give a little overview, Adam Traweek is... are you Senior VP now?

Adam: Senior Vice President, yeah.

Dave: Yeah, Senior Vice President at Amegy Bank of Texas. We're going to learn a little more about his background, and get kind of a banker's perspective of the IC-DISC. Why don't we start at the beginning, where you from?

Adam: I like to say all over Texas. What that really is a nice way of saying, is a bunch of small towns all over Texas. Say that, most of the time, right outside of Houston in a small town, East Bernard. Close enough to Houston, to still feel like I could be part of the city.

Dave: Okay, that's excellent. You went to high school there in East Bernard?

Adam: High School, East Bernard. Then after high school, ended up at Rice University in Houston. Got a economics degree from Rice.

Dave: I understand you were a fireball, throwing fastball pitchers. Is that correct, on the baseball team?

Adam: Well, a pitcher and baseball team, out of that sentence, yeah, that's correct. The fireball part of it... plus, so I was the little soft toss and left-handed pitcher. I enjoyed my time there, and had a ton of great experiences.

Adam: Made a lot of really good and lifelong friends, from my time on the team. We had a lot of fun and a lot of good guys, and great coaches too.

Dave: That's great. That is great. Then you graduated from there, and then you went straight to Amegy, is that correct?

Adam: Straight to Amegy. Yes, I've been there ever since, so I-

Dave: That's what, 10, 12 years ago? How long have you been at Amegy?

Adam: Almost 13.

Dave: Okay, and-

Adam: Yeah. I started-

Dave: Go ahead.

Adam: I was going to say I started in the Officer Training Program. The bank has a developmental program for college grads, that they hire a couple of times a year for.

Adam: Being like many 22 and 23-year-olds right out of college, kind of had an idea of what I wanted to do. Like looking back, it turns out I don't know that I really had any clue, what I really wanted to do at that time.

Dave: Sure, so why did you pick Amegy? Was it because of the officer development program, that drew you to the bank, or there're other things?

Adam: It was. The chance to go somewhere and be trained, and given a skillset and then some exposure to different industries, and to finance at a deeper level, was really appealing. Also, the interview process was really enjoyable.

Adam: I get to meet with some really senior people around the bank, and really get a great feel for the culture, and how they approach banking in business. Just there were multiple components of that, that just really rang true and joined them.

Adam: I'm so glad I did. I'm not sure if I got lucky, or if I was all that insightful or what, but it's been a great run.

Dave: Oh, that is great. I guess as the kind of circle of life goes, I think in the last few years, haven't you been involved in that program, more in the mentor or instructor level?

Adam: Very much, more so it's something that the bank believes strongly in, is engaging a lot of the young bankers in the recruiting effort. That can mean anything from on-campus interviews, to showing interns and potential candidates around the bank, when they've come their interview days.

Adam: All the way to decision committees on, and working with our HR partners, in getting offers out and with our college recruiting team, getting offers out to the various candidates. Yeah, I've had a little bit more of a leadership role, over the last couple of years.

Adam: That's been a lot of fun, really rewarding. I make this comment every year. I look at the candidates that we hire, and just how sharp they are. How well-prepared they are to enter the job market, in so many ways.

Adam: Kind of joke with some of my colleagues, and say, "Man, I'm glad I'm not competing against them as a fellow potential banker, because I don't know that I'd get hired today."

Dave: Well, it's good you got it in when you did.

Adam: Absolutely.

Dave: Your title is Senior Vice President, but what does that translate to? What's your current role at the bank? What do you do? Do you manage a team? Tell me about that.

Adam: I do, and so I love the term player coach, that it applies in so many ways. I think kind of old school baseball, there were people that were player coaches up until the '40s and '50s, and 1940s and '50s in baseball. Not so much anymore in baseball, but in the job force, very much a player coach.

Adam: I think being able to be a player coach, really helps keep your perspective grounded in some of the day-to-day challenges, some of the real work going on at a level, either one or two levels kind of junior to you. That's a good tool to use, in how you manage your team.

Adam: I get the privilege of working with a team of about eight here, outside of the Officer Training Program. These are real life bankers and support staff. We have an experience level really across the board. We've got two-year bankers on my team, and we've got 35 and 40-year bankers on my team.

Adam: Some really talented people. The fun part about the team is, there's such a diverse skillset and diverse experience background among that range, that really brings a lot of unique perspective, to how we tackle problems for customers on a daily basis.

Dave: Yeah, I know. I've seen that firsthand. I mean, in the interest of full disclosure, I've been a customer of the banks for several decades. I am certainly familiar with that teamwork approach, to customer service. What-?

Adam: We appreciate your business?

Dave: Well, you're welcome. What do you most like about being a banker?

Adam: I think every day, I'm amazed by the entrepreneurial minds in our state, in our city, in our country. How so many people come up with unique ways to solve problems, and start a business to do just that.

Adam: I guess that description maybe sounds a little technology, and intellectual-property focused and it's really not. It could be as simple as a dirt contractor, and somebody who pushes dirt around with heavy equipment for a living.

Adam: All the way to some really, really intricate manufacturing processes and everything in between. It's so cool to be able to work with company owners, and privately-held companies, to help them grow, to help them impact more families.

Adam: To help them achieve the kind lifestyle, and the goals that they have set out for in their lives. That's just super rewarding.

Dave: Yeah, I know the feeling, and I've seen that firsthand with the clients of ours that I've introduced you to, that enthusiasm you have of working with those entrepreneurs. Hey, while I think of it, because our listeners are not all in the Houston area.

Dave: Amegy Bank of Texas is a bank that's based... the headquarters are in Houston, Texas. It's part of a larger banking organization, Zions Bancorp. Is that correct, Adam?

Adam: That's right, Zion Bancorporation, out of Salt Lake City, Utah. Amegy is one of about seven affiliate banks. We all fall under Zions, but we have a decentralized model in so many ways, and so have different flags under the kind of the western states, Texas and Amegy are the farther east.

Adam: Kind of Texas and East is really the footprint all the way through New Mexico, Colorado, Arizona, Utah, Nevada, California, a little bit in Idaho and Washington, Oregon. The bulk of the head count, and kind of the lending assets are in California, Texas and Salt Lake City, Utah.

Dave: Okay, and you're based in Houston?

Adam: Yes. Yeah, that's correct.

Dave: Yeah, I just realized we missed there, so well, since this is the IC-DISC show, I guess we need to talk some IC-DISC. We've got about 30 minutes left, so I'll turn it over to you. Can you take 30 minutes to share all the knowledge you have of IC-DISC?

Adam: Well, I'll-

Dave: I'm just kidding.

Adam: Two minutes sounds better.

Dave: Okay, so given that you're not a CPA, how do you describe the IC-DISC like to your customers and potential customers as a banker? Which is more of a higher level overview, but how do you typically describe it to folks?

Adam: I'll start off first in a little different way, before I get to the description. I'll start off with a question. I think it's important as a banker to understand, the revenue mix of particular clients. Kind of where revenue comes from, where their customer comes from.

Adam: If they're making a product or performing a service, where the product is going or where the service is coming from. If at any point along that line of discovery, we uncover a good or service that has an international component to it.

Adam: Whether they're selling directly to the international market, or international companies or not, we immediately know to consider the IC-DISC as a potential tool for them to use, to gain some tax advantages. That they might otherwise not be able to.

Adam: I think the description of an IC-DISC is simple. Whenever we do identify an opportunity, or are asking that question, we refer to the DISC by name. Then if they asked for more, we say, "Well, look, it's an export tax incentive program, that has really been around a long time through the IRS tax code."

Adam: Many PPA firms specialty, tax advising firms use that product in their various forms or functions. It's a product that's not meant for every situation. If it does fit your particular situation, it's really a great benefit from a tax strategy standpoint. In taking advantage of a longstanding tax program.

Dave: Okay, well, that's a nice, succinct way to describe it. What in your experience...? I mean, other than some export revenue threshold, what types of companies have you seen that it works best for?

Dave: Is there a particular ownership structure you see, or kind of a mindset of the owner or who does it seem like it works best for?

Adam: Well, I'd say, certainly privately-held companies. Maybe that's not exclusive, but I think predominantly what we see is privately-held companies. A lot of times that's single owner. I think I can think of a couple of situations off-hand, where it's not single owner, but predominantly single owner.

Adam: Generally, it's an owner that has a creative mindset, for lack of a better term. They can see the value in executing a unique strategy, and really want to go and pursue something that is new, and that they may have not heard about from their CPA and their trusted advisor.

Adam: Who may be with a firm that may or it may not, provide the service. I think that type of situation... other than that, I mean, I think there is a pretty wide net of companies, and kind of different personalities and type of individuals, that we've seen be open and willing to use the DISC.

Dave: Okay, but it certainly helps if the owner has a creative mindset, or an outside-the-box mindset to even be willing to entertain a novel idea. Is that right?

Adam: Absolutely, and that's kind of back to the entrepreneurial mindset. I think those two go hand-in-hand.

Dave: Now, that makes sense. That's been my experience as well. How do you strategically incorporate the DISC into your service offerings? I guess before you answer that, I know that the bank strategy, is to try to add value to their customers, whether it's a product they offer or not. Is that accurate?

Adam: That's right. I will say-

Dave: There is a lot of recommendations or introductions, you all will make, right or?

Adam: That's accurate. We're in business to be able to help our customers solve problems, kind of no matter what that problem is. We're not doing our job as bankers, if we don't understand ancillary product offerings, from a variety of sources out there.

Adam: Whether that be tax advice or MNA advice or insurance advice, Excel and the list goes on. That's part of the job of a banker, is to understand where they can help a client, who might be experiencing a problem.

Dave: Okay, that's perfect. I'm guessing that creative mindset you talked about, is not really just for the DISC, but really for any other ways you can help them, right? You can't help somebody who doesn't want your help.

Adam: That's right. Or I guess maybe a different way to say it is, you can't uncover opportunities to help, unless you ask the right questions.

Dave: Oh, okay. Yeah, excellent point. Excellent, okay.

Adam: I think back to your original question around just, how we incorporate the IC-DISC into our service offerings, it's really easy. It's about asking that question. Back to the original exploration, we're meeting with a potential client of the bank, or an actual client of the bank.

Adam: We really try to understand their business in a variety of aspects. That includes their sources of revenue, and their customer base. If it feels like an opportunity for IC-DISC, I'm not an IC-DISC expert by any means. My two-minute explanation, didn't go very far.

Adam: It's really about getting the right person, the right team and the right group of people involved, to consider whether or not the disc makes sense, for that individual company. I think as far as how we use it to differentiate ourselves, I mean, we structure an offering.

Adam: Whenever we come in and we're talking about a loan or deposit, or some other product or service that the banks can offer, we will look for other ways to make a relational difference with that company.

Adam: If that means introducing them to someone who's outside the bank, or the bank didn't make any money off of a particular introduction, well, that's okay. It's good for the client.

Adam: Hopefully, they kind of see how we do business, and that we have interests that align with them being more successful. That incentivizes them to come and consider us as a banking partner in the longterm.

Adam: In fact, I can think of of one situation earlier in my career, where we were looking at moving a particular company, over from another lending institution. The lending institution was one of the mega banks, and their loan pricing was just incredibly cheap. They weren't charging any fees.

Adam: We were having a hard time, creating an economic incentive for the company to move. They said, "Well, hey, we like you guys, but you're not showing us any value, outside of kind of a relationship-based approach. While there is value there, we need to have a good reason economically too."

Adam: We said, "Well, okay, let us take a creative approach." As we dove into the data, and we understood their... it appeared to be a nice IC-DISC opportunity. Thanks to you and your firm Dave, for answering some silly questions-

Dave: Yeah.

Adam: ... we ended up introducing them to you guys, and y'all made us look like heroes and export tax advisors. You really made us look good. They in many ways, gave us credit for first some tax savings that you helped them achieve. Thanks for that.

Dave: Well, hey, that's okay. Did they end up becoming a customer then?

Adam: They did. They've become a customer, and they've been a good long-term loyal customer for about eight or nine years now. I think the money that, that client has paid to us and interest expense, and bank fees and other things over the past eight or nine years. It's been offset 10 fold by the savings that they've achieved, through the IC-DISC. They really look at us fondly.

Dave: That is awesome. Does that mean they don't beat you up, on 20 basis points every chance they get?

Adam: That's right. They have a little more tolerance, for our desire and need to make money as a bank. They'll fight us over 20 basis points.

Dave: Awesome, that is awesome. You had mentioned earlier, that there was a number of ways that you seek to help your clients. Aside from non-banking things such as tax incentives in general, via IC-DISC or some other incentive, insurance, other things.

Dave: I'm just curious, what do you look for in a firm in general, that if you are looking to refer some non-banking services to...? What matters to you or what do you look for? Is it, how fancy their offices are?

Dave: How many years they've been doing it? How pleasant they are to work with, how responsive they are? What do you use as your criteria, to kind of choose those partners?

Adam: Well, certainly all of the aspects that you mentioned are important, and I think can factor into the equation. I think one word and one idea really rises above the rest, and that's trust.

Dave: Okay.

Adam: I'd say especially in the situation that I just described, I was a young banker at the time, and fairly inexperienced. I had developed a high degree of trust, in a potential business partner.

Adam: Being able to, with confidence introduce someone who is outside of the bank, a third-party service provider and say, "Hey, I think these guys or this group of people, or this lady is going to be good to know, and can help you with your business." With confidence, makes all the difference in the world.

Adam: I don't know at what point relationships reach that. It's more of a feel, than kind of a checklist that you hit, or a potential or a particular inflection point.

Adam: Whenever that feeling of trust is reached, I think that's what makes that third-party non-banking kind of service provider, really elevate themselves to someone I want to introduce to clients, friends, and prospective clients, et cetera.

Adam: I think some of the other items that you mentioned as well, are they good to work with? Well, yes, that's hugely important. That speaks to the level of confidence, and their ability to execute. Which if they can execute for me, well, then I feel confident they can execute for my client.

Adam: Then the amount of experience they have, I think that goes without saying. That somebody has seen almost everything out there, really can add value at a level where someone who has three to five years of experience, just never will be able to.

Dave: Now, that makes sense, because I guess at the end of the day, when you make an introduction to somebody, you're putting your reputation on the line every time, aren't you?

Adam: That's right. I think there's two ways to learn that lesson. There is the hard way-

Dave: Yeah.

Adam: ... especially when you're young and inexperienced. Although I guess you can learn that same lesson, when you have 30 years of experience too, but you certainly are putting your reputation on the line. You have to be careful with that, and thoughtful with it.

Dave: Yeah, I know that from our businesses, and introductions we make as well. We have a similar philosophy as the bank, in that we just do one thing, the IC-DISC. There's lots of ways that our clients can benefit, from people we know.

Dave: Yeah, I know that feeling of putting your own reputation on the line. What I'd like to... now, let's change gears a little bit, and get a little bit into the banking nitty gritty of IC-DISC.

Dave: The reason I ask this is that, so many times when we have a new client that comes on board, probably only 5% of the time the client comes to us from a banker referral. It's mostly an existing client, and then followed by probably their CPA firms, kind of the next biggest source of new clients.

Dave: An interesting thing happens, so for the 95% of the time that the bankers didn't introduce us, at some point in the first few months, we invariably get a call from the banker who has little to no IC-DISC experience, and we need to help them out.

Dave: I don't say that with any negativity or criticism, because it's just a very niche part of the tax code. I always tell the bankers. They feel kind of bad, because they feel like they should know about this. I try to convey to them that they shouldn't, and most bankers don't.

Dave: Since you've had some experience, for a number of years with IC-DISC and with your clients. I'd kind of like to talk about like loan structure, deal structure, for the different types of IC-DISC.

Dave: Honestly I'm asking this, because I myself don't really fully understand it. These bankers will call, they'll ask me some questions. I think I know the direction they're going, but I never really know kind of for sure, how they're looking at the IC-DISC. That's what I'd kind of like to talk about.

Dave: Let's just start with like a flow through a corporation, an S Corp or LLC, or partnership that has an IC-DISC. That typically, that the operating company owns the IC-DISC. What will you all do for loan structure, loan covenants to kind of factor in the fact that they have an IC-DISC?

Dave: Then I'm going to contrast that with a C Corporation, where the individual shareholders own the DISC. Maybe kind of contrast, if you handle those the same, or if you handle them differently.

Adam: All right. Dave, there is no question that the mechanics, and some of the different structural considerations for an IC-DISC, can impact how loan structuring can work within the context of the DISC. Happy to try to kind of walk through that, and how we've looked at it in the past.

Dave: Yeah.

Adam: I actually think it's easier to start with that flow through corporation, where the shareholders own the DISC. The problems are... I think they're more clear, and the solutions are a little more clear.

Dave: Okay.

Adam: First, just a couple of comments. I think it took us a period of time, to get comfortable with the mechanics, and how to craft covenants and flow of funds. Then also, how to really set expectations, and communicate with the owner of the company.

Adam: Around kind of a structure that we could both the bank and the owner, could be good with. Then still met kind of IC-DISC requirements.

Dave: Okay.

Adam: Just probably the bigger piece was understanding and communication, to your point. Bankers aren't IC-DISC, or tax experts in any way. Those two components have their challenges. Back to kind of the DISC structure.

Adam: I think the two main components that get impacted in a bankers' view, on a DISC are things that are really important to us, because we care. Generally, we're loaning money to that company. Otherwise, you don't have the banker involved.

Dave: Sure.

Adam: If you're lending money to the company, you likely care about cashflow and things that impact cash flow, and capital structure, and things that impact capital structure.

Dave: Okay.

Adam: To address both of those points, cashflow, when the DISC is active and there are DISC commissions being paid out to that the DISC entity, there is a reduction in perceived cashflow by all standard definitions.

Adam: One thought is to amend the definition of cashflow, to capture commissions being paid to the DISC. You can do it very simply in naming those DISC commissions.

Adam: Or you can do it in a slightly more complicated way, where the shareholder is contributing back the excess DISC commissions, over their individual tax liability to the company, and capture the delta there.

Adam: Then a fairly similar concept around that contribution, back to the operating company from the shareholder, that's frequently done in the form of sub-debt. The bank would need to contemplate subordination of that debt, or subordination of those funds that are coming back into the company, from the shareholder.

Adam: What form they're going to take, if there're truly will be of a debt form with a note formalized, or if it's really more of equity. The donor's willingness to subordinate that, if it is in fact that, is a component of that too. Part of that's the discussion, and the communication piece that I referenced earlier.

Dave: Okay, that makes sense. I was familiar with some of that. Like amending the definition of cashflow, I hadn't heard of that approach, but it makes perfect sense. It's like you're trying to normalize the cashflow.

Dave: Kind of like when a company is looking to sell, they'll kind of normalize the cashflow by adding back, like owner perks and such that... like a large corporate buyer, wouldn't be paying. It seems like that's kind of a similar approach, to sort of normalize the cashflow. Did I understand that correctly?

Adam: Absolutely, that's 100% right. It's really an expense that's controllable, to the point where it could really be turned off if needed to, at some point to provide that additional cashflow.

Adam: In our view, the overall picture of cashflow isn't really changing, but the presentation of it might be. That's how we look at it.

Dave: Yeah, that makes sense. Then I'm guessing then that the other situation we see frequently, that would have to be easier as what you have, a flow-through corporation. Like an S Corp, where the flow-through corporation itself owns the DISC.

Dave: That the DISC is effectively just a wholly-owned sub, of the operating company. That the commission gets paid at the DISC. Then the DISC returns the money immediately to the company, as dividend income. I'm guessing that's easier to get a comfortable with. I mean, is that a fair assumption?

Adam: It is, with the assumption that you've got accounting presentation, that's accurate and a large enough. Hopefully, sophisticated enough accounting firm, to document and explain that, in the notes to the financial statements every year.

Dave: Okay.

Adam: I think that's where there is frequently confusion, is a company prepared financial statements. May present the information accurately, but when there's not those added notes, there bankers are going to ask questions. We would do the same thing in many of those positions, to make sure we understand.

Dave: Okay, that makes sense. You need to make sure that the financials, appropriately reflect that structure and the timing, and the receipt of the dividend income by the operating company.

Adam: Yeah, that's accurate. I think we see.... and Dave, any clients that you've ever had experience with in the world of IC-DISC, I think we've seen companies that are really nice size, larger, middle market, privately-held companies. 2, 3, $400 million a year in revenue.

Adam: Sophisticated internal accounting, and financial reporting capabilities. Have a good well-known or well-respected CPA firms, doing audited financial statements every year. Follow gap guidelines.

Adam: Then kind of on the smaller end of that, you have kind of really small businesses, down in the $10 to $15 million a year revenue space, that maybe feel a little more mom-and-pop. They're frequently great companies and really well run, and doing high-margin work.

Adam: They have maybe a little less controls, a little less documentation. Really at that size, they're likely with a smaller CPA firm and not required to produce audited financial statements, which is fine. We see that too. Just the information is less available and apparent, in those situations.

Dave: That makes sense. I don't know if I've ever shared this with you, but probably three quarters of our IC-DISC clients don't borrow money. It's one of the reasons that oftentimes that the... well, sort of does two things.

Dave: One is, if they're not borrowing money, I'm probably not thinking about an introduction to another banker. Without borrowing money, they're just not as seen as compelling of a customer. The other thing that does is, it seems like many of our clients are the largest client of their CPA firm.

Dave: We have clients that have $100 million a year of revenue, 5, 6, 7, $8 million of taxable income. Their CPA firm is a tax guy, working out of the spare bedroom of his house.

Dave: It's because they don't borrow money, there is not a bank requiring audited or reviewed financial statements. All they use the CPA for, is just preparing the corporate and individual tax returns.

Adam: Well, I'd say we see lots of customers, that fit that profile. Dave, I know you pay more attention to a IC-DISC and IRS tax code changes. In the banking world, deposits are sexy again these days, so-

Dave: Oh, are they? Okay, that's good to know.

Adam: Some-

Dave: Now that interest rates are above zero, deposits are more attractive?

Adam: That's right. There is a reason they are above zero. It's supply and demand. You've got many banks out there, who are seeking to grow their deposit base and fund their loan growth, with the cheapest cost capital available.

Adam: That's generally demand deposits, from operating accounts for many of these companies. If you notice any of your customers, is not generating some level of return on their cash balances, they should be talking to their bank or a new bank.

Dave: Thank you for that, that is really good to know. I guess I've kind of just gotten lulled into a sense of complacency, that banks don't care about deposits.

Dave: Of course, I don't think any bank ever said, "We don't care about deposits." There was a sense that I would receive from banks, not just Amegy but that others four, five, six years ago, that deposits weren't as sexy as loaning money.

Adam: Well, you read the dailies 100% correctly on that. That like, rates were so low for so long, that most bankers didn't want to talk about deposit rates, because there was nothing to talk about, so the winds shifted.

Dave: Okay. Well, that is good to know. Clients that have substantial deposit balances, they should actually be making some money on that, is what I think I hear you saying.

Adam: They should. I'm not a rate expert, and nor am I licensed to really talk about specific rates. I know, kind of the last check I saw as of this morning, many of your overnight rates were anywhere between kind of 1 and 2, to slightly above 2%.

Adam: Just depending on what those balances were in. Of course, I'm referring to kind of larger dollar clients-

Dave: Sure.

Adam: ... that have the excess cash, to just sweep into accounts to earn interest.

Dave: Okay. Well, that is very good to know. I'm just making a note of that, so deposits are sexy. That's a good thing to know.

Adam: That's a great title.

Dave: Yeah, deposits are sexy. I guess as we're kind of nearing the end here, I want to just talk... we kind of touched on it a little bit. As far as the type of clients, that you and the bank are best able to serve, I'd like to talk just a bit more about what the characteristics are, of the client you can most help.

Dave: The example you gave earlier, you were talking about that your customer was with one of the mega banks, they had great rates. You couldn't really match the rates, and some of the fees and stuff that they were waving or reducing. That it made it really difficult for you to compete, kind of on just pure price.

Dave: Is that still kind of the case, that competing on prices is...? Because I guess there is always somebody willing to do something cheaper, right? With that in mind, what are the characteristics you look for, where you really can help a company?

Adam: Well, you're right. It is hard to compete solely on price at times. It's generally not a great position to be in because... that's the point you illustrated. Depending on the time, there is always somebody willing to be cheaper.

Adam: I think where we do get really aggressive on price, and actually in that part of situation, we matched price. We weren't going to let it be a race to the bottom. We wanted to show that we could provide some value in other ways. That was a more meaningful discussion with the client. That's kind of where we-

Dave: Okay.

Adam: ... we focused our efforts. I'd say in looking at the existing clients, and potential clients of the Amegy, we largely focus our efforts on privately-held, which means in many cases family-owned businesses. The core of the bank was really built on businesses, $10 million to $500 million in revenue. That’s a pretty wide swath.

Adam: Depending on who you talk to, that's defined as middle-market companies or lower-middle market companies, if you're talking to a big bank. We really like that sweet spot. That's how the bank was really built.

Adam: Then over the years, we added on ancillary service offerings, to take care of the needs that companies and company owners, ran across in that space. One, we've got to be able to serve bigger than that. We have a syndicated loans desk, where we can lead syndications, some very large syndication.

Adam: Many of those are for family-owned, privately-held companies that have grown substantially past that revenue bandwidth. Then we also have a great and growing small business portfolio companies, that are less than $10 million in revenue.

Adam: I think just from our differentiation, from our competition in the market, Amegy has really, really tried to maintain consistency of approach with our clients over the years, and not take a flavor of the month kind of attitude. We want to be competitive, and we want to earn potential clients' business.

Adam: We want to make our existing clients happy, through our service level. There's industry and other challenges to that personnel. It's never fun when somebody leaves, but that does happen at times.

Adam: I think we have a really unique approach, from the executive team all the way down to the baby bankers, I'll call them, on how we try to take care of clients. It's not perfect, we're not perfect.

Adam: We work really hard to communicate well, to really take a lot of effort in thoughtful approaches, in how we bring value to our clients. In many cases, sometimes it's just staying out of the way. We like to think we-

Dave: Okay.

Adam: ... trace companies and company owners, that are top of their niche or top of their industry. We're just there to help. Sometimes we can offer advice that's really valuable.

Adam: Sometimes it's them picking up the phone and saying, "Hey, here is what I need you to do, can you make this happen?" It's a lot of fun to be able to say, "Yes," in those situations.

Dave: Okay. Well, that really... I think gives some insight into the types of companies, that you play best with or work best with. Well, I guess as we wrap up here, is there anything I didn't ask you, that you think needs to be mentioned?

Adam: Well, certainly not about the IC-DISC. I think the depth of my knowledge around IC-DISC was tested any further, I'd be exposed.

Dave: Okay, fair enough. I only have one more question for you, and I think this one will be pretty easy for you. What's your contact info, email address and phone number?

Adam: Sure, happy to share that. That is easy. Thanks for finishing that way. Again, my name is Adam Traweek. My direct office line is 2812387148. My email address is, adam.traweek, T-R-A-W-E-E-K, @amegybank.com. For anybody outside of Texas, that doesn't know how to spell Amegy, it's, A-M-E-G-Y.

Dave: Excellent. Yeah, it's kind of one of those made up names. I remember when you all rebranded.

Adam: We-

Dave: Yeah, I remember one of your colleagues, I was asking about the name. I remember he said, “I know it sounds kind of peculiar, but over time it'll sound very normal," and he was right.

Adam: It really is.

Dave: There was one more question I was going to ask you, your contact info. Oh, are you generally amenable? Say some CFO or business owner of a company in the Houston area or even in Texas, would like to just call you.

Dave: Just pick your brain on something, are you generally amenable to those calls? Or do you have a strict screening process, that they have to jump through, 10 steps to talk to you on the phone?

Adam: No, I'm generally amenable. I try to do a good job of being in my office, and returning phone calls within 24 hours if I'm not. I love to talk to people, and love to meet new owners, CFOs, people who are curious about ways to add value to their company.

Adam: If I can be some small part of that, that's a lot of fun for me. Happy to take any and all comers.

Dave: Well, that is great. Well, Adam, I appreciate you spending some time to talk to me on the IC-DISC show. I hope you have a great-

Adam: Dave, it was really great-

Dave: Oh. Go ahead.

Adam: This was a lot of fun.

Dave: Well, good. Well, it was fun for me as well. It was fun for me as well. Well, you have a great day then, and I'll talk to you soon.

Adam: Thank you Dave, you too. Take care.

David Spray:  Hi Neal.

Neal Block:  Hi David.

David Spray:  So how are you today?

Neal Block:  Doing fine.

David Spray:  Thank you for taking time to be on the IC-DISC show. Well, let's just get right to it. I'd like to start out by just reading your bio, and then we can... if there's anything that I left out from the bio that you think is relevant to add, please add.

David Spray:  Neal Block received his BS with high honors from the University of Illinois in 1964, and passed the CPA exam in the same year, receiving an Illinois silver medal, and the Elijah Watt Sells honorable mention. He received his JD from the University of Chicago in 1967. He was admitted to practice law in the District of Columbia and Illinois in 1967. Upon graduation from law school he served as an attorney advisor on the U.S. tax court from 1967 to 1969. And I believe you joined Baker & McKenzie in 1969 then, is that correct?

Neal Block:  That's correct.

David Spray:  Mr. Block was also an adjunct professor of taxation in the Master's of tax law program at the Chicago-Kent School of Law from 1986 to 1990, where he taught a foreign taxation course. Neal is a frequent contributor of articles on the extraterritorial income exclusion, foreign sales corporations, and domestic international sales corporations, and he has had numerous publications. He's also published a book for Commerce Clearing House on extraterritorial income exclusion, and foreign sales corporations, and domestic sales corporations. So, is there anything else that we need to add, that you think is important about your background?

Neal Block:  Well, I just published the B & M portfolio.

David Spray:  Oh, that's right. So can you just talk a bit about that, before we get started?

Neal Block:  Yeah, I think I was chosen by default. There was an export incentives portfolio, primarily devoted to foreign sales corporations for a while, for quite a while, and I was asked a number of years ago if I would update it. And as it turned out, the update for DISC reg and foreign sales corporations, and there's almost very little on that. So I got together all of my outlines from the speeches I gave and articles I wrote, and came out with the most recent version of the export incentives, just earlier this year. So it's hot off the press, 603, I believe it is.

David Spray:  Okay, well thank you for the reminder of that. Anything else about your bio that we should mention, or can we go ahead and get started with some of the questions I have?

Neal Block:  I'm sure that the questions are more important than my bio.

David Spray:  Okay. So, I'd like to start off with... just to kind of set the stage, I believe that a law professor of yours encouraged you to specialize. Can you just share that story of who that was, and what his thoughts were on that?

Neal Block:  Well, I wouldn't consider him encouraging me, it was a general comment that he made to the class.

David Spray:  Okay.

Neal Block:  Incorporations, and something. I don't know if he was looking at me, but he said something to the fact that you didn't have to be the sharpest tack in the shed in order to be successful. If you could specialize in an area that nobody else knew about and looking around, I had all these lawfully famous people. I had John Ashcroft in my class the Attorney General. I had a guy that became... had his own chair in California at Berkeley. I figured maybe I ought to start specializing, so when I got off of tax court, the DISC was just being introduced as a new tax regime, and I figured I might as well become a specialist in that area, and so that's how it started. I commented on proposed regulations, and tried to learn as much as I could about the area. And I'd say for a long time, no more than 5 or 10 percent of my practice was in the DISC area, but I sort of stuck with it until I got a name for myself. And eventually I had it as a major focus in my practice.

David Spray:  Okay. And so from then, so basically from the time that you joined Baker & McKenzie in '69, was the DISC legislation then already... were they already starting to talk about it? Because I don't think it was actually enacted until 1971. Is that correct?

Neal Block:  That's correct, but it was being introduced, and it was being talked about, and there was a predecessor called the western hemisphere trade corporation, which I wasn't aware of at the time, which was somewhat like the DISC. It provided an export incentive, and a bit of a different manner, more of an arm's length transaction nature, but it was within the code itself.

David Spray:  Okay. And so you mentioned that you had the chance to have some input, or commentary on the proposed regs. What were your initial thoughts on the DISC when you first started to read about it?

Neal Block:  Well, since I was pretty naïve, I had no idea of the fact that it was something I wanted to get interested in, and try to know as much about it as I could. I wasn't politically motivated as to whether or not it made any sense. I wasn't sure it did, because of the fact that I wasn't sure how much people were exporting, or how much more they would export because of the DISC provisions. And interestingly enough, I never really tried to devout the fact that my clients were adopting DISCS, so that they could have the incentives dashboard, because I didn't really know if they did or did not.

David Spray:  Sure.

Neal Block:  And as it turns out, even today when we just have these similar cases... I know we're jumping ahead, but with the DISC owned by ROTH IRA, we did not try to imply that the clients were incentivized to export because of the DISC provisions, because we just couldn't prove it.

David Spray:  Sure. Okay, well that makes sense. And when this came online in 1971, could you have imagined that it would still be in existence 48 years later?

Neal Block:  Well, of course the answer is no. As a matter of fact, it's interesting, because at the time there were a number of us younger associates who were told to try to learn about areas that were becoming popular in the code, so we could be up-to-date. And various cash persons came in and left, and the DISC was always on its way out, but never quite made it out. Just to let you know, the DISC was introduced by the Ford administration, as a Republican export benefit for the benefit of large and small businesses. A few years later, the Republicans decided to get rid of DISC, but the Democrats decided it was a good small business incentive, and so they decided they wanted to keep it in. And so every so often, the DISC provisions are looked and designed to be legislative out, and come right back in again. And most recently the tax reform act of 2016, the DISC was out, and in the senate report they were going to get rid of DISC, but some senators refused to vote for the bill, and DISC came back in again. It's still there.

David Spray:  Yeah, and I think you had mentioned to me before, that one of the reasons that it seems like there's not a lot of people that have really specialized in the DISC to the extent you have, is because of this whole idea that quote, it's going away. And like you just mentioned, it's been quote going away for 48 years now, hasn't it?

Neal Block:  I would say about every five years or something, it's been proposed to get rid of it, or change it dramatically. In fact, in 19... the big shift came in 1984, when the DISC was held to be in violation of the general agreement of the tariffs and trade, and that's when the foreign sales corporation provisions were adopted in order to meet the DISC objections. The DISC was kept in as an interest charge DISC designed to help the smaller exporters who didn't want to go offshore. So in 1984 there was a substantial shift in the DISC provisions, but they stayed in the code, whereas the foreign sales corporation came in, and then ultimately in 2000, was phased out again.

David Spray:  Okay. Yeah, so one of the reasons I was really excited to have you on the show, is because you really had a ringside seat from the very beginning of DISC. And what I'd kind of like to do, is really just kind of go through and in chronological order, through the history of the DISC. And you had mentioned 1984 was a major year, because of the issues with the foreign sales corporation. Was there anything before '84 that comes to mind, any relevant things? Or was the DISC pretty quite from '71 to '84?

Neal Block:  Well, actually from '71 on, there was a lot of litigation. Of course there were proposed regulations, final regulations. There were amendments to the regulations, and there was litigation. Interestingly enough, while the most recent cases were substance or reform cases, the service has always been trying to put more substance into the DISC. And for the most part, the regulations that the service came out with were held invalid by the tax court. Just about all the cases involving DISC were tax court cases, except for the Caterpillar Tractor case, which we'll talk about in a little bit. But basically, the DISC was required to have its own bank account, and that was held to be invalid, or decided it would be invalid. There were a number of requirements for DISCS to meet, that the taxpayers challenged when they were found to be invalid, so if you look at the history of the DISC litigation, a good portion of it involved validity of regulations. Some regulations were upheld, they weren't all generally attacked, but certainly some of the ones requiring more than a bare boned structure were struck down.

David Spray:  Okay. And you're saying those happened over the course of several cases during those first 10 years or so?

Neal Block:  I would say through the '70s, there were quite a bit of DISC litigation.

David Spray:  Okay. And just to make sure I understand, so the service was trying to basically force more substance to the DISC, and that the litigation, that much of the time, the service got lost in that endeavor, but some of the times they were successful? Is that correct?

Neal Block:  That is correct. In fact, one of the cases I tried, the Swanson Tool case, which was one that was in the IRA case, we went for attorney seize on the basis that there was no reasonable basis for the service to take its position, and we were upheld on that basis. And one of the points made by the court, was the plain language rule had to be strictly filed in the DISC area, because of the fact that it was totally statutory.

David Spray:  Okay. That's interesting. You had mentioned the Caterpillar Tractor case. Was that also around 1984, about the same time as the DISC.

Neal Block:  No, it was in the early '70s.

David Spray:  Oh, it was that long ago? Okay, well why don't we jump into that. Why don't you tell us about that case, and kind of the significance of that.

Neal Block:  Okay, I almost forgot about it when we tried the other cases. But the Caterpillar Tractor case involved a regulation, which basically said that a WHTC, which was the forerunner of the DISC, could not generate qualified export receipts to a DISC, with respect to its transactions with the DISC, on the basis that the DISC was intended to be a replacement for the WHTC, and not work in tandem with the WHTC. And the court of claims, claims court in the court of claims, held that the regulation was invalid, that there was nothing in the legislation, in the WHTC or the DISC, that prevented either one from using the other. And therefore, even though there was basically an assignment of income, that's the phrase that the claims court used, there was nothing to prevent it, so that if you're looking for a history of invalid regulations in terms of transactions between two taxed identities, you'll find that in Caterpillar Tractor case.

David Spray:  And when did the western hemisphere trade corporation either cease to exist, or when did it fall out of favor?

Neal Block:  Probably '72, '73. It was not too much longer after Caterpillar, I think that the WHTC went out. And in fact, it might have gone out before the case was decided. I can't remember now.

David Spray:  Okay.

Neal Block:  I haven't had a question involving the western hemisphere trade corporation for many years.

David Spray:  Okay, yeah. Well, I always try to ask you novel questions as I'm able to. Okay, so we have the Caterpillar Tractor case. Were you involved in that case, or was that somebody else that was responsible for that?

Neal Block:  I had nothing to do with the case itself, but I had a large taxpayer who had used the WHTC, and we were able to file amended returns going back to all the open years that we would qualify for, so that we were able to get all the benefits of the WHTC for that company. But I did not have the pleasure or responsibility for shepherding that case through.

David Spray:  So, basically your client was able to benefit without having to pay any of the legal fees to get to that point? That sounds like a good outcome for your client.

Neal Block:  Well, I think we charged them.

David Spray:  Oh, understood. So, after the Caterpillar case, what's the next maybe case that comes to mind chronologically that had significance? Either a case, or change in rules?

Neal Block:  Well, I think what came about, was in the late '70s, or maybe... whenever the IRA provisions came into effect, I don't take responsibility for it. There was one of our employee benefits people got together with [inaudible 00:16:15], they had lunch, and they sort of drafted out on a piece of paper, having DISC owned by an IRA. And that was in the '70s, or early '80s, that the concept came through. And ultimately, the service started challenging that after awhile. But I would say in terms of by-practice, that was the next big thing. I think it's important to note, that initially the DISC was the child of the large exporters, that was where the big money was, because the DISC was designed to be a deferral vehicle, but unlimited deferral, and it was based on creating exports. And initially, it was unlimited deferral, and then they put in deemed distributions to cut back the benefit.

Neal Block:  But some of the biggest companies in the world, like Caterpillar tractor, and I know Pillsbury when the DISC got phased out, they were providing for income tax when the DISC provisions were forgiven in 1984. I think they organized about three or four dollar special income item per share, because they were forgiven all the tax. I think one of the other big things, was I think Caterpillar Tractor was responsible for the transaction by transaction rulings. Up to that point, almost everybody had grouped their transactions in category case. It wasn't a case, it was actually a revenue ruling that they got from the service, saying that they could do transaction by transaction, which in most cases, multiplied the DISC benefit exponentially.

David Spray:  Sure.

Neal Block:  Because of the fact that you could now pick the best pricing, the 4% versus 50/50, and do that on a transaction by transaction basis. Now, not every taxpayer got a billion dollar benefit, but it did have ripple down effects, so that most people could adopt it.

David Spray:  Sure.

Neal Block:  The big difference was the DISC, up until 1984... Well, we had started using it as a tax avoidance, permanent avoidance. Not to share hold their own DISC, but basically because of the big players, the publicly held companies, it was basically a deferral vehicle, and companies were using it for that. And by 1984, you had companies such as Caterpillar, and General Motors, and other... I think Microsoft. I think the biggest...

David Spray:  Boeing maybe.

Neal Block:  Yeah, they had maybe a billion dollars or more of deferred income in the DISC. So in 1984, when the DISC was held to be invalid under the gap provisions, the DISC replacement was widely promoted by all these companies, because under the DISC replacement, or the FISC, all the DISC deferred income got forgiven, so any accumulated DISC income in 1984, was to be distributed tax free, which is a big bonus, and as I mentioned before, Pillsbury recognized the huge dividend, or income shift, because they no longer had to provide for the tax.

David Spray:  Yeah, that's really amazing that you think about it, that there was a benefit or ruling that resulted in billions of dollars of benefits to mostly fortune 500 companies, right?

Neal Block:  Yeah, I remember going to a meeting where FISC was being discussed, and I forgot which one, one of these big companies said, "I don't really give a damn what's in the legislation, as long as we can get that money back tax free."

David Spray:  Sure, yeah he'll worry about that later, but let's capture that deferred income tax-free. Okay, so then... so that was early '80s. And then what was the next kind of significant case, was that the Blue Bird case by now, or was there something else that comes to mind?

Neal Block:  Well, I'd have to go back and search my memory as to what other significant DISC cases there were. I would have to go through the literature. My involvement was primarily through the IRA, and the offshore ownership of DISC, got to be more and more popular, although the offshore ownership of DISC, we had one case that we got back had been settled, but never really has percolated as anything the IRS has definitely attacked. So, the IRA cases have always been adverted to the idea of having a DISC owned by another tax infinity, similar to the Caterpillar Tractor case. So, I got involved with, basically the IRA structure, and that was challenged by the service constantly. And a Bluebird body case was in the late '80s, I guess it was. I'm trying to remember, '86, '87. And that was a case where we had a DISC owned by a qualified profit-sharing plan, and at that time, the DISC dividends could flaw the plan tax free, and what the service tried to do, is disallow the DISC commission on section 482 grounds, even though the court of regulations said now you applied 482 to DISC commissions. And then ultimately, they conceded that case in the tax court, but then legislation was introduced in section 995-G was implemented, which provided that DISC dividends were to be subject to UBT tax, or unrelated business tax, which had not existed before.

David Spray:  So, when that happened, did you think that was going to be kind of the resolution to the IRA-owned DISC, so that as long as the IRA's were willing to pay the UBT tax, that it'd be kind of smooth sailing?

Neal Block:  I did. And that lasted a couple of years, until the service decided that the DISC provisions, the 995G was now dispositive. I think it should be noted that the DISC, and the IRA structures were never intended to necessarily go together, they're just two pieces of legislation that happened to fit. But in executing the IRA structure, you had to make sure that you did not have prohibited transactions, or do things that you weren't allowed to do with qualified plans. And if you did them, you could disqualify the plan, and disqualify the DISC. So there's always the possibility of doing something wrong, and the next case that we had was the Swanson Tool case, and once the service took the position that while they couldn't make a 482 adjustment, they were going to treat the DISC transactions as prohibited transactions, therefore disqualify the IRA's on that basis.

David Spray:  Okay.

Neal Block:  The interesting thing about Swanson Tool, is similar to the Blue Bird body case, by the time the case came up to submit into the court, the service conceded the Blue Bird body case. The same thing happened in the Swanson Tool case, when it came time to submit the case for decision, the service conceded the case. But my client didn't want to pay any more fees unless we could recover attorney's fees, so I filed a motion for attorney's fees in that case, and we were fortunately able to meet the requirements for attorney's fees qualification. The Swanson Tool case came out, it was not a decision for the taxpayer, because we'd already won the case.

Neal Block:  It was whether or not the service had a reasonable basis for its decision, and therefore we were awarded attorney's fees on the basis that the service did not have a reasonable basis for its position, and that there was a prohibited transaction. So that's how we won attorney's fees on that case, and the case itself, of course, has been sided for the proposition that you can't have prohibited transactions on the payment of DISC commissions, or receipt of DISC dividends. But the truth be known, it's not a case where we won the case, because the service conceded.

David Spray:  So, is that, I can't imagine that it happens all the time, that you can get the service to pay attorney's fees. Is that somewhat unusual circumstance, or does it happen, or is it something that happens frequently?

Neal Block:  It happens more against the taxpayer than against the government.

David Spray:  Oh, really? Okay.

Neal Block:  So, a lot of the frivolous cases, the tax protestor cases, what have you, are ones where attorney's fees get awarded against the taxpayer, to get them against the government it's a little bit more unusual.

David Spray:  Yeah. And I'm just curious, when the taxpayer has to pay attorney's fees, how is that calculated? Because I would assume that most of those attorney's fees are just the in-house folks at the service.

Neal Block:  There's a rate that they use.

David Spray:  Okay.

Neal Block:  In fact, the rate that was applied, recovered attorney's fees were substantially lower rate than our normal billing rate.

David Spray:  Oh, I see, so it's like the same rate, regardless of which side wins? It's a formulaic calculation?

Neal Block:  Right. Of course, we were more interested in the attorney's fees for the taxpayer, than what the government could recover. But basically, it's like a frivolous penalty provision, more for the taxpayers.

David Spray:  Okay. And then so what comes to mind next? I think, was there a jet research for the commissioner case?

Neal Block:  Well, those cases came down, basically the jet research... and I forgot the other one.

David Spray:  Is that the Addison?

Neal Block:  Addison, yeah. They were basically two sides of the same client. One, the taxpayer was contending for, and the other was the government. The question arose in those cases, is whether or not what you did with the DISC after it was disqualified, and the taxpayer, and I believe it was Addison one that was disregarded by the entire commission reversed, was the government said why don't you pay the commission, and we didn't make any 482 allocations, you're stuck with it. And then the court upheld that. So, the answer was that you have to be careful. If you pay a DISC commission and you don't reverse it timely, you could end up having to pay tax, and the company having no intention of using it for tax purposes. The jet research case was just the opposite. It was one where the taxpayer didn't qualify, and the government was trying to take the entire DISC commission and put it back into the supplier, but it was a buy-sell DISC, and the court held that even though it was disqualified, it's still a corporation, and held to the 482 pricing. So I think the court left 10% of the income in the company.

Neal Block:  But basically, both cases said that you cannot apply substance over form to rewrite a qualified DISC, or a disqualified one.

David Spray:  And those two cases, and I don't believe you were involved in either of those, is that correct?

Neal Block:  That is correct.

David Spray:  Okay. So kind of staying in the sequence, because I think those cases were in the '90s, is that right? For Addison? The late '80s?

Neal Block:  Yes, they were. Of course we relied on them when the tax for the Roth IRA started. The Swanson Tool case was a traditional IRA, but the next case that came up was... what was interesting about Swanson, by the way, is there was a DISC and a FISC, and the FISC was also being used for IRA purposes. That sort of got lost in the shuffle. But initially, the IRA concept with the DISC, was with the foreign sales corporation, and with the DISC. But the foreign sales corporation was used more readily than the DISC was. So in the Swanson Tool case, there was a DISC and a FISC owned by an IRA, and that case involved, actually, a tangential issue of the 995-G UBIT Income being imposed by the DISC.

David Spray:  But not on the FISC?

Neal Block:  Well, UBIT was never imposed on the FISC. The FISC always paid its own tax. The way the FISC worked, was it was a regular foreign corporation, but 16/23 of its income was tax-exempt, and 8/23 was effectively connected income with the U.S. trade or business. So when you paid a commission to the FISC, you got a deduction for 16/23 of the commission, I guess it was, and 8/23 the customers got remitted tax free.

David Spray:  Okay, well that is interesting.

Neal Block:  I might have my numbers mixed up, it's been a while since I did the math. The point is that a portion of the corporation's tax was exempt from U.S. tax. But the FISC only benefited corporations, because the dividends received deduction that you got on FISC dividends only applied to U.S. corporations.

David Spray:  Okay. And C Corps at that, I guess, right?

Neal Block:  Yeah, at all times, the DISC was a C corporation, the FISC was a C corporation. Although the FISC had to be located in a qualifying jurisdiction outside of the United States, commonly in the Virgin Islands.

David Spray:  Okay. So then when we go to the next significant cases, that brings us to Helwig? Or were there any other cases that come to mind, that had some significance?

Neal Block:  I'd have to think. I really didn't do a survey of all the different cases that came down, but our next big case was the Helwig case, where the service decided that they'd already lost on 482, they lost on substance of reform. They'd lost on just about everything else they could think of, so they decided that they'd graft with the excise tax, and what they did is they said that even though the DISC commissions were deductible for income tax purposes, the excise tax was a different animal, and you could not apply safe harbor rules to excise taxes that you could apply to the income taxes. So in the Helwig case, they allowed the deductibility of the DISC commissions, but they held that there was an excise tax due for an excess contribution, because you could not apply the DISC provisions to the excise tax provisions.

David Spray:  Okay. And then so could we maybe just back up a little bit? Because I know this one has a lot of significance as it relates to SUMA, I believe. So on that Helwig case, you got involved, I guess when it was audited, or were you involved in the initial structuring of their DISC?

Neal Block:  Well, we had Helwig, and we had another case called Oshman, O-S-H-M-A-N. And Helwig was one, I believe, that we instituted ourselves. From the ground up, we organized the DISCS, and the Roth IRA's. Well, we didn't organize, but we worked with the custodians. The Oshman case was one that was referred to us, and the Oshman case was a foreign sales corporation case, owning a Roth IRA, and the same result was that they allowed the FISC commission, but they didn't allow the constructive contribution to the Roth IRA's, held up in excess contribution in both cases.

David Spray:  Okay. So could you just... I know we kind of went through that Helwig case kind of quickly. Could we just maybe take a step back? So what year, do you remember what year the legislation, or the litigation started on the Helwig case?

Neal Block:  Oh, let's see. I'm trying to remember. I think 2011 was when it was finally decided. I don't have it right... I can grab it. But I think that's when the case finally came out. Incidentally, just about all the cases that we've tried have been fully stipulated. I think all the DISC cases were fully stipulated. We did not have to have any testimony presented at trial, everything came in as a fully stipulated case.

David Spray:  Pardon my ignorance of that legal term. Could you just describe more what fully stipulated means?

Neal Block:  Sure. In every case, the parties are supposed to stipulate the facts that are not being litigated, or agreed facts.

David Spray:  Okay.

Neal Block:  So if you have a fully stipulated case, that means that both parties agree on the essential facts of the case, and the court can decide the case based on the stipulated facts, rather than having to find facts as a matter of evidence.

David Spray:  I see, tell me about that.

Neal Block:  Okay. Because it's the standard review of a fully stipulated case, means that the reviewing court reviews the case what the call de novo. In other words, the reviewing court is not bound by any of the decisions of the court below it.

David Spray:  Okay.

Neal Block:  For a case that has evidentiary facts, the reviewing court must accept those facts as found by the lower court, unless clearly erroneous.

David Spray:  Oh, that is really interesting. So, let me just make sure I understand this. When you have it fully stipulated, is that the term?

Neal Block:  Yes.

David Spray:  So when you have a fully stipulated case, when it goes up a level, it becomes a de novo case, in which the evidentiary items are not taken into account?

Neal Block:  Well, all evidentiary items are being stipulated. In other words, for example, just as an aside in the Suma case, we stipulated with the IRS with the taxpayer's basis, and the DISC stock. I mean, the Roth IRA is basically the DISC stock was of value. We stipulated with them. That then came up later on in a companion case, that we were not part of, we talked to the attorneys, called Mazzei, M-A-Z-Z-E-I, in which the tax court found that the shared FISC situation was improperly valued, and therefore, they considered the owner of the FISC stock to be the related supplier, rather than a Roth IRA. In our case, we'd already stipulated that the DISC stock was owned by the Roth IRA's, and we also stipulated what the basis was. And therefore, the Suma cases were distinguished from the Mazzei case on the basis that was not an item of issue, and this was decided by all three courts that came up on appeal, that they were not going to address whether or not the stock was properly valued, because it was not an issue in the case.

David Spray:  I see.

Neal Block:  And because it was stipulated, they could not go behind it.

David Spray:  Oh, that is very interesting. Well, I know I've been chomping at the bit. Is it time to get into the Suma case? To me this case is just so fascinating. If there's nothing else, let's get into the Suma case.

Neal Block:  Well first, I think we should point out that the Helwig case was decided in favor of the taxpayer.

David Spray:  Okay.

Neal Block:  And that the court held that basically as long as you got a deduction for income tax purposes on the DISC commissions, that the services prevent it from finding a contribution to the Roth IRA's.

David Spray:  Okay.

Neal Block:  So that's the holding of the Helwig case. Interestingly enough, it was the last case that Judge Nims decided. He retired from the tax court immediately after our case was entered, and the handwriting on the wall was that the case was issued as a memorandum opinion of the court, rather than what they call a published opinion of the court. The significance is not as great as it used to be, but basically a decision is issued as a tax court decision, in the tax court volume, it has greater precedent than if it's issued as a memorandum opinion. Memorandum opinions are considered to have less precedential value than published opinions, even though they can be decided as precedent. And when the Helwig case and the Oshman case had the same result, we were surprised that they didn't come out as published opinions, but as memorandum opinions. But I think the reason for that, was when the next case came out, which was the Suma case, the Helwig case was not as a binding precedent, as it would have been, had it come out as a tax court opinion.

David Spray:  I see.

Neal Block:  So we think now, that even after the Helwig decision came out, there were certain judges that made more of a fuss about it, than they did, because Nims was retiring, and that was his decision, and they probably just let it go. So ours is the next case up, which was called Suma Holdings Inc. And Suma Holdings Inc. then became the next case up where the service, unlike the Helwig case, the service for the first time argued that you could not pay a DISC commission, where the DISC was owned by an Roth IRA on substance of reform principles.

David Spray:  Okay.

Neal Block:  So what they did in the Helwig case, is they accepted the DISC commission as giving rise to DISC benefits. In the Suma case, they took the position that there never was a DISC commission, that the entire commission could be reallocated as the destructive dividends to the related supplier shareholder, and then a constructive contribution to the Roth IRA's.

David Spray:  Well, could you just kind of back up? Like you remember the year that the Suma started? I think it was '04 or '05 that they had their first years that they used it?

Neal Block:  Yeah, I think 2002 was the first year that the Roth IRA structure was put in place, and we were involved in the structuring of the company. People ask what's the difference between litigation and planning, and I said one's before the fact, and the other one is after the fact. You're always planning. So in this case, we have the structure set up, and we did things the right way. We set up the Roth IRA's, and the Roth IRA's then formed the DISC, and they dropped the DISC stock, and put the DISC stock of the Roth IRA's. We also had a holding company, so I think maybe it was the Roth IRA formed the holding company, and the holding company formed the DISC. It didn't really matter. The point was, everything was done internally, and by the way, you cannot transfer property into an IRA, you can only transfer cash. And if your IRA makes an investment, it's got to make cash. So you cannot transfer stock into a Roth IRA, because that would be an invalid transfer of assets.

David Spray:  Oh, okay. Well that's good to know. I was just trying to make sure I had the chronology. So they started using this in about '02, and then several years later the IRS audited them, or notified them that they didn't agree with their approach?

Neal Block:  Yeah, they were audited from time to time. Now, they were around when the Helwig case was decided, and so it wasn't their turn yet, so to speak.

David Spray:  Okay.

Neal Block:  And interestingly enough, the only years they picked were the open years, 2008, even though there were no excise tax returns filed, but they took the same position in Suma as they had in Helwig, except for the fact that unlike Helwig, they were now disallowing the DISC commission.

David Spray:  Okay. And so then your in initial argument then... or what was your response then to that when they were disallowing the commission?

Neal Block:  Well, our official response was don't do it. Our unofficial response was a little more emphatic.

David Spray:  Okay.

Neal Block:  We felt that by this time they lost every single argument they made, and they were still attacking the structure. And now they're attacking the DISC commission, which seemed to be fairly straightforward. I mean, the DISC commission is provided for by statute, and since there were no exceptions for the DISC commission being deductible, and the income of the DISC. And so their position was that there never was a DISC commission. And it took us a while to figure out why they were saying that, but their position was is that the Roth IRA limitation provisions were being abused, and then in substance, because the DISC didn't do anything, there was nothing more than the constructive dividend from the related supplier to the shareholders.

David Spray:  Okay.

Neal Block:  They never imposed the gift tax, but they took the position that whether or not there was a gift tax there was a constructive contribution by the beneficiaries of the Roth IRA, to the Roth IRA. I should point out in both Helwig and in Suma, what you really had was a disproportion of ownership involved. You had the father, who had owned the stock of pretty much all the stock of the supplier, and the children owning the DISC stock, which then went into the Roth IRA, so that the ownership of the DISC was not the same as the ownership of the related supplier.

David Spray:  And why did that bother the service? Because I mean, that's allowed for. There's no statutory prohibition, is there? That the ownership of the DISC have to be the same as the related supplier.

Neal Block:  Well, because their problem was not so much that. Years before, when you talk about use of the DISC as being a deferral device, it was always accepted, or pretty much from the very beginning, is if you had the stock owned by the shareholders of the C corporation, you could avoid corporate tax on the DISC commissions.

David Spray:  Okay.

Neal Block:  So you had a C corporation, and it's really closely held because it was publicly held. But if you had a C corporation owned by X, Y, and Z, and then X Y and Z owned stock of a DISC, and X Y and Z were individuals, the DISC dividends, the DISC commissions were deductible to the C corporations, and the DISC dividends became taxable solely to the shareholders, and you avoided corporate taxation.

David Spray:  Sure.

Neal Block:  And the service issued a number of private letter rulings, and pronouncements, TCM's, what have you, accepting this result, even though it was clear that this was being done solely to avoid income tax.

David Spray:  So, then what happens next with Suma then? Because I know that there were several appeals, so just kind of help me understand the sequence. The service was making their argument, you disagreed, and then what happened next?

Neal Block:  Well, we argued that the result under Roth IRA had to be the same as under traditional IRA. I don't want to get into more of the details, but the tax court accepted that rationale, and said that the Helwig case really didn't get into the nuts and bolts of the ownership of the DISC, and the ability to disallow the DISC commission, because everything was accepted by the service. And because of the Roth IRA limitations on contributions being two, three, or four, $5,000, the DISC commissions were a abuse of those limitations, and therefore were vowed to the congress' intent. And so therefore to be disallowed as commissions to the DISC, and rather, be treated as constructive dividends.

David Spray:  Okay.

Neal Block:  And so to make the long story shorter, or I can make it as long as you want it, the tax court sided with the IRS, and said yes you're correct, this is an abuse, and therefore should be disallowed and rather than having DISC commissions, we had a constructive dividends to the shareholders of the related supplier, and then excess contributions by the children of the owner of the company, as excess contributions to the Roth IRA's. And also set up the pre appeals.

David Spray:  Got you.

Neal Block:  It turned out that the related supplier, Suma corporation, is located in Cleveland Ohio, and filed his tax return there, and therefore became a fixed circuit taxpayer.

David Spray:  Okay.

Neal Block:  But the majority owner of the company, a guy named Jim Bennison, is a resident of New York, and therefore was in the second circuit. His children, James third, and Clement, lived in Massachusetts, and therefore, the excess contributions to the Roth IRA's were deemed to made by them, and taxable to them, and they were in the first circuit.

David Spray:  Okay.

Neal Block:  So we wanted to go to sixth circuit, but the IRS insisted that the case be appealed to all three circuits that had jurisdiction over the individuals, so we had to file the appeals in the first, second, and sixth circuits.

David Spray:  Okay, so that's why you had the three different court processes going on. So, which one was decided first?

Neal Block:  Well, the first was one we think we wanted to get aside first, was the sixth circuit case. Because the sixth circuit had decided the Addison International case, and which there was held that there could not be substance of reform to a DISC. We thought that would be the best place to go.

David Spray:  Okay.

Neal Block:  So we appealed the case to the sixth circuit first, and then to the first and second circuits.

David Spray:  What happened in the sixth circuit then?

Neal Block:  One, since we were in the sixth circuit, we had to have the other two circuits postponed until the sixth circuit handed down its decision.

David Spray:  Okay.

Neal Block:  And interestingly enough, the first circuit said that they would do so, but we had to stipulate that we would be bound by the sixth circuit's decision. And so we agreed to that. And then the first circuit, which initially didn't buy the argument. When the first circuit... I'm sorry, the second circuit realized the first circuit was going to postpone the case, they agreed to postpone on the same basis, that if we agreed to be bound by the sixth circuit's decision, they would postpone hearing the case. And if you want a war story, this is on the side.

Neal Block:  When I went before the second circuit, we had already won the cases in the first and sixth circuit, and the Chief Judge said to me, "Just don't put on your high hat. We know darn well that if you had lost the first two cases you'd be right here trying to get us to split up the circuits, just like the government is." And I said, "No, that's not true your honor." She said, "Why is that not true?" I said, "Because we stipulated we'd be bound by the sixth circuit. And if we had lost in the sixth circuit, we couldn't come before your court." So brownie points for us on that one, I guess. But anyway, so the sixth circuit did get briefed and argued before the first and second circuits.

David Spray:  Okay. And then the findings, or the rulings of the sixth circuit then, was what?

Neal Block:  The sixth circuit unanimously found that for the taxpayer, on us, for our side, that the statute was clear. There was no basis for departing from the statute. There was nothing to prevent a Roth IRA from owning stock of a DISC, and basically adopted the position we had in the tax courts, saying that there was nothing wrong with what we did, and therefore there was no constructive dividend to the shareholders, and no excess contributions to the Roth IRA's. And we thought that based on the sixth circuit's decision, we probably won the case in the other two circuits, because the sixth circuit addressed every issue that was before the other circuits. We were wrong.

David Spray:  Okay.

Neal Block:  We lost that, and the other two courts, we lost on that saying nice try, but we're going to decide both of your cases on the merits, just like the sixth circuit decided on the merits. Ultimately, we won both circuits, so it didn't matter. But when you look at the opinions of all three circuits, you'll see they were on the merits of the case, not on what they called res judicata, which is basically under the law you can't have the same case tried twice. And so if I won a case in the first circuit, and had the same issues with the same taxpayer in the sixth circuit, I'm going to get the decision in the sixth circuit too, because they're not going to depart... they call that res judicata.

David Spray:  Okay.

Neal Block:  But we couldn't get... because the company was in one circuit, and the father's in another, and we couldn't prove we had common ownership, make a long story short, each taxpayer had to prove up his own case, even though each taxpayer's case involved issues that were before the other circuits.

David Spray:  Okay. And which circuit had the ruling where the judge really seemed to get addressing down to the service, and there's the Caligula reference? Was that the first circuit, or the second circuit?

Neal Block:  Well, the dressing down came in the first circuit.

David Spray:  Okay.

Neal Block:  The Caligula reference came in the sixth circuit.

David Spray:  Oh, okay. Can you just talk a bit.

Neal Block:  Okay, well the judge in the sixth circuit has a reputation for being sort of flamboyant, and a good reputation. Jeffery Sutton is his name. And one thing I'll say, is that the pedigree of all the judges that we had was really top-notch. I could not say... I don't want to get into the current judicial appointees, but I can assure you, every judge that we had was thoroughly vetted by the senate, all U.S. court appeal judges have to be approved by the senate, and they have special committees for that purpose. And for the most part, up to that, these judges were all approved basically on not non-partisan, but certainly on a judicial qualification standard. And I think even Judge Sutton got turned down once before he was finally approved, and he's a first-class judge. But every judge we had was first quality. As a matter of fact in the sixth circuit, Judge Sutton's predecessor, who was a retired judge, who qualified after duty, was also on our panel.

Neal Block:  I think one of the judges we had in the first circuit had tried the case of John Gotti when it was a district judge.

David Spray:  Oh, wow. Now, the second court and the first court, did they also issue a unanimous opinions?

Neal Block:  No.

David Spray:  Okay.

Neal Block:  We had eight out of nine judges vote to reverse the tax court. The ninth judge was in the first circuit, which was the same circuit that had just bound the tax court, interestingly enough. But the signing judge in the first circuit was the chief justice of the court of appeals for the first circuit. Highly respected, all the judges were. But she did not care for our case, and was more sympathetic to the tax court decision. All the differences, but she was the one who of course was the chief judge of our session, and by the way, I'm trying to remember the... Cosby, Bill Cosby's case was also on the same docket as ours.

David Spray:  Really? Oh, wow.

Neal Block:  So I can't say that the court was for our case, but-

David Spray:  Understood. So you had these favorable rulings from all three circuits, so does that mean-

Neal Block:  But the point was, that the first circuit majority is the one that told the tax court that... that the Roth IRA provisions having adopted the same rules as the traditional IRA's was bound by the first tax court to make the same finding for the Roth IRA's, as it would have made for the traditional IRA's.

David Spray:  Which is why it goes back to the Helwig case, right? Because the Helwig case refers to the traditional IRA?

Neal Block:  No, Helwig was a Roth IRA.

David Spray:  Oh, it was? Okay.

Neal Block:  Let's go back to 1998. Before 1998, I can't remember when IRA's were introduced, the IRA was the only IRA that you could have. But then in 1998, the Roth IRA's were introduced, in order to provide for the greater incentive to save, because the Roth IRA allowed you to pull all your money out at the age of 59 and a half, without any income being recognized. Whereas a traditional IRA you have to recognize income on the distribution of the IRA proceeds.

David Spray:  Okay. Thanks for that clarification. So, now that you've prevailed in all three of these courts, I guess it's a done deal now, right? The Roth IRA on DISC is just bulletproof, no issues, no risks, is that accurate?

Neal Block:  No.

David Spray:  Yeah, I kind of figured that'd be the answer. So what's the wrinkle in it?

Neal Block:  So, there's two things. One, each circuit is only binding for the courts in its own circuit. So the sixth circuit has, for example, a Ohio and Michigan, and the first circuit has Massachusetts, and Maine or a couple other states. And then the second circuit has New York, Pennsylvania, and New Jersey, I guess.

David Spray:  Okay.

Neal Block:  Maybe not Pennsylvania. But the point being, those are the only decisions that are binding. There's nothing before the supreme court, but any other circuit can decided to go along or not. As a practical matter, you might say that it's pretty much settled, but there's another case out there called Mazzei, M-A-Z-Z-E-I, and I made slight reference to them. And that's the case where the issue was who owned the DISC stock, and the foreign sales corporation area, there was a thing called shared FISC, which was designed for little tiny taxpayers to own a foreign corporation without having to spend a lot of money on it. For $500 you could buy in interest in a shared FISC, and the shared FISC could have 30 shareholders, so that each interest was treated as if it was a separate foreign corporation. But the FISC itself didn't have any substance, and it's basically a gimmick in order to allow people to have it.

Neal Block:  In the Mazzei case, the court held that because the shared FISC was purchased, not originally incorporated, that you had to look to see whether or not the proper valuation was placed on the stock, and who got the benefit from the valuation, and the tax court held that in that case, the related supplier would be deemed to own the DISC stock, not the FISC stock in that case, rather than the Roth IRA. Now, the FISC is dead, and the shared FISC was unique for the FISC, it doesn't exist in the DISC area. But they did raise the issue as to whether or not the proper valuation was paid for the FISC stock. Now, that was a purchase in that case. Ours was original issue, which is a different animal. And the tax part differentiated between the the original issue from purchase.

Neal Block:  But the fact is, all the courts of appeal made reference to the fact that we had stipulated our case, and it wasn't stipulated in the Mazzei case. The sword is still out there.

David Spray:  So is the Mazzei case not been settled yet, or resolved?

Neal Block:  No. The Mazzei case was decided in favor of the government, on the basis that-

David Spray:  Oh, I see.

Neal Block:  The true purchaser of the FISC stock was the related supplier, or shareholders. But in any event, there was no FISC benefit, there was a constructive dividend, not a constructive dividend, but the FISC was actually owned by the shareholders, and therefore the FISC dividend did not go to the IRA, it went to the individual shareholders.

David Spray:  Okay.

Neal Block:  And that case is on appeal to the ninth circuit.

David Spray:  And is this a case that you're arguing?

Neal Block:  No.

David Spray:  Okay.

Neal Block:  I've been in touch with the attorneys, obviously, on the case. But this is not our case.

David Spray:  Okay. So is it safe to say then, that if a taxpayer is in the first, second, or sixth circuit, that their position is conceptually superior to a taxpayer that's not in one of those three circuits, or for practical matters... okay.

Neal Block:  But I know of no cases that are pending in any other circuits.

David Spray:  Okay.

Neal Block:  And the fact that they had other cases conceded by the government, with the same issue. So I would say that the probability for success with the Roth IRA structure now is very high.

David Spray:  Okay. So say somebody comes to you, a potential client, and says we're interested in this Roth structure, what are your thoughts Neal? Should we do it, should we not do it? How might you answer such a question?

Neal Block:  Okay. Well first of all, there are other DISC structures that are available. And so that the Roth IRA structure may not be the structure which is the best for the individual taxpayer.

David Spray:  I got you.

Neal Block:  If you want to go with the Roth IRA structure, it should not be subject to attack, because it's the Roth IRA structure.

David Spray:  Okay.

Neal Block:  You still have to make sure you cross your t's and dot your i's, in making sure that you don't have primitive transactions and what have you. But the basic structure should be available.

David Spray:  Okay, well that is helpful. Well jeez, I can't believe our hour is up already. I could go on for hours. So I tell you what, at this point, how about if we go ahead and wrap up this episode, and would you be available to have a second episode where we really go into detail on some of the different structures, and where they're appropriate?

Neal Block:  Sure. As I told the second circuit, I consider these things as tutorials.

David Spray:  Okay. That sounds great, then. So I guess the last question for you, if somebody needs to, or wants to reach out to you, or is interested in retaining you, what's the best way for them to reach you? Should they call you, or shoot you an email?

Neal Block:  Any way they want, is fine. They can send me an email, they can call.

David Spray:  Can you go ahead and state your phone number and your email address?

Neal Block:  Sure. My phone number is area code 312-861-2937. And my email is neal.block@bakermckenzie.com.

David Spray:  Okay, well that is great. And I believe from clients of ours that I've introduced to you, am I correct that your policy is such that you're kind of amendable to an introductory, kind of a brief exploratory call that you typically don't bill for. Is that correct? Just kind of help me understand what the parameters are if somebody calls you up.

Neal Block:  Sure. There's no problem with a phone call to try and find out whether or not we think what they have is doable, and what have you.

David Spray:  Okay.

Neal Block:  If it takes all day long we might want to charge.

David Spray:  Sure.

Neal Block:  But a half hour of our time certainly is no problem.

David Spray:  That's excellent. Well, I really appreciate your time Neal, and we'll look forward to the next episode where we get into some of the structure questions. And just a little teaser here, I also will share the story of the most valuable lesson that Neal Block taught me, about hiring experts. So we'll save that for that episode as well. Okay? Great, well again, thank you very much for your time, Neal. It was really a lot of fun, and I really loved all the war stories. I could just listen to the war stories all day long. So thanks for taking time.

Neal Block:  No problem. Thanks for having me.

David Spray:  All right, have a great day.

Neal Block:  You too. Bye-bye.

David Spray: Hi, John.

John Flatowicz: Hello, how are you doing?

David Spray: Hey, I'm good, and how are you today?

John Flatowicz: Doing good.

David Spray: That's excellent, so let me go ahead and get started. My guest today is John Flatowicz, the former Managing Shareholder at the CPA firm of Briggs & Veselka, the largest independent CPA firm in Houston. Is that correct, John?

John Flatowicz: That is correct.

David Spray: With that, why don't we get started? What I'd first like to do is I like to give our listeners just some context for our guests. I believe you grew up in Nebraska. Is that correct?

John Flatowicz: That's correct.

David Spray: Omaha? Or a suburb of Omaha I believe?

John Flatowicz: I actually grew up in Omaha, Nebraska, and pretty much stayed there until I left to go to graduate school in Austin, Texas, in my early 20s.

David Spray: I guess you went undergraduate then somewhere besides UT?

John Flatowicz: Yeah, so I attended the University of Nebraska for undergraduate school where I got my accounting degree, and then I went to the University of Texas in Austin to get a Master's in accounting.

David Spray: I did not realize that you had an undergraduate degree from Nebraska, and that's UNL in Lincoln?

John Flatowicz: Yeah.

David Spray: Or where you in Omaha? Okay. Excellent, and so then when you graduated from UT, I guess that's what brought you to Houston?

John Flatowicz: Yeah. At the time, of course, everybody wants to stay in Austin. 

David Spray: Sure.

John Flatowicz: The jobs were all pretty much in Houston. At that time, there were The Big 8 accounting firms, not The Big 4 as they are now, and heavily recruited UT's Master's in accounting graduates and decided to come to Houston and followed several friends that went to Arthur Young & Company in Houston.

David Spray: Then, they subsequently merged with Ernst & Whinney I believe-

John Flatowicz: That's correct.

David Spray: Which formed Ernst & Young.

John Flatowicz: That's correct.

David Spray: I also believe that... Am I correct? Is my understanding correct that you are a first-generation American? Is that what it means that you were the first in your family born in the U.S.?

John Flatowicz: Yeah. My Dad was originally from Poland. My Mom was from Paris, and my two older siblings, my older brother Pierre, my older sister Martine, were born in Paris. My next oldest brother, Frank, was actually born on the ship coming over here and I was the first one born actually in the United States, along with my younger brother Glen.

David Spray: Oh, wow. I did not know that. Just for the record, I used to work at Briggs & Veselka and John was my primary boss, so I thought I knew a lot about your background, but it turns out that there's a lot I didn't know. Well, congratulations on being the first in your family to be born in the U.S.

John Flatowicz: Thank you.

David Spray: You came to Houston to go to work for Arthur Young, and so I guess, did you start in the audit practice?

John Flatowicz: Yeah. When I was at Arthur Young, I started in the audit practice side and spent about a little under four years there.

David Spray: What year did you start there?

John Flatowicz: I think it was 1978.

David Spray: You were there from '78 to '82?

John Flatowicz: That's correct.

David Spray: What made you leave Arthur Young? What made you decide to leave?

John Flatowicz: I was with Arthur Young, like you said, a little under four years out of college. I learned a great deal there, being with an international Big 8 accounting firm. However, it was large. It was a large firm. I worked way too many hours and didn't really have strong relationships with both my clients and fellow employees. They weren't great because we never saw each other, always on jobs. 

At the time, I wanted to go to a firm where I could make some kind of immediate impact, where I'd know everybody, and coincidentally at the same time, Briggs & Veselka was a small tax firm looking to start an audit practice to become a full-service firm. It was the picture perfect time and so I learned of it and interviewed and got the job and started the audit practice at Briggs & Veselka. 

David Spray: That's exciting because at that time, after four years at Arthur Young, had you even been promoted to manager? 

John Flatowicz: I was getting ready to be but I was not. To be honest, it was a little scary because coming to Briggs & Veselka... at a large Big 8 accounting firm, they have so many levels of supervision that you don't learn the full picture right away or as quickly as you would at a firm like Briggs & Veselka, so there was a lot I didn't know, but my nature is to kind of... I love challenges and that was a great challenge. I can honestly say there was no one at Briggs & Veselka that knew any more than I did about audits, so that made it a breeze.

David Spray: Sure. When you look back on your... you were probably about, what, 27 or 28 at the time?

John Flatowicz: Yes, about 26, yes.

David Spray: About 26. When you look back, are you like kind of scared for your younger self in hindsight realizing just what a big challenge it was?

John Flatowicz: Yeah I was, although at that time, I didn't really have a concept of liability and I was and just anxious to grow things and make things happen. All these years later, I am more conscious of that, so yes, I was scared.

David Spray: Understood, and so when you joined the firm, how many people were at the firm when you joined?

John Flatowicz: We had either eight, nine, or 10. I'd say around nine people at the time.

David Spray: The firm started... what year did Briggs & Veselka start?

John Flatowicz: Briggs & Veselka officially started in 1973.

David Spray: They had been in business nearly a decade, nine years or so, and I guess Johnny Veselka and Mel Briggs decided that they wanted to start an audit practice.

John Flatowicz: Yeah. They were pretty much a tax practice and they got together and decided they wanted to be a full-service accounting practice, and in those days, audit and tax were the two main practices you had to have to be a full-service practice.

David Spray: Sure, sure. What was it about the opportunity at Briggs & Veselka that was attractive? Obviously, with four years under your belt at a Big 8 firm, you would have had a lot of opportunities if you wanted to leave, right? You could have gone in-house, internal audit or as a controller, or you could have gone to a smaller CPA firm that had an audit practice already. What were the elements that made Briggs & Veselka attractive?

John Flatowicz: Well, like I was saying earlier, the thing that was really attractive to me is they didn't have an audit practice and it was a chance to start something up and build it from scratch. Not saying I knew how to do it then, but it was attractive because they were committed to being a quality firm. If you've met Johnny Veselka, tremendous integrity, great reputation in the city, and I had an opportunity of kind of a lifetime to start an audit practice for a quality firm, and especially at my age. I just looked at it as someone was looking out for me, and I looked forward to it. I'm not saying it was always easy, but through the years built up the audit practice to what it is today.

David Spray: That is a great story. I guess in summary, there was only one opportunity to start an audit practice from scratch, and then it sounds like the icing on the cake, then, was just your respect for Johnny in just the sense of connection you felt with the other people. It felt like a comfortable place to be.

John Flatowicz: I'd say so. As I look back on it now, Johnny was a tremendous influence when I interviewed with him. Interviewed with Johnny Veselka and Steve Awalt and I got a sense after that interview that they were down to earth humble, despite having great reputations. Again, with the culture that they had, the opportunity they said they would help me grow, how fast I wanted to grow, they'd help support it, and they said, "If you do well, you have a clear shot to make partner one day because you're starting a whole new practice." All of those things combined were very attractive to me, and you have to remember, this was in the early '80s when the Houston economy was bad, the Savings and Loan debacle, a lot of real estate problems in the city. I kind of looked at it as a gold mine and took advantage of it and here we are.

David Spray: That's awesome. Do you remember what year, then, that you made partner?

John Flatowicz: I think it was... I'm trying to think. I think it was in 1989.

David Spray: Do you remember at what point that the audit practice was as large as the tax practice? Was that a couple of years? Or did that take a decade? Or was it 20 years?

John Flatowicz: I'd say obviously from the time I got here in 1982, it was probably 15 years, 15, 17 years, and primarily because for many years, when I became partner in '89, I was the lone audit partner and probably at [crosstalk 00:12:13] that time, five or six tax partners, so obviously the tax practice was going to grow faster, but at some point in time through the years, until we started doing lots of acquisitions, that was, the audit practice had caught up to the tax practice.

David Spray: That is helpful. Talk to me about your philosophy of building the audit practice. What kind of people were you looking for? Just again, what was kind of your philosophy? Was it to be the cheapest audit in town? Was it to be the most expensive audit in town? Was it to... just talk to us about what your philosophy was.

John Flatowicz: That's easy for me. My focus and philosophy, number one, has always got to be two things. It's got to be quality. We have technical standards the AICPA puts out, generally accepted accounting principles and auditing standards, the SASes, and so number one, you have to have quality. You have to know what you're doing. You have to study all of those SASes. That's number one, and the second thing that's critical I've always felt and lived by this creed is client service. Clients expect calls the same day. Clients expect you to be proactive if you have an idea that can help them, but even beyond that, once we had that, and that took a while to get because I was alone in the audit department for several years. 

Once we had that, my nature, and I'm not sure where I got that from, but I like to grow things, so once I felt comfortable that we had a quality control system in place, my goal was to get out in the business community and meet as many bankers, lawyers, insurance folk, and join boards of directors, do speeches in the community or do whatever it took to grow the practice, which took a lot of work, too.

David Spray: It sounds like that philosophy is really been a very durable philosophy because from what I know about you and the firm's philosophy, it's unchanged, right? Quality and client service.

John Flatowicz: Yeah. We've spent for example... sometime in the last few years, we spent a lot of time defining our core values because if it's all about making money, it's not good. Making money is critical, but you got to have core values. You got to believe in something. You got to believe in the things that we believe in. We believe in, number one, compassion. Compassion for employees, compassion for our clients, making sure we give back to the business community. Like I said, making sure the quality has always got to be there. Making sure that we're proactive with our clients. 

One of my famous comments with prospects and existing clients is there's probably over a hundred thousand CPAs in the State of Texas. There's several good competitors, great competitors, and so we have to do something that they're not doing. We all say we have great client service, but we have to be proactive, we have to meet with them regularly, figure out what their needs are, how we can help them solve it. Point out things that they may not know that could help them and it's never an easy row. 

Millennials, different generational type people that we hire, we spend a lot of time on culture, client service, soft skills training, technical skills, and I honestly believe that we still to this day have that same culture, the same core values as large as we've become. It's something that we believe in. We talk about in our board meetings and we actually do.

David Spray: That's awesome, and to give a context, we talked about when you joined there were about nine people in 1982. Approximately how many total employees does the firm have now?

John Flatowicz: We have around 300 people now.

David Spray: Wow, that is just amazing growth. Are you aware of any other firm in the state that has had that level of growth over that period of time? I can't think of one.

John Flatowicz: I don't know some of the firms. I know all the firms in Houston I don't think have had that type of growth. I can't say on all the other firms in the rest of Texas, but...

David Spray: I really appreciate the insight and kind of hearing the story of the audit practice from the very beginning. What about from like when you started... You talked about the '80s and you made partner in '89. Now, let's get into the '90s. What were some of the significant events that happened in the '90s? Was that the year that, or was that the decade that the El Campo office was opened?

John Flatowicz: Yeah, the El Campo office I think was opened in '89 or '99, but some of our growth, it's hard to pinpoint, but I would say most of our growth, the majority of our growth of the years have been organic. It's been based upon the things that Johnny stood for, our core values, the quality work, fair prices, and trying to hire team players who live our culture, serve our clients, do the timely service, treat our employees well. Also, in addition, as you said, David, we opened up our El Campo office I believe in 1999. Had three to four small acquisitions prior to 2017, but through that period it was a lot of internal growth. 

I sincerely believe that if you treat your clients well, you're proactive, give them value for what they're paying, most importantly treating your employees and training them, finding out what they're passion is that all of those factors together make you so valuable to the community and they refer their friends. All of our referral sources are happy with the services we provide their client in, so when you take all of that together, I would say that in total is the most significant factor of our growth.

Now after 2017, from 2017 to current, we've done five additional major acquisitions and those have all been none that we approached them first. We were approached by those companies and we've always said that we want to be a Texas CPA firm, and to do that we needed to be in the major Texas cities. We had every major international, national, and regional firm try to buy us out. Five or six years ago we decided we wanted to be a legacy firm and we decided that to do that, we needed to be in the major cities, so we have to have the resources to have all the technical resources we need, all the changes that are taking place in the CPA profession. We've all heard about the artificial intelligence, robotics and everything that's going to change the audit and tax practices, and the computer and IT areas that you really need to be up on and spending the resources.

When we were looking for acquisitions or they came to us, geographical location was critical. I think you know that we have made three acquisitions in the Austin area in the last year and a half, two CPA firms and one valuation practice. We started our San Antonio CPA practice from scratch two years ago, and then we acquired a Woodlands CPA firm and also we've acquired a Woodlands-based IT forensics company. Again, we're looking for geographic location. The culture of these firms have to be right. Found to mix a culture that does not have our core values would never work. 

We were looking for complementary or new niche areas that we didn't have. We were looking for strong, young personnel that could be future partners, and then most importantly, to myself and our successor Managing Partner Sheila Enriquez, we're looking for growing innovative firms with strong leadership because as we open up in other cities, we don't know the markets as well, so we're counting on the strong existing leadership to have the same core values we have and to be innovative, to be growth-oriented. Fortunately for our firm, we've been very successful with all of these acquisitions.

David Spray: That is great. That is really an amazing acquisition spree over just a few years. 

John Flatowicz: I hope we continue.

David Spray: Sure. I'm just curious. Why was it important for the partners in the firm to remain a legacy firm? It seems like the easy thing to do would have been to have sold to a national or a regional firm. What was the motivation or the underlying cultural decision that made you all make that decision to stay a legacy firm?

John Flatowicz: A great question. We received some tremendous offers that for some of the senior partners such as myself, we could have retired a lot earlier. Monetarily, it was a great deal. Less stress, less pressure, but our firm, we always make decision for the best interests of the firm and all the partners, and many of our young partners, as we promoted them through the years, we promised them that we would be a legacy firm. They joined the firm, many came from Big 8, Big 6, Big 4 regional firms or even local firms and they wanted to be with a firm that one day they'd have leadership responsibilities. They'd have the same chance, for example, that I had to grow something, to grow a niche, to grow a department.

When all these firms approached us, and we spent probably six months with nine or 10 of them, several days with each, we had all the entire partner group listen to their presentations and everything else, and then we decided after a few months that we needed to make a decision, legacy or sell out? We did PowerPoint presentations on the pros and cons, some people call it smart analysis, and we held a vote. Our senior partners were hoping that we would remain a legacy firm, but we really weren't sure what the younger partners were thinking because it was one vote per one partner. To our surprise and happiness, it was unanimous to stay a legacy firm and all of the partners in the discussion said they want a chance to build this firm. 

We think we could be a top... at the time, a top 100. Now, we're thinking about top 50 firm, but they want a chance to grow it, prove themselves, and we were all happy with that decision. The only caveat that we had going out of that meeting was we need to be in all the major Texas cities and grow enough to keep up with technology and robotics, the artificial intelligence, all the efficiencies and bring the right people in-house that we need to compete because I hear so many of our competitors that are smaller and several that have been surprised that have approached us that they don't have the resources. They're scared about the future.

We've worked real hard to make sure we have the best people in all areas, whether it's administration, audit, tax, consulting, and I think we all made the wise decision. We have a super group of young partners and can't wait to see how they're doing in the next five years.

David Spray: That's awesome. I remember you told me probably more than a decade ago because both of us being in Houston, we're familiar with other firms in town. It wasn't hard to notice that some other firms that 20 years ago were larger than Briggs & Veselka, but grew at a much slower growth rate than Briggs & Veselka, and now Briggs & Veselka is larger, maybe even a multiple. One of the things that you told me, one of the reasons that the growth was so important was because you had these great young rising stars that if you didn't have growth you would lose them, or you would make them have to wait for a spot to open up to make partner. I always found that to be really interesting, especially when I've seen other firms that literally have told people that I've heard rumors to the effect that, "Yeah, you have everything it takes to make partner, but you need to wait till a partner retires till there's a slot."

Could you just expand a little more on that? First of all, was my recollection correct on that conversation?

John Flatowicz: Yeah. It's interesting, you hit the nail on the head because I've always attributed our growth to a philosophy that when I took over as Managing Shareholder, the tendency for most CPA firms and some of the established senior partners is, "Well, if we make a younger partner, we'll make less money." There's more ways to split the pot. I have never felt that way. I felt exactly what you just said, Dave. Number one, if you don't make young partners or young people that are qualified to be a partner, you're going to lose them, and secondly, if they're doing real well and you make them a partner, they're going to go out there, they're enthusiastic, they got more energy than someone like me being a lot older. 

Our philosophy has always been since I was running the firm that we're going to make as many partners as we can. I don't want to mention names of firms, but I remember it was, I don't know, it was somewhere eight or 10 years ago, we were about the same size as two of our competitors in the City of Houston, and now, like you said, I don't know if we're twice their size, probably two or three times. I believe the difference is in that period of time, like it was an eight- or 10-year period, I think we made 10 or 11 new partners and while I don't know exactly, but I think in one of our competitors they made zero partners, and the other one, I'm not really sure, but it couldn't have been more than one or two. I have always said that I believe, especially the partners we made, I saw the results. 

Every year, our existing partners made more money. The younger partners, after two or three years, they built their books up. It was large as some of ours and it's a way, number one, like you said, to keep your talent because, who would stick around a firm that's never making partners? They'd look around and say, "Well, why waste my time here?" That's not always be true, but generally it is, and that was one of the philosophies, and I'll be honest with you, like I said earlier, I wasn't sure I was right, but it's something that I just believed in. Over the years, it turned out to be right. I just believe in people and I think if you believe in the people and you give them that chance, 99% of the time they're going to perform for you.

David Spray: That is really a refreshing attitude. I appreciate your candor there. Hey, just for the record, what year where you elected as Managing Partner? How many years did you serve?

John Flatowicz: I believe it was in, and I may be six months or a year off, I think it was in 2009, and in that year... I think I had done a two-year transition before that with Johnny Veselka. Whenever you have a new Managing Shareholder, we go through a two-year transition and I think I took over in 2009 officially after that two years, and then in July of 2018, last year, I stepped down and Sheila Enriquez is my successor at the firm.

David Spray: That's a long time to be leading the ship, and so if I'm just doing my simple math, you all had a lot of organic growth during that time with some acquisitions near the end, right?

John Flatowicz: Oh yeah. Unfortunately for myself, I had some health problems last year I think you're aware of and the transition was supposed to last until October of 2019 this year, but after being in the hospital for a while, Sheila was temporarily running the firm and I saw some great qualities in her. We were in the middle of several acquisitions, we had the hurricane, we had the new tax law, and several other things that were going on and I guess I was so impressed and my philosophy has always been, like I said earlier, that if you have young talent and they're capable of doing a great job, the best thing you can do is promote them as quickly as you can. 

Based upon some of my health concerns and what I saw she did while I was out, it was quite obvious to me that for the future of this firm and the success of this firm that she needed to be running it. Called a board meeting when I got a little bit better and made it happen, so she's been running the firm since July of last year, 2018, and doing a great job. Just a super job.

David Spray: She's an impressive individual. Just out of curiosity, what are some of the reasons that you believe that she was chosen as your successor as the Managing Partner?

John Flatowicz: Interesting, another great question. Dave, you knew Johnny Veselka personally, and the entire business community, all of us, Johnny Veselka had tremendous integrity. When you were around him, you knew he was honest, you knew his integrity, you knew he was humble smart as he was. When I was thinking about who could be my successor, I was thinking of our Executive Committee members and there were... I can't remember, four or five or six at the time, and I spent a lot of time thinking about who could really run this firm with the core values and have the qualities that I really think it needs in the future. 

After a lot of scratching on weekends, I came up with four things I was looking for. Number one, I needed someone that was growth oriented, innovative. Secondly, proactive in changing our firm from the compliance aspect to more of the consulting, the IT, the robotics, data analytics, cyber risk assessments and several of those things that we know are the future of the CPA profession. The compliance, the audit, and tax will always be a core of our services, but the high margin areas are more in the consulting areas and I needed someone that understood that, that was keeping current on all of that.

Then, the last two that were even more important to me is, and this was so difficult with people being emotional and all of that, is I needed someone that was fair and balanced to everyone. For example, even if Sheila or I do not like one particular partner for their personality, but they live their core values, they did a great job for the firm, they were a team player, you need to respect them and be fair to them. Not everybody can do that, but she could. 

The final one was no ego, team player, and to be humble. I felt like of all the people I was considering, she was the only one that had that. Now, I could tell you all the other qualities she had, as you've probably seen. She's very eloquent. People just love being around her just like they did Johnny, but these four were the four things that I thought were important to our firm at that point in time and she had all of those qualities.

David Spray: Let me just recap the four things you were looking for; growth-oriented, proactive in leading the firm through an evolution due to technological change, the third being fair and balanced, and then the fourth being someone with no ego and a team player with humility. Did I capture that?

John Flatowicz:Got it.

David Spray: Excellent. Well, I would say from my experience of spending time with Sheila, I would certainly agree. Interestingly enough on that, I'd noticed recently that the managing partners of all of the Big 4 firms in Houston all have female managing partners, and so this isn't really something I've paid attention to, I've just happened to notice it. Is this a trend that's been going on for a while? If so, do you have any thoughts on why that is? It just seems interesting when for so long there were no female managing partners, and then suddenly all the firms have female partners. I know I'm kind of asking your opinion here.

John Flatowicz: This is just an opinion, this is not based upon any facts, but it is true in the last few years that the remaining Big 4 accounting firms and even some of the regional firms all seem to have female managing partners. The obvious reason is, and I don't know how many years, but maybe the last 10, 12 years the majority of accounting graduates have been women, not men. If you go to the University of Houston Bauer, I don't know, 60 or 70% of accounting graduates the last several years have been women, so eventually the numbers are more favoring them to rise up to become partners, managing partners [crosstalk 00:36:47]-

David Spray: Oh, interesting. I wasn't aware of that.

John Flatowicz: But I still think in some of the local firms, although the trend is changing to a lot of female managing partners, it's a little different than the national firms. I still think there's a lot of men managing partners still, and that may be because some of them are hanging into their 70s and some in their 80s, believe it or not, but hopefully that'll get kind of balanced out in the future.

David Spray: Well, thanks for that. What would you say... There's a couple of questions I want to ask, but I'm also sensitive to our time. What's one unique thing about the firm that most people outside the firm are not aware of? If anything that comes to mind?

John Flatowicz: Something unique about our firm…

David Spray: That maybe isn't just super well known.

John Flatowicz: I would say... Although I don't know if this is the case at other firms, but at our firm, one of the things that surprised me actually in the last five years is we're an extremely diverse firm in terms of our personnel. Just like Houston is one of the most diverse cities in the country as far as people, I have learned that we speak over 20 different languages-

David Spray: Oh really?

John Flatowicz: Yeah. I don't know how many countries we have represented here, and it's kind of a surprise to me because if I go back more than 10 years ago, I would never have imagined that. I was talking to our business development manager about a year or two ago and he said we speak over 18 different languages. I don't know how many, 20 or some countries we have people here, and it's really helped because whether it's Hispanic... We have I think three or four Mandarin-speaking partners. 

When a lot of the business community is as diverse as it is, when they have people that they can trust and be comfortable with that are their same culture and everything, it really helps. I don't know how many opportunities I've had where... One of them asked me, "Well, do you speak Japanese?" I said, "Nope, not even close", but it really helps in the relationships, and again, I don't know if we're unique in that, but I thought that was unique about our firm.

David Spray: I would sense that this is unique. I know we actually share a client that's owned by Chinese people, and the tax partner for that engagement is one of your tax partners who speaks Chinese. I remember because they were a client of ours before they became a client of Briggs & Veselka and I didn't even know they were looking for a new firm, but when they announced that they had selected you all, it made perfect sense because of your partner Shen Shen, and so I can imagine where that cultural connection they have and the fact that this company is active in China. I can see where that can be a real asset because I can imagine some of the other firms in your space, I wouldn't be surprised if none of them had any Chinese-speaking partners.

John Flatowicz: We also have... Interesting in the Asian community, we actually have one of our audit shareholders is fluent in Mandarin, and of course, Shen as you mentioned, and Forest, another tax partner, both also fluent in Mandarin, so we have a large Asian practice also because of them primarily.

David Spray: Sure, sure. No, that makes sense. I'd like to shift gears now and talk about the Briggs & Veselka philosophy of referring clients to service providers other than Briggs & Veselka. The firm has always had a reputation of making introductions to banks and other service providers that perform services that the firm does not. I assume that the firm historically has not been compensated for such referrals. With that in mind, why do you and your partners invest the time to make these introductions when there's no benefit to the firm financially?

John Flatowicz: One of our core values that I always kep referring back to is to make sure that we provide high-quality, hopefully proactive and effective service to our clients, and to be honest, we do not always have the resources or capabilities to help our clients in all these things that can benefit them. We spend a lot of time looking for high-quality service providers most of the time in Houston that can help them, for example, save taxes, better loan terms, other valuable and necessary services that are clients need and expect from us. As you well know, we don't have the capability and we don't do IC-DISC and some of the things that you do and the cost segregation that others do or R&D or some of these other things.

We vet pretty hard these outside vendors who can help our clients, and it's not about us always getting the money, it's about making sure our clients get the best possible help they can to do what they need to do or save money or structure better. A lot of times, we have to look for outside service providers and we've done well over the years to make sure that whoever we're recommending for our clients are high-quality people, they have the same core values we do, great client service, and the know what they're doing. It's just like a natural thing to do.

David Spray: It sounds like when I flip back... would you believe I already have four pages of notes? When I flip back or look back to the first page, you talked about the philosophy back in '82 of quality and client service. It really sounds like what we're talking about here is just a subset of the client service. It just sounds like it's just a natural part of the client service. Is that right?

John Flatowicz: No, that's exactly right.

David Spray: How do you decide when to bring a service in-house either organically or through acquisition? Is it just when you get to the point that you've referred out a hundred projects for a certain area that you think, "Well, geez, maybe with that level of volume, maybe it would make sense to develop it in-house"? Or would it be like a specific client request? Or what kind of goes into that thought process?

John Flatowicz: Dave, I think that's part of it, like you said, where you're outsourcing so much revenue that you think, "Okay, we can do this and we can keep the revenue in-house", but I think another more important part at least the way we think here is, are the people that we're outsourcing the services to, are they providing the same high-quality service, the same responsiveness to our clients that we would expect? What we've traditionally and historically done is when the outside service providers are, we see no need for us to get into that area because our clients are being served. They know we recommended a quality person, so it's okay. 

It's interesting that you bring that up because in the last two years, one of those situations happened. We, and obviously I'm not going to mention any names.

David Spray: Of course.

John Flatowicz: Were referring tons of work on what they SALT cases, sales and use tax, because we didn't really have the expertise in-house. Every state in this country, every municipality, they all have different rules and regs and so whenever we had a situation where the state was auditing one of our clients, our clients would call us and say, "Hey, do I need to pay sales tax on this?" All this was before the Wayfair decision that happened recently. We referred it out. We started getting comments from our clients in the last couple of years, all various partners who brought it to my attention saying, "Hey, they're not responsive. It's been six months. What's going on?" It got to a point where we had a board meeting and we started saying, "Hey, do we need to find someone from the outside to start an in-house practice?" We did. 

It wasn't... yes we were giving up a lot of revenue, but the real impetus of this was the lack of quality service that the various outside vendors that we were sending to our clients just wasn't working. Service wasn't there. Too many complaints, and that was our SALT practice. Again, I don't know, somebody is looking out for our firm, but a gentlemen named John Cooney, who headed up Pricewaterhouse's SALT practice in the Houston office, he had just retired. I think they make their partners retire like in their 50s or something like that, and one of our partners had met him at some function or somewhere and conversation developed. He was and still is at his peak, and we got him in-house. It's just been wonderful. No complaints. In the first year alone, it's on our internet, he saved our clients over 25 million in sales tax savings-

David Spray: Wow.

John Flatowicz: Combination of during sales tax audits, inform our clients, "No, you don't need to pay sales tax on that." It's a cumulative type number and that was within one year. I haven't seen what... he's been here a little over two years, but more importantly than all of that is we know we have someone that cares about our clients, that's giving quality service. We've gotten no complaints, and not only has he done that, but our clients are talking to other companies in town and he's going out and helping them. What I've learned because he's been in front of some of my clients, I used to think sales and use taxes were a pretty simple thing, and it's so complicated. Each industry has different rules and it seems like it would take a lifetime of learning to know all of that, and he's done such a wonderful job. 

As an example with the Wayfair Supreme Court decision which basically, and I'm not an expert on this, but basically said for many years if you didn't have a physical presence in another state, you didn't have to pay sales tax. You didn't have to file all the forms, but everybody complained about online internet sales and those were exempt. The Wayfair said no longer, so each state is coming up with rules to say, "Hey, if you do a certain amount of internet dollars online, we're going to tax you." He has been in high demand lately because you don't want clients to suddenly after two or three years get these huge bills, or if they're trying to sell it does often due diligence. John has been just a super asset to this firm. His client service and quality are exceptional.

Again, that was a case we brought someone in-house for the first reason you said, because we were sending literally tons of money that we could have had, but more importantly, we kept getting complaints. Now, it's another area we don't have to worry about. It's a growing area of the firm and there have been others thought the years like international tax, but those are the reasons that we would take it in-house.

David Spray: I think there's a great learning lesson there I think all of us in the service business can take notice of, and that is that you had either one or a collection of SALT firms that you were referring business to, and here you are a rapidly growing firm, which I would assume would mean the referrals you were sending them are growing, the number of referrals you are sending them are growing, and they had this really this golden goose that was just automatically growing that all they had to keep it going was just to feed the goose and take care of the goose. Apparently, for whatever reason, they took their eye off the ball and the goose flew away. I guess it's just a reminder to never get complacent in serving both clients and your centers of influence for new clients.

John Flatowicz: That's true, and that applies to us, too. I always try to remind our managers and seniors and actually fellow partners that we're only as good as our last job. You got to keep up with all the technical standards, be in front of your clients all the time. Make sure that they're getting their needs answered and solved. It's a constant... you're like us, we're all in the service business and we need to do it. You cannot ever become complacent.

David Spray: Sure, sure. Well, wow, I can't believe how fast the time has flown. We're already 50 minutes in. Let's see, so you mentioned you've got offices in Houston, El Campo, The Woodlands, San Antonio, and Austin, and you mentioned that you want to be in all the major cities, so that would imply that the Metroplex, Dallas-Fort Worth is on your radar screen. I'm not going to ask any specific questions as far as things you're considering doing, but is it fair to say that you expect to have an office in the Metroplex at some point?

John Flatowicz: That's correct.

David Spray: You had talked about that I think the HBJ article of Sheila, she was talking about that the firm was nearly in the top 100, and that you had mentioned that you've now kind of set new goals of trying to be in the top 50 at some point. If we were guessing like five years from now, how large do you think the firm might be? Or maybe give me... I don't know. What are your thoughts there? If you had 600 people five years from now, would that surprise you? Maybe that would be a better way to phrase it. If the firm was twice as big five years from now, would that surprise you?

John Flatowicz: Actually, no. We update our strategic plan every year. We have an internal organic growth percentage, and it's always exceeded whatever our plan is, plus we have an acquisition strategy. Both Johnny, myself, and Sheila are eternal optimists, by the way. Keep that in mind. 

David Spray: I've observed that.

John Flatowicz: I believe that based upon our past organic growth, the expected future growth, expected acquisitions, and more important to me, and the super leadership team that we have assembled... I can say their names. Sheila is our Managing Partner. Jason Sanders is our Tax Department Chair. Adam Dimmick is our Audit Department Chair. I'm really excited about that leadership team. At least compared to me, it's young, it's smart, it's technical, it's innovative, and I see a firm in the next five to 10 years at least doubling in size. I believe we'll be bigger than that, but a lot of it depends on what acquisitions you do. There's a lot of factors that you can't control, but it would not surprise me at all.

David Spray: Wow, that is great, and speaking of your partners, how many partners does the firm have now? Or shareholders I guess technically?

John Flatowicz: I'm going to say approximately, if I don't get killed on this one, I think around 32 or 33.

David Spray: Wow, that is really... that's really impressive because your partner growth has occurred along with your employee growth. One of the questions I had that you answered already was as the firm has grown, what are some of the things that have not changed? I think that you had mentioned that commitment to quality in client service. Is there anything that we didn't cover today that you think we should have talked about or that you would like to mention?

John Flatowicz: Yeah, one of the other things that I think I mentioned it briefly answering another question, but I would like to emphasize, you've got to believe in your people and it's a different era than it was 10 or 15 years ago. You've got to make sure that you offer the best training, the best opportunities. You've got to figure out what each individual's passion is. You don't just put X number of people in audit tax and consulting. Each person is unique. They have unique talents. We spend a lot of time trying to figure out where their passion is, where they can help the firm the most, benefit themselves the most. That's sort of on the technical side.

On the people side, we want to make sure that just like I get up every morning and I love coming to work almost 40 years here, we want to make sure that all of our people, it's an environment where they feel they can speak up, their ideas are listened to, but it's also a fun place. To that end, one of the things I think Johnny and myself and Sheila are most proud of is we've gotten Best Places to Work either from the HBJ or The Chronicle I think we're going on years 13 or 14 now, but we do a lot of things. We do a lot of employee activities. We spend several days out, all of our employees, out in the community. We pick like 10 or 11 charities in the community. Groups go out to those charities and volunteer for an entire day, and that's important to a lot of our people. 

As an example, I'm a dog lover, so I go to BARC and let the dogs out of their cages and walk them.

David Spray: That's awesome.

John Flatowicz: So the community, charity, making sure it's fun. We have a lot of outings and we do a lot of fun things at the firm and we offer all of those. I think that... I've just seen it work through the years. I've seen people do things like, for me as a partner, come to my house, drive 50 miles on a Sunday to drop off something so I don't have to. Keeping your people happy, challenged, I think it's so important to the success and I believe that we make that effort and it really helps the firm grow.

David Spray: This is great. It's really clear that you have a commitment to the firm and your clients. You've always had a reputation as having tremendous client and employee commitment and it's just really great to kind of hear it right from your mouth, your thoughts on this and your passion and conviction on the type of culture that you've tried to build and hope continues even after you retire. It's just really clear that it's really heartfelt and genuine. 

John Flatowicz: Well, I have to say I love the firm. I care about the firm. I also care about the profession, and the profession took some hits in the public eye over the years, so quality is important. Like I say, giving back to the community charity-wise, giving back to the profession. Many of our CPAs are very active in the Houston CPA Chapter, The Texas Society of CPAs, and it's all about giving back because it's been great for our firm, this city and this community, and I want to plug you if that’s ok.

David Spray: Go ahead.

John Flatowicz: I've known Dave for, gosh, I don't know, over 20 years. More than that maybe, and Dave is one of our service providers that we don't feel like we need to do anything in-house because Dave was with us for a short while but he is one of these outside service folks that does a great job of quality, timely service. I know in the past I could call him up no matter what hour and say, "Hey, my client needs this", and he is on it, so I'd like to put a plug in for your business, too.

David Spray: Well, John, that was very kind of you. You didn't need to do that, but in all fairness, almost everything I know about client service I've learned from you, so if you're happy with the way we treat your clients, it's because I learned it from you, so thank you for showing me how to do that. You're good at it.

Well, John, I really appreciate your time today. I know you're busy, and I do just want... could you just share your contact info? The phone number is the main number, 713-667-9147. Is that right?

John Flatowicz: Correct. That's correct.

David Spray: Your email address is?

John Flatowicz: jflatowicz@bvccpa.com.

David Spray: If somebody just wants to reach out to you directly, just say hi, they can do that, but what about if somebody is interested in exploring a relationship with your firm? Somebody that owns a business that's looking to change CPA firms. Would you rather they reach out to Sheila? Or would it make sense for them to reach out to you? What would you prefer?

John Flatowicz: Either way is fine. One of us is always here in the firm, so they can call me, they can call Sheila. We also have a business development gentleman named Bill Penczak. They can call him. Any one of us three and we'll make sure we get them to the right people. It may not be me, it may not be Sheila, it may be whoever has the expertise and the industry experience to help those people.

David Spray: Great. Well, that sounds awesome. Well, John, thank you again for your time, and best of luck in the continued growth of the firm.

John Flatowicz: Thank you so much, Dave. Appreciate it.

David Spray: Bye.

John Flatowicz: Bye.

David Spray:                 Hi, Meril.

Meril Markley:             Hi, Dave.

David Spray:                 Well, how are you today?

Meril Markley:             I am excited to be on the IC-DISC Show.

David Spray:                 Well, I am glad to have you on here, and we are already recording. So, normally, I have my guests take five or 10 minutes to talk about their background, but I have so many things I want to cover with you today. Do you mind if I just do a quick recap of your background based on my understanding?

Meril Markley:             Sure. The shorter, the better.

David Spray:                 Okay. Well, I am really happy that you're on the show today. So, Meril Markley is an international tax lawyer whose career has included stints at a Fortune 500 company, two of the four big four accounting firms, and I believe you also were a member of the staff Congressman Kevin Brady. Is that correct?

Meril Markley:             That's right. He was chairman of the House Ways and Means Committee from 2017 to 2019, and I'd like to think that some of those ideas we talked about on the back roads of Texas made it into the new tax law.

David Spray:                 I'm sure they did. How could they not? How could they not? You also spent six years advising international film production and tech companies in LA, right? And then you spent a few years in Paris helping French multinationals?

Meril Markley:             That's right, coming to grips with how to do business in the US and understand our tax system.

David Spray:                 Exactly, but then most of your career in the last 20 years or so has been spent in Houston advising companies mostly in the energy sector, correct?

Meril Markley:             That's right. Going to all of those difficult places to do business. It has always been challenging and never dull.

David Spray:                 Oh, and while I think of it, the views expressed by Meril today are just simply her opinions and hers alone, and nothing that she or I say should be taken as legal or tax advice, and any listener should consult their own tax or legal advisors for their specific situation. Let's see. In addition, if we go back a little further, I believe you have a bachelor's degree in music from Vassar, right?

Meril Markley:             That's right.

David Spray:                 And then, you've also got some other voice certificates from Vienna, is that correct?

Meril Markley:             Yes. I had the opportunity to study on a graduate fellowship at the University of Music in Vienna, Austria, and while I was there, I sang all over Europe until I lost my voice, and then I had to find a legitimate way to earn a living. That led me to laws school at the University of Cincinnati, and I couldn't get a job after that degree, so I got another degree and borrowed a little bit more money, and got an LLM in transnational business and tax from McGeorge School of Law, and that's in Sacramento, California, and also with a campus in Salzburg, Austria.

David Spray:                 Okay. And before, as you had mentioned, you sang all over Europe, but even though when you went to law school, you did not cease your singing, did you?

Meril Markley:             No. My voice eventually came back, and I got to sing quite a bit at the Hollywood Bowl when I was living in Los Angeles. Then when I moved to Houston, I had the thrill of a lifetime getting to sing the national anthem for an Astros baseball game, and I'd like to think that that was part of the reason that they won that game.

David Spray:                 I'm sure it was. You probably really set the tone for the whole game. Then I believe you also have served on the board of the Houston Grand Opera, correct?

Meril Markley:             That's right, Dave. I like to keep my hand in musical things, and I like to remind people that you can have a business career but also have a love for the arts.

David Spray:                 That is awesome. That is inspiring. That one doesn't have to just be pigeonholed as a tax professional, they can have other interests beyond that. Speaking of other interests, I have a feeling, given your time in Austria, given your time in France, I have a feeling that you speak more languages than just English. Is that correct?

Meril Markley:             I speak English at home on a daily basis.

David Spray:                 Okay.

Meril Markley:             Then for business, my main language is Spanish, which is the language I learned first when I was a child, after English. So, I've done a lot of advising in Mexico and Latin America, and worked with a number of Mexican companies investing in the US, because I was the gringa who could speak Spanish and it turned out to be an ideal way to get to work with some very interesting companies on some fascinating tax issues. But also I do business in French, and when pushed, I could do business in German, but people usually make fun of me for my Austrian accent.

David Spray:                 So, I think that that's four languages that I've counted, but isn't there a fifth one that you have some working knowledge in?

Meril Markley:             I can sing a number of arias in Italian, and I can order a beer in Rome in Italian.

David Spray:                 Okay, so that's the fifth one, would be-

Meril Markley:             Yeah.

David Spray:                 ... Italian. Well, thank you for that additional color. One of the things that I really enjoy working with you over the last number of years is because of your background in the arts, you have a unique historical context on taxation that I've always found fascinating. Before we dive into the DISC, why don't we take a step back and talk about tax incentives from a historical perspective? Are you up for that?

Meril Markley:             I am, because tax incentives including things like the IC-DISC are as old as governments seeking to squeeze revenue out of taxpayers. They're based on the assumption that human beings act based on what is beneficial to them or what punishes them. So, since the dawn of history, governments have collected taxes on transactions, profits, sins, and even mere existence in the form of the poll tax, while providing exemptions to encourage certain behavior. Dave, for a fascinating romp through the history of the world seen through the lens of tax policy, I highly recommend a book called For Good and Evil: The Impact of Taxes on the Course of Civilization, and it was written by a tax lawyer named Charles Adams. For example, in the book, he attributes the fall of the Roman Empire to factors that include the tax system.

David Spray:                 Really?

Meril Markley:             There was lax enforcement, and that meant that the wealthy stopped paying taxes. Farmers were taxes so heavily that they abandoned their fields and crops dried up, starvation spread, and the legion stopped being supplied, making the empire vulnerable to rampaging Visigoths and other invaders.

David Spray:                 Really?

Meril Markley:             But that's not the only interesting story.

David Spray:                 Okay. There's more?

Meril Markley:             Yes. Oh, the book is fascinating, Dave. Anybody who has a passing interest in history should read it because it really does show how decisions made by governments about how to tax their people really changed the course of history. For example, at one point, the Ottoman Empire was spreading into Europe and occupying the Balkans, and when the government decided to end tax incentives that were being offered to Christians who professed Islam, if there was no break, no tax break, no convert. Really interesting result.

David Spray:                 Oh, Lord.

Meril Markley:             Yes. All of Europe might have been conquered if it had not been for the elimination of this tax break.

David Spray:                 Really?

Meril Markley:             Adams also cites harsh tax policies in Spain from which the colonies in the New World were exempt as a reason why so many Spaniards relocated to the New World, and that triggered the decline of Spain itself. So, it's no surprise that our internal revenue code is full of levers to both entice and to punish.

David Spray:                 So, this is not a new invention, even though the IRS was formed, what, in the early 1900s I believe, 1917 or something like that?

Meril Markley:             It came about, yes, after the income tax law, which initially failed, and was deemed unconstitutional; was then eventually brought into law, and then the IRS has been with us ever since.

David Spray:                 Got you. Now as we turn our attention more to the IC-DISC, let's talk about tax policy, I guess about the DISC specifically, and tax policy over, say, the last three or four decades. It seems like the export tax incentives, they seem to come and go. Is that right?

Meril Markley:             They do, and the IC-DISC is a tiny remnant whose useful remains attractive. What I love about it as a tax policy bonk is it's grounded in economic substance. So, I contrast that with some of the other incentives that I've watched come and go over the years. For example, in the late 1980s, an entire industry grew up around incentives for passive investing in wind turbines and concave mirrors to generate electricity, and took out a whole part of the desert east of Los Angeles for these tax haven projects.

David Spray:                 Oh, really?

Meril Markley:             And film companies, I always loved watching film companies chase incentives offered by foreign countries. For example, Yugoslavia and Argentina, where those countries hoped to host the filming of a blockbuster, but most of the time, they ended up with turkeys, such as you may remember Transylvania 6-5000 or Naked Tango. These were films that got tax arrangements that were attractive, but it didn't mean that it was the ticket to success in theaters.

David Spray:                 Or said another way, you can't cost cut your way to success in business. It's a bit more....

Meril Markley:             That's right, and that's why incentives are so important, that Dave, they really be linked to doing something, and not just to reducing taxes by sticking your finger up in the air and hoping that you catch an attractive loophole.

David Spray:                 Sure, sure. Well, when you talk to clients about IC-DISC, what are the typical questions that they might have, and do they ever have any reservations?

Meril Markley:             They do, and that's a good thing. I like it when clients ask questions and want to understand something that at first blush may seem that it's a little bit dodgy. For example, I always get asked, is it a loophole that's likely to be plugged by Congress? Other people say, "Gee, isn't the DISC a sham corporation? It is no employees or assets, and it exists solely to generate a tax benefit." The one I hate the most is when people ask me, "Is this a tax shelter like those smoke and mirrors things that accounting firms got in trouble for promoting?"

David Spray:                 That is a good point. What's your typical response to these questions?

Meril Markley:             It's an easy one to understand. The DISC is embodied in the internal revenue code itself. It's not just a regulation or a ruling or a series of sham transactions. And so, only Congress can get rid of it.

David Spray:                 Okay. Now ... Go ahead.

Meril Markley:             If you follow the rules, and you know what those are, that seem a bit formulaic or mechanical, but if you follow them, the tax savings are legitimate and attractive. What I find interesting is that there aren't a lot of court cases or IRS rulings interpreting the IC-DISC statute and regulations. It's pretty much what you see is what you get, not a lot of gray area or room for argument. You stick to the rules, and the rewards should result.

David Spray:                 Okay. It sounds good so far. Well, let's go back to the beginning of the DISC. When did this get started?

Meril Markley:             The DISC was actually part of the Revenue Act of 1971, and in that law, it provided the basic exemption from corporate income tax that the DISC as a company still enjoys. The second important thing that the act did was it postponed the time for taxing the DISC's shareholders on those tax-free earnings until the shareholders received an actual dividend.

David Spray:                 Why was that? What do you think the motivation of Congress was to structure it that way?

Meril Markley:             I think it came down to wanting to encourage exports by small businesses, using an easy to administer domestic corporation. That way, small business could achieve benefits similar to the tax deferral that large corporations had been enjoying for years by using foreign subsidiaries as low tax resellers.

David Spray:                 Okay. But at its core, it was really a deferral play, right?

Meril Markley:             It was, and that's what got it into trouble with our trading partners. At the time-

David Spray:                 How was that? How did it get us in trouble?

Meril Markley:             Well, if you remember back to the days of the GATT, or the general agreement on tariffs and trade, which was the predecessor to the World Trade Organization, it was viewed by members of the GATT as an impermissible subsidy targeting exports from the US and harming our trading partners by allowing US exports into those countries at prices lower than what the same goods cost in the US.

David Spray:                 So, what was Congress' or the government's answer to that?

Meril Markley:             Well, they repealed the DISC, and in 1984 they created something called the foreign sales corporation, or the FSC, and that required that in place of using a US incorporated company, that a foreign corporation would be used to assist in the import sale. In that way, the US claimed that this resembled a territorial system of taxation, and therefore would be permissible under the GATT. The key was that this was not a paper company like the DISC. The FSC had to be incorporated outside the US and it had to have employees, and it had to undertake specific economic processes as outlined in the law.

David Spray:                 What year was that?

Meril Markley:             That was 1984, which is a very special year for me because I was-

David Spray:                 Oh, yeah? Why is that?

Meril Markley:             I was starting my career. I was a newly minted tax lawyer, and I was sent off on my first foreign business trip to go to Brussels and to set up the Belgian branch of the FSC that was incorporated in Guam.

David Spray:                 Oh, wow.

Meril Markley:             That was also my first interaction with Neal Block, Baker McKensie's irrepressible guru who truly wrote the book on export-related incentives such as DISC and FSC. So, for me, that was an exciting time, Dave.

David Spray:                 Sure. Well, just an FYI, I know Neal. We've relied on his expertise many times through the years, and I'm actually hoping to have Neal as a future guest on the podcast. Now, I better not let him listen to your interview first or it may intimidate him and he may not wish to be on, so I may want to get him wrapped up and booked before this episode gets released.

Meril Markley:             Well, it would be an honor to be on the IC-DISC show and be able to say that Neal Block was also interviewed. That would be another career highlight for me, Dave.

David Spray:                 Well, anything I can do to create highlights in your career. That's what I'm all over. Now, with the FSC, with some of the ways it different from the DISC, was it simpler or more complex to administer?

Meril Markley:             It was way more complex because it had to have multiple agreement and subcontracts in foreign languages, and so it meant foreign legal entanglements, through setting up a foreign corporation with all the governance requirements under foreign law, and it had to file tax returns in the foreign country. So, this was a far cry from the DISC as a paper company tucked away safely in the US. The FSC was not popular with smaller exporters, the very people for whom DISC had been intended, especially because it required boots on the ground in the form of employees and economic activity in foreign locales that a lot of small exporters simply could not invest in.

David Spray:                 Wow. I'm not a FSC guru, and so that's really interesting, on just the ways that the FSC made it a lot more difficult. I guess that's why when I hear about companies who used to have a FSC, it's typically larger companies. I guess that's the reason why.

Meril Markley:             Yes, and it was popular for a while, but from the very beginning, there was objection to the FSC from our trading partners, especially in the European Union. Again, there was the claim it was an impermissible export subsidy, giving US goods an advantage in Europe over European-made products. Despite the requirement that the FSC be foreign and undertake significant activities outside the US, it was still basically dead on arrival when it came to approval by our trading partners.

David Spray:                 Wow. What year was this, then, that the FSC was basically killed?

Meril Markley:             Well, it was killed off by ... formally, in 2000, with the extraterritorial income exclusion act, and that created the ETI, or extraterritorial income benefit, that didn't require a separate corporation. A company could get it and simply exempt certain export sales from income tax, while still retaining the requirements that activities and components and so forth be US made. So, this, too, failed to pass muster with the WTO. It led to years of complaints, reports, rulings, and appeals, and it's interesting that in a historic and ultimately successful threat to impose tariffs, this time on US goods, the EU forced Congress to repeal the ETI in 2006.

David Spray:                 Wow. Let me just interject something there. I had heard that what really got the Europeans upset was that Boeing received a billion dollars in tax savings in one of the first years, and that Air Bus didn't take kindly to that. Are you familiar with that, or is that just-

Meril Markley:             Well, I probably shouldn't comment on the arguments in opposition to that statement, looking at what sorts of subsidies Air Bus may have gotten, and that continues to remain controversial, so I think we'll step back from that one, Dave.

David Spray:                 Fair enough. Fair enough.

Meril Markley:             But, the Europeans have another aspect to their law that I think was interesting that Senator Max Baucus highlighted this in his opening remarks from a senate finance committee hearing a number of years ago, when he remarked that the WTO seems far more concerned with direct taxes, what we think of as income taxes, that might be export subsidies, but it ignores indirect taxes such as value added tax, or VAT, that completely exempts export sales.

David Spray:                 Oh, yeah. That seems like an export subsidy ... a slightly disguised export subsidy.

Meril Markley:             Well, it's interesting because for our European trading partners, the lion's share of tax revenues come from VAT, transaction taxes, rather than from corporate income taxes. So, that exemption for export sales from VAT remains firmly in place. But in the meantime, luckily the IC-DISC has flown under the European radar since the repeal of ETI.

David Spray:                 Why do you think that is? I've heard different theories on that, some being that the large public companies don't seem to use DISC as much as they used ETI, and maybe just doesn't get the attention, but what are your thoughts on why that is?

Meril Markley:             Well, I think it was a clever ploy on the part of congress back in 1984 when they repealed the lion's share of the old DISC provisions in the code. They left this rump concept of the interest charge DISC, so that it still benefited the DISC itself from the exemption from corporate income tax, but the shareholders on longer got to enjoy that indefinitely deferral of tax on the DISC's earnings until some point in the future when they received a dividend. So, instead, the shareholders became subject to an interest charge, and I think that took some of the sting out of the objection to DISC.

Meril Markley:             I think the other point is, and you raise a very good one, Dave, about who uses the interest charge DISC. I think that really benefits a lot of small and medium sized companies, especially in the run up to the 2017 tax law, reducing corporate income tax rates. The IC-DISC was really part of a perfect storm of tax circumstances, if you can ever really have anything like that, and that was taxation of qualified dividends at capital gains rates, and congress' final commitment not to repeal the IC-DISC. A lot of people had sat on the fence for a long time saying, "It's going to be gone. Why do I need to invest in this thing?" But when it became clear that the DISC would remain around, or the IC-DISC would remain around, it made it very attractive for individuals especially who owned an S corporation or perhaps a limited liability company, where the company's ordinary income from its sales activities was taxed only once, at the shareholder level. So, those individuals could own the IC-DISC, including through a limited liability company, in order to have more control over how profits would be allocated to those owners.

Meril Markley:             They could also determine what qualifying sales to run through the DISC. They didn't have to put everything through there. It really became more of a tax planning approach, and not just a tax incentive. So, when you think about it, it's really pretty clever. The commission paid to the IC-DISC by the company, for example, the manufacturing company, that's a deductible business expense, that commission, and so it lowers the taxable income of the manufacturing company. Then the IC-DISC receives the commission, and it's not taxes on it at all. The shareholders get a dividend out of the DISC, and that dividend is eligible for the preferential tax rate for capital gains. So, during that perfect storm, period, it was really a great arrangement. The bottom line for the owners of the manufacturing company who are shareholders of the IC-DISC is they replaced a chunk of income taxed at ordinary rates with dividends taxed at lower capital gains rates. What's not to love?

David Spray:                 I would agree. I would agree. What is there not to love? I know that there's some industries that seem like they've been a better fit than others. For example, a lot of our clients are in the scrap metal business. But I know there's other industries that have also found it particularly attractive. What are some of the other industries you've seen that it's really helpful for?

Meril Markley:             I particularly like an underutilized aspect of IC-DISC. A lot of engineering and architectural and design companies, especially in the oil field services realm, didn't know that they too could benefit from the IC-DISC. So, beyond that realm of manufacturing, the IC-DISC is available with respect to engineering and architectural services if the project being designed will be built outside the US. This is especially interesting because the tax savings available from an IC-DISC helped to alleviate the pain when foreign withholding taxes are collected from fees received from US design firms.

Meril Markley:             So, without getting too technical, let me just say that those foreign withholding taxes are only creditable against US tax on foreign source income, but services performed in the US don't give rise to foreign source income. That's US source income. So, in many cases, those foreign tax credits would never be usable. And the benefits available from an IC-DISC for a design firm finding itself in this situation, it helps to take the sting out of this inherent assymetry in taxing fees for services.

David Spray:                 No, I've seen that first hand. We have several clients ourself that are engineering firms that are involved in construction projects related to pipe line projects and such outside the US, and I've seen first hand where that can be very valuable, especially since often times those services firms, if they have a really high quality service, they may have higher gross margin percentages that a lot of manufacturing companies. So, the benefit we've seen is substantial.

Meril Markley:             That's a great point, and as we know, so many foreign countries, where oil rigs are located, are ones that have high withholding taxes on any kind of a fee that's paid for engineering or construction services, and so you can really get trapped in that assymetry and not be able to use a foreign tax credit that's being paid on gross income that you're getting from the foreign project, even though maybe 95% of your work is done in the US.

David Spray:                 Excellent. Excellent point. Well, it sounds like the DISC is just heaven on earth, nirvana, if you will. So, is it just a slam dunk? You just go to town, and that's it on the DISC, or is there more to it?

Meril Markley:             Well, that's where you come in. That's where you come in, Dave, because while the IC-DISC remains an attractive incentive, there's more to it than just setting up a paper company and watching the tax savings roll in. There are, as you and I have talked about so often over the years, it's essential that the requirements are met and that they're fully documented in a timely manner, and they may seem purely mechanical, but missing just one can lead to the IC-DISC being disqualified, and therefore losing the tax exemption on its commission income.

Meril Markley:             In my experience, the sad truth is that not every advisor who claims to be knowledgeable about IC-DISC has the expertise and the resources to prevent that disqualification, but also to maximize the benefits to the owners based on the various methods for computing the IC-DISC commission. So, done right, the IC-DISC can be a useful and legitimate way to reduce federal income tax. So, it warms this tax lawyer's heart that the IC-DISC is still around. It survives, and it thrives.

David Spray:                 I am glad to know that your heart is warmed by the IC-DISC. I can't say that everybody's is. It's funny, you've made me think of a plumbing truck I saw recently, back to the comment about not every advisor who claims to be knowledgeable out the IC-DISC has the expertise, and I always find it interesting the word specialize. To me, specialize implies an exclusion of other services to focus on just the narrow few, and I've sometimes seen some firms, because they have such enthusiasm to do as much as they can for their clients, they end up specializing in 120 things. Well, anyway, this truck I saw is a plumbing truck. I even took a picture of it. It said, 'We specialize in new construction, remodeling, repairs, emergencies, and consulting of new projects,' or something to that effect, and I was thinking to myself, what does that leave around plumbing that they don't do?

Meril Markley:             That's right, and that's why I am very skeptical of advisors who try to be all things to all people, especially they don't want to appear to not have a certain expertise in front of their clients, but the client comes first, and it's important, especially in the IC-DISC area, which is so specialized, that people look to someone with the experience and the expertise.

David Spray:                 Agreed. Agreed. We have a little bit of time left. Do you think we could maybe delve into just a little mini case study or example or two? Obviously with clients being anonymous, but could you maybe give an example of maybe a situation where you introduced IC-DISC into the planning, and maybe how that came to be, or could you maybe just walk us through an example?

Meril Markley:             Well, I can think of one where it just seemed so obvious. The client was a small company. They didn't want to do any manufacturing outside the US. They had a proprietary product that was very unique in the oil field service business, sort of a chemical product, and they were very worried about someone try to reverse engineer it if they allowed too much of the manufacturing process to go on outside the US, and yet, more than 50% of their customers were foreign customers. So, I suggested that they ought to consider having an IC-DISC, and I was met with blank stares, and like, "Well, what kind of a goofy tax shelter loophole are we talking about here?" As I kept explaining to them about it and how it had evolved over the years and it was still available and it was legitimate and it was in the internal revenue code, they warmed to it, and they did it. And they set it up, and you helped with it, and through years after that, every time I would see them at a cocktail party or some other gathering, the first thing they said was, "That IC-DISC, that's made all the difference." So, you can't ask for more when you're a tax lawyer. Mostly people are mad at you about something, some bad news you're trying to tell them, and here's a client who saw me as a hero because I knew you.

David Spray:                 Well, it sounds like a win-win all around. You were able to be a hero to the client, and you were also a hero to me at the same time, so that is a win all around. What do you find is the biggest reason that people who are eligible for DISC don't have a DISC, from what you've seen in your experience, or maybe several reasons that might come to mind?

Meril Markley:             Yeah. I think it's a couple of factors, Dave. I can think of a couple of instances when clients said to me that they had raised the issue with their tax advisor who wasn't familiar with it and poo-pooed it, and just said, "Oh, that's going to go away, you can't do that." So, that's an education process for anyone who's advising a company that has export sales, that they should have the IC-DISC as one of the arrows in their quiver, and make sure that they're pulling it out and shooting it at the target and getting their clients interested in it.

David Spray:                 Okay. This has been my experience in a lot of ways, that it's really education or lack thereof that's the main impediment. Maybe not even education. Just knowledge, either by their CPA who maybe has a focus on small to mid market companies, but with no specific exporting focus. They may only have one or two clients that would even qualify, and it seems like these firms serving companies like that, they really need to be a good all-around generalist firm, in things like-

Meril Markley:             Well, and I think another factor that has made IC-DISC more attractive is that since companies have started selling all over the world through the internet, they can be visible to their foreign customers without having to send a salesman to trace around the UAE or something like that. So, they have-

David Spray:                 Oh, right.

Meril Markley:             ... more foreign customers than they may have every dreams they would have, and I think one of the important points that you make, Dave, is that it doesn't require a huge investment to make the IC-DISC work. What's your basic threshold for when you would tell a client it's time to consider that they have enough export sales for a DISC?

David Spray:                 Several million dollars. Two, three million dollars of exports, we find it's usually worth looking at.

Meril Markley:             Well, and as you say, for high margin businesses like design firms and engineering firms, that could be really attractive from the get go because of those higher margins, higher profits.

David Spray:                 I could say so. Now, another angle I'd like to talk to you about, and you're one of the few people, maybe the only person, who really brought this up as far as this strategy on the DISC, is on foreign companies, foreign-owned companies using an IC-DISC. Can you talk a bit about that?

Meril Markley:             Well, I think that's still somewhat controversial, and I have never had a client do that. I think in theory, it would work, particularly if the company is ... the foreign parent company is a resident of a country with which the US has a treaty, but that's probably a good question for you to go over with Neal Block.

David Spray:                 Okay. I'll save that one for Neal. I know that we never had a client that utilized that structure, and I wasn't sure if that was something you had experience with, personally with one of your clients or not. So, I'll go over that with Neal, but I got to tell you, I'm pretty sure Neal has not sung the national anthem of an opening game, and I'm also pretty sure you probably have him on the languages, so Neal's really going to have to step it up when I have him on the program, right?

Meril Markley:             Well, I think you could do hours with Neal on different DISC scenarios that he's seen and cutting edge approaches that he's developed to help clients through this process. He's a very creative guy, so he doesn't have to sing in order to make his clients happy.

David Spray:                 No, and just to be clear, we're both huge fans of Neal. I'm just having some fun. Well, Meril, I really appreciate your time today. Was there anything else that we didn't cover that you think should be mentioned as it relates to IC-DISC or the history of taxation?

Meril Markley:             No. I just think that people ought to go out and get Charles Adams' book on the history of taxation. It's a great read for an airplane trip, and it's full of fascinating tidbits, so maybe we can do an IC-DISC show in the future on all of the mistakes that governments have made and how they've changed the course of civilization through tax policy.

David Spray:                 I think that may be a great idea. I've made note of the book, and I'm going to add that to my reading list. Well, with that, why don't we wrap up, and again, Meril, thank you very much for being on the IC-DISC show.

Meril Markley:             Well, thanks, Dave, and thanks for always doing such a great job for my clients. It means a lot to me because when they're happy, I'm happy.

David Spray:                 Well, it's always a pleasure working with you and your clients. You have a great day.

Meril Markley:             Thanks, Dave. Bye-bye.

David Spray:                 Bye.