Why Your Books Decide What Happens When Private Equity Comes Knocking

A private equity group knocks on your door tomorrow. What do your last three years of financials say about your company?

In this episode, Elizabeth Ledoux talks with Brian Kofford, CPA and founder of Strive CPAs, about the work that happens long before anyone signs anything. Brian has owned his practice since 2001 and works almost entirely with growth-minded, founder-led businesses. He opens with a story about a Florida practice that grew from roughly seven million in revenue to more than forty million in five years. A private equity group came looking, saw the books, and walked away. After a couple of months of cleanup, the same company went back to market with an investment bank, received nine letters of intent, and closed a hundred million dollar transaction.

Brian and Elizabeth get into why that pattern repeats. Owners are often excellent at vision, sales, and creating something from nothing, and far less interested in the details underneath. That gap shows up as books that were never converted to accrual, personal spending mixed into business expenses, and no historical record a buyer can make sense of. Brian also names the harder version of the same problem, which is the owner who is so central to every decision that there is nothing for a successor to step into.

The conversation then turns to what Brian calls the million dollar ceiling. He shares a recent example of a company that grew from 2.3 million in revenue to 4.8 million in a single year, and from 400,000 in profit to 1.3 million. Their tax bill came back at 450,000, more than the entire prior year’s profit, because nobody preparing the return had eyes on the growth while it was happening.

On the strategy side, Brian walks through what has to be handled in advance. Estate work, trusts, charitable remainder trusts, and donor advised funds all depend on moving value at a lower valuation before a transaction, and the IRS pays attention to how much time sits between the planning and the payday. Elizabeth adds a story of two brothers who agreed verbally that one owned forty percent, never documented it, and created a taxable event on the way to a sale that could have been zero with earlier action.

Key takeaways from the conversation:

• Buyers typically want two to three years of clean, accrual-basis financials, and five years is better if you can build the record now.
• Clean books matter just as much for a successor inside the family or the company. A younger successor needs numbers that make sense on their own.
• A lifestyle business consumes what it earns, which leaves nothing to fund the strategies that would lower the tax bill later.
• Tax liability climbs exponentially rather than in a straight line, and owners crossing a million in profit for the first time are often unprepared for it.
• Preparation is the same work no matter which path you take. Third party, employee, or family, the financials and the systems have to hold up either way.

Brian and Elizabeth close on the part nobody puts in a spreadsheet. Brian compares founders to professional athletes who cannot let go of the game, and both agree that the abrupt version of this change is the hardest on the owner, the family, and the company. Long timelines give room for the tax work, the successor development, and the identity shift to happen in stages.

Chapters in this Episode:
00:00 – Welcome and introducing Brian Kofford
01:42 – Growing up entrepreneurial and the summer in Mexico
03:25 – Audit versus tax and why most CPAs miss small business owners
04:32 – Why entrepreneurs and conservative CPAs clash
05:06 – Optimizing tax rather than only minimizing it
06:16 – The first thing owners overlook about their own books
07:34 – A Florida practice that went from a pass to a $100 million close
08:41 – Two Texas companies that lost buyers over messy numbers
09:49 – Normalizing financials and separating personal from business
10:41 – The DIY complex and the lifestyle business trap
12:39 – Why an internal successor needs clean books just as much
14:43 – Eighty percent of net worth and the businesses that never sell
16:34 – Preparation pays off no matter which path you take
18:22 – How far back buyers look at your financials
20:01 – What breaks when a lifestyle business starts to scale
22:35 – A $450,000 tax bill after a $400,000 year
25:39 – Tax strategies that have to be set up in advance
28:22 – Gifting shares early and the lifetime exemption
29:10 – The brothers who never documented the forty percent
33:42 – Identity, professional athletes, and life after the business
37:26 – Long timelines, staged transitions, and the cliff
39:29 – Brian’s one thing for listeners

Connect with Brian Kofford
Striv CPAs: https://strivcpas.com/
LinkedIn: https://www.linkedin.com/in/brian-kofford-cpa/

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Why Your Books Decide What Happens When Private Equity Comes Knocking Transcript

Elizabeth Ledoux:
Hi everyone and welcome back to the Business Transition Roadmap. I’m Elizabeth Ledoux, and today we are joined by Brian Kofford. Brian is an entrepreneur, a CPA, and a founder of Strive CPAs with more than 25 years of experience serving growth-minded business owners. He helps founder-led companies, so privately owned companies.

That have outgrown traditional CPA firms. And what what they do is they provide proactive tax strategies, which we’re going to talk about today. Fractional CFO services, which come in very handy as you navigate a business transition. And they do full outsourced finance department type services. So also tax compliance. So Brian is known for helping entrepreneurs get to clearer numbers.

save sometimes six figures in taxes and provide a financial infrastructure that they might need in order to scale faster with confidence and for today’s podcast also to transition well for for the business. So the business does well, the owners do well, and taxes are all say optimized, right? They’re optimized.

So Brian, welcome and I’m so grateful that you’re here today with us.

Brian Kofford:
Thank you, I appreciate it. Thanks for the invite.

Elizabeth Ledoux:
You’re welcome. So how about we start with you telling us a little bit about your background, your experience and you know, what drives you to do what you do?

Brian Kofford:
Yeah, that’s a great question. I think one of the things that’s unique and different maybe about me in the in my industry in the CPA world is that I don’t think that most CPAs are entrepreneurial. And so I’m very entrepreneurial. I was raised by my father was an entrepreneur, I grew up in Colorado. And just maybe, you know, a real quick story, as a 14-year-old, you know, maybe answer the question. When did I think that I wanted to become an entrepreneur?

And it really is when I was 14 years old. And my dad quit his job as a financial planner, started doing his own businesses for about a year. And then the next summer we went to Mexico for three months. And in a tent trailer and a van. And I’m the oldest of five kids. And so it was this big crazy adventure, you know. And and I just, you know, I think probably like a month in, I’m thinking, hmm, like who does this? Like, right?

Elizabeth Ledoux:
Mm.

Brian Kofford:
Entrepreneurs do crazy things like that. People that are, you know, have two weeks’ vacation PTO or whatever, they’re not they’re not going to Mexico for three months. So anyway, that’s a little quick story about yeah, how I became I was just raised that way. I I worked for my dad growing up at through junior high and high school with my brothers, working family business and stuff. And so it was just it’s just kinda in my blood being an entrepreneur. And then I always liked business and people, and so I just kind of migrated to

being a a CPA in the public space and focusing on tax, you know, mostly. you know, in in the in the public accounting world, there’s more than half of the people that are CPAs that are in public accounting, maybe you know this already, but they’re in audit. They do audit. And that doesn’t really mesh with small business entrepreneurs, you know, audits are done for big publicly traded companies or

Elizabeth Ledoux:
Yeah.

Brian Kofford:
government owned agencies, school districts, utilities, you know, and so so of CPAs that are in public accounting, less than half are really on the tax side and an even smaller fraction of those are working with small businesses, working with entrepreneurs.

Elizabeth Ledoux:
Yeah, yeah, I know that I did not know that statistic and it’s it’s truly amazing. I think I think entrepreneurs enjoy entrepreneurial accounting type CPAs. They match well together.

Brian Kofford:
Yeah. That’s what’s been really fun. I mean, I’ve owned my own practice since 2001, like you said, for 25 years. And that’s what I get a lot of. I I just had a lot of fun in my career, honestly, in in working with entrepreneurs because I I understand them. I am one. And so often they come to me because where they’re shocking for a CPA, right? They’re not happy with their CPA, their then their relationship. And a lot of times it is just a it’s a personality conflict, right? I mean, I’ve had entrepreneurs come to me and say,

Elizabeth Ledoux:
Mm-hmm.

Brian Kofford:
I’m looking for a new CPA because the one that I go to, I feel like I’m going to the principal’s office. I don’t try to go in and ask them, Hey, can I do this? I they’re going to their CPA with tax strategies and getting slapped on the hand because their CPA is like, no, no, you d you gotta be careful. You don’t wanna get in trouble with the IRS and just super conservative, you know. And entrepreneurs aren’t cut out of a conservative cloth. They’re cut out of a risk, they they like risk. Entrepreneurs generally are are pretty

Elizabeth Ledoux:
It’s like no.

They like risk.

Brian Kofford:
They like th they’re okay with risk.

Elizabeth Ledoux:
They do. And I and earlier, you know, when

We I use the word optimized. Yeah, they optimize taxes because I so many times when I’m talking to an entrepreneur and they’re like, Well, no, I don’t wanna I want to minimize tax as much as possible. And I’m like, Well, we can do that. You know, there are a lot of different strategies that you can use to get there, but sometimes it’s the concept of optimizing the tax so that the tax decision doesn’t w doesn’t basically drive the entire transition because it can’t

Brian Kofford:
Yeah.

Elizabeth Ledoux:
Can at times. Yeah. So let’s so you’ve done a lot of work in this area with a lot of entrepreneurs, likely walked many entrepreneurs through some type of a business transaction, right? Which is where the tax implications come.

So yeah, from you know gifting all the way to a a full sale or a partial sale. So when you see an entrepreneur approaching that type of a you know business transaction, that event in their lives, what what kinds of things do you talk to them about?

Brian Kofford:
That’s a good question. So I’ll give you a couple of examples. I think one of the things that business owners don’t think about is they don’t think about how what kind of condition their what their books are in. For example, even cash to accrual basis, for example as an example. well, first of all, just are the books clean, are they accurate? And then two, are they are they set up in a way that when a private equity group comes knocking or

another in vet you’re they’re considering a transaction and and they’re going through due diligence and someone’s looking at their books, you know, I think a lot of entrepreneurs just don’t think about that they’re going to be looking at historic financials and and ideally they’re going to want to see those on an accrual basis so that they can that’s just what they understand, right? That’s what they that’s what they want to see. So I think a lot of times business owners get caught unprepared because they’re not thinking about

And they’re not in the details of their financials. And so their financials are subpar. I’ll give you two examples. just in the last year, I had a group, doctor I was introduced to in Florida, and he had a private equity group come and look at him. He’d grown dramatically from six, seven million to four over 40 million in revenue in like five years. So private equity group comes knocking on the door, right? He wasn’t out looking, he wasn’t soliciting them, they came knocking on the door and

Elizabeth Ledoux:
Wow.

Brian Kofford:
they looked at his financials and they were mess. And so they passed. So then he was introduced to us, and we came in, cleaned up his last couple years of financials in a couple months, went back out with his investment bank to the market. He got nine LOIs. we helped him go through due diligence, the whole process. It was like a five-month process. just closed in May on a hundred million dollar transaction. And and so, in his case, again, he wasn’t ready or or looking.

Elizabeth Ledoux:
Crazy.

Brian Kofford:
for a buyer, but one came knocking on the door, like I said. And so so we help them get that organized. We have another couple groups, a c concrete company in d in Texas and a plumbing company also in Texas. Similar thing, you know, they’re they’re doing 15 million in revenue and private equity comes knocking and after a few months they pass. They can’t get their heads around their numbers. They they don’t they don’t understand the financials are a mess.

So we just barely, we just I think are now just on the very tail end of cleaning that up. So I think financials is one thing that people, business owners, you know, a lot of times my experience has been they’re not they’re not all detail oriented yet, guys or gals. And so they’re they’re really good at certain things and maybe they’re good at sales or they’re good at promoting or they’re good at creating or they’re good at being a visionary. but oftentimes they’re not really good at the details. And so they they just they just miss that. They just don’t even think about it.

Elizabeth Ledoux:
Yeah.

Brian Kofford:
As far as

Elizabeth Ledoux:
Well sure. Well and and you know if you’ve been owning it, operating it, you’re the founder of it ten years or or more, right? Twenty years, you

Brian Kofford:
Yeah.

Elizabeth Ledoux:
You sometimes have things in the business also that may belong in the business, sure, but they could be borderline, right? That when you leave and when you take those out, which could be you know, conference trips that lasted another couple days or different things like that. just things that business owners do because they get so used to living the business life.

Brian Kofford:
Yeah.

Right, right. So there’s a couple of things there that I can speak to you and one of them is you’re talking about kind of maybe the term is normalizing the financials and and that is getting out, removing the the the crossover between maybe what’s personal and versus what’s business and if someone else

Elizabeth Ledoux:
Mm, mm.

Brian Kofford:
is to going to acquire your business, they’re they’re not gonna maybe run the books the same or do run the same kind of expenses to their. So some of that is normalizing it you know to where it’s consistent and more representative of what the business is doing for a prospect prospective buyer. I think you you touched on a couple other things. One of the challenges I see and again working with entrepreneurs for all these years is

Entrepreneurs generally like control, like we talked about a second ago. They don’t they don’t mind risk. They’re willing to go out and jump into the deep end of the pool and they’re gonna make a better mousetrap or do something bigger and better, right? all those things that make entrepreneurs great also sometimes can be a an Achilles heel. It’s the DIY complex. It’s like I can just do it myself. I can figure it out, I’m just gonna do it myself.

Elizabeth Ledoux:
Yeah.

Yeah.

Brian Kofford:
Well, the problem with that, as I’ve seen, is that businesses, I call them, I think most businesses are what I define as a lifestyle business, meaning it supports the owner’s lifestyle. So there’s two things going on here that that inhibit a business owner from being able to scale and to exit successfully. One is if you’re in a lifestyle business, and by that, let me explain that a little bit. A lifestyle business is just supporting your lifestyle, meaning

You’re making 200 grand, 400 grand, 600 grand. Your business grows over time, maybe just organically, but your lifestyle changes and you’re spending all of that money. You’re just consuming all of that. And and there’s not really, there’s not anything for a CPA like me who’s trying to do proactive tax strategy with people in that kind of mindset, because there’s no there’s no money to to dedicate to and invest in tax strategies that are gonna save them taxes. And so,

And then the other part, the DIY part that has to, I’m sure you’ve seen this over and over again. You’ve got to the business owner has to be able to scale and get out of the way and build systems and processes and the people, the team, the culture, the tech stack. They have to build all those things so that it’s attractive for someone else to buy it. Because someone else doesn’t want to buy it if all the decisions go through you. You know, right? If you’re in the middle of everything, they’re like, well.

Elizabeth Ledoux:
Absolutely.

Brian Kofford:
No. Yeah, anyway. So th those are a couple of things I think that come to mind with again, maybe some of the traits that are make entrepreneurs who they are, but also that DIY idea can sometimes be a hindrance to them.

Elizabeth Ledoux:
Yeah, you can get in your way. Yeah. And and so, you know, yeah, what popped into my head, Brian, was the idea a lot of our listeners, are they haven’t decided whether or not they’re gonna sell to a third party and they’re still navigating even whether maybe one of their kids, you know, that might be their dream to get it into an employee’s hands or, you know, a few employees or

you know, into their kid or kids’ hands, depending on if they have more than one that are might be interested. And so from that perspective, you know, talking about getting your books ready, I think it’s just as important to have clean, accurate books for any successor, right? Even if it’s an internal, especially if they’re younger, because having clean books

means that it it operates properly and the logic is there and it’s easy for them to understand versus like, yeah, this is this and you know, that’s just there because

Brian Kofford:
Right. Well, I think when I listen to you say that, I think that a business owner, regardless of of what they think that might or might not happen, it’s in their best interest to be prepared and to have options. So the financials need to be in order regardless. the culture, the organization, the the workflows, the the processes, everything that that

Elizabeth Ledoux:
Yes.

Brian Kofford:
The business needs to be able to function again without the owner in the middle of everything. And certainly the foundation for all business is finance and accounting. Right. That’s that’s what that’s the language of business. And so yeah, I think I I heard some some statistics and and maybe you heard the similar things. And and this is part of what I think motivates me to do what I do, and is maybe my my mission here later on, and as I in the latter part of my career.

And that is that that on average, entrepreneurs have eighty percent of their net worth is tied up in their business.

Elizabeth Ledoux:
That’s an yeah, I’ve heard that statistic many times.

Brian Kofford:
huge yeah, a huge number. Okay, so just let that sink in for a second. Then I think statistically I heard that half of businesses don’t ever really sell.

Why? Well, they don’t sell because the business owner isn’t prepared, isn’t thinking ahead a year or two or three. They’re not doing the things we’re talking about and the things that your team helps them with, right? It’s all those things. They’re not thinking about that. And so one of the what happens is one of the one of the Ds that that life insurance agents talk about all the time, right? There’s some kind of disagreement. The partners don’t want to work together anymore.

Death, divorce, disability. So one of those things happens. And guess what? The business owner hasn’t thought ahead. They’re not ready. They haven’t done anything to prepare their financials. They haven’t done tax strategy to optimize the taxes. They haven’t, they haven’t worked on their culture. They haven’t worked on their tech stack. They haven’t worked on any of these things. And so guess what? It’s like, okay, maybe that was a lifestyle business that centered around you and that supported your lifestyle. And it might have been a nice lifestyle, but

But as far as it being attractive to someone else to come in and purchase it, no. And so you you you went through different options. You sell it internally, you gift it to your kids, maybe one your kids wants to inherit it, whatever. It you’re those things you don’t know. And I I’ve had clients come to me just all sad and just, Brian, that I thought one of my kids would take over my business, and none of them want to. And he was just all this dejected and sad. And it’s like, well, you know, so again,

Elizabeth Ledoux:
Mm.

Yeah, yeah.

Brian Kofford:
Whatever you’re at anticipating those those the the that exit might look like, you don’t you don’t know. And so a lot of these things that we do and that your team does are are just gives them options, right? If you make your company better prepared to exit, whether it’s externally, whether it’s to employees, whether it’s to family, it’s all the it’s all this. It’s all gonna be the same. It’s all gonna pay pay itself, you know, pay the rewards. Yeah, pays off for the effort.

Elizabeth Ledoux:
You don’t know.

It all pays off. Yeah, it all pays off because and you and I are on the same page and I’m so yeah, I’m so glad we’re having this conversation because you know operating a smart business and helping to build the team around you and do all of those things. One, it helps you in your lifestyle business because you can enjoy life more typically.

And two, it helps you have those options because so many people have the mindset, I think, Brian, of, well, I’m too small to, you know, be that complicated. Or I’m too, you know, I’m too far away, I don’t need to do that work yet. and being too small or too far away, a thought is you don’t know what’s coming and you don’t want to have no options when you get there.

So trying to figure out how do we how do you just put some of these things in place that actually at times are easier to put in place when you’re smaller or easier to put in place when you have a longer runway to, you know, to run. It’s it is a fraction of what it can be when you come in and do s things like you need to do, which is clean up years. I wrote down here how far back do, you know, potential buyers go.

in financials and how far back do they go, Brian?

Brian Kofford:
Well, usually at least two or three and sometimes more years than that. So like I gave you a couple of those examples of of clients that we worked with in the last six, nine months, and and we just went back, you know, two years and did the cash accrual and cleanup for two years. but you know, the like the groups the the two groups in in Texas, they’re they’re not planning to look they’re not looking to exit for two or three more years.

So by having those two years cleaned up and then we stack two or three more on top of it, then they’ll have a five year history that they can look back. And so I think it it it just depends. but the more the better, I think it especially if you can show some some nice growth trajectory, you know, nice growth pattern over the last several years, and it just helps to establish the foundation. I think it’s yeah, at least two, but two to five.

Elizabeth Ledoux:
Yeah. And the idea and you can this is my belief, but if say those two companies a company is you’ve got two years of cleaned up financials, smart reviews going on on a regular basis throughout the next two to three years and and they’re doing that, my my thought is that the business likely will run better and make more money in the two or three years where they have

Better books, better numbers. I’m an engineer from Colorado School of Minds, so I’m like I love numbers. Just love, you know, seeing the data and knowing that you can use data to make better choices.

Brian Kofford:
Yeah, absolutely. And I think that’s one of the things that let’s talk about businesses, you know, that are are tired of or have left the lifestyle. Like I said, a lot of businesses, I think the vast, huge, vast majority are just kind of lifestyle businesses and that they’re not preparing for to scale. They’re not really prepared everybody wants their business to grow, but they’re not really doing things intentionally to scale quickly and to prepare to exit. So some of the things that

those growing pains that they have, if they do get out of out of that kind of lifestyle type mode and get into growth mode, scaling mode, they they they have a couple of big pain points. And one you just mentioned, and that is the way they used to make decisions when they were smaller on financial data that was kind of so-so doesn’t really work when they start to really scale.

Why? Because all of a sudden they’re trying to figure out marketing and sales. They’ve got HR th concerns. They’re trying to hire faster. they’re trying to figure out culture, they’re trying to figure out all these different things. And so there’s all these decisions to be made, but w what are they relying up upon to make those decisions? And and certainly there’s different things to factor, but from a financial standpoint, again, as they scale, they r they soon realize that they gotta have good data. They gotta have

really good solid numbers to be able to anticipate, hey, am I able to hire another person or two or three? Am I able to go in, you know, go into some a bigger lease or bigger office space, you know, big expand their their footprint or what whatever the expense might be, their d the decision as to what do I do this, do I do that? yeah, they gotta have good financial numbers and and and again, at a s smaller sizes, maybe they can get away with it, but as they scale, they can’t.

or it just becomes a friction point. And then the other big one I think is is just the numbers, being on top of the numbers and having the CPA that’s preparing your tax return is trying to provide proactive tax strategy being in the numbers as they scale, that becomes more and more important. And that’s why we’ve we’ve you know adapted over time to create that I guess, service offering, if you will, those three components, right?

Elizabeth Ledoux:
Right.

Brian Kofford:
‘Cause as they scale, what happens a lot of times if they go through like I call it the the million dollar ceiling, if they go through a million where they’re making a million dollars in profit or more, first time they go through that, it’s it’s they’re shell shocked at the tax bill, right? I’ll give you a quick example. I got introduced to a group in a small business in in Idaho.

Elizabeth Ledoux:
Mm-hmm.

Yeah.

Brian Kofford:
and they I I’m I’m talking with them saying, talk to me about 24, 25. 24, how much sales revenue did you have? And they said, 2.3 million or something. I said, Well, what kind of profit did you have? about 400,000. Like, great. How did 24 how was 25 different? And they said, Well, in 25 we did like 4.8 million. I was like, Wow, 4.8 million sales. That’s awesome. what kind of profit did you show? 1.3 million. Okay. And so then my next question was.

after I said, wow, good for you. That’s huge growth in one year to go from $400,000 in profit to 1.3. And then my next question was, what what kind of tax did you pay last year? And they’re like, and they’re like, well, our tax returns aren’t done yet, but our CPA is telling us that the tax bill is gonna be $450,000.

Elizabeth Ledoux:
Wow.

Brian Kofford:
And they’re just like their eyes are like this big, like what they’re just wait so just let that sink in for a minute. Your business profited you four hundred grand. The next year you get a tax bill of four fifty.

They’re like, what? Well, what happened is their CPA that was doing their tax return didn’t have any eyes on the growth. He didn’t have any eyes on the finance that he wasn’t involved in the accounting. And so they went, it had that huge uplift and increase in income. And there was no tax strategy because the CPA didn’t know who’s preparing the tax returns. One didn’t do tax strategy. And two, didn’t even know that they had grown that quickly. So

Elizabeth Ledoux:
Mm.

No?

Yeah.

Brian Kofford:
There’s a couple yeah, pain points there for when businesses start to really scale quickly, they have finance pain or or the numbers pain becomes real, and that they’re not if they’re not confident in their numbers, and then and then the tax bill just goes up exponentially. It doesn’t go up linearly. So if they’ve never made over a million, they’re just like, what in the world just happened? Right?

Elizabeth Ledoux:
Mm-hmm.

No, it does not.

Yeah. And they’re not prepared because they may have s they may have taken that money and done something else with it or tied it up in AR or other things that, you know, that required some required some growth strategy. So they don’t they may not even have the cash to pay it, the cash to show for it. Yeah. So so Brian, great strat great segue and we’re getting close to the end of our podcast already. It goes so quickly for us.

but what are some things that as business owners start to prepare for transition and they start thinking about it? in my work and in my experience, there are some tax strategies that require some pre thinking, right? Some proactive kind of things to be done that can be very important and very

powerful in optimizing tax. So can you talk a little bit about that?

Brian Kofford:
Yeah, well, it depends on the size of the exit, but bigger exits, then estate tax planning comes into play. making sure that the their estates in order as far as legally the entities, the trusts, those types of things are prepared in advance. Those have to be done a ahead of time. and then also there’s just there’s a lot of different strategies as far as like for example.

There’s there’s several different strategies that relate to charitable contributions and and donating to like say for example a university or a church or whatever charity that they they want, putting money into a donor advice fund, you know, setting those things up so that charitable remainder trust, things like that that that also can be set up ahead of time.

So that what’s the easiest way to explain that? It’s basically what you’re trying to do is get assets, get some of the stock, some of your ownership in the company into some of these other legal entities and vehicles, charitable vehicles, at a lower valuation before the transaction, before the valuation. And so it would be like, I don’t know, the b easiest way to explain it is.

Is like, for example, you can donate stock to a charity. and the deduction you get is fair market value, what it trades for on the day. So let’s say you you own some shares of Tesla or whatever, some publicly traded company, and you want to you’re wanting to donate some money to a charity. maybe you bought that stock years ago and it was valued at $10 a share and now it’s at $50 a share.

Well, you when you donate it, you you get the the fair market value, the deduction based off the fair market value of the stock when you donate it to the charity, right? But I guess the the the similar or the to finish that story, it’s like you may be only you’re you’re avoiding paying capital gains on the difference between what you what your basis tax basis was, what you bought the stock at, in my example, 10 or whatever, and and the fair market value when you give it.

A similar strategy is behind the things that we’re just talking about, as far as charterable remainder trust or putting money outside of your estate into a trust at a lower value than it really is worth if you do it the right way. And then you just avoid paying capital gains on on that on that increase, right?

Elizabeth Ledoux:
Mm-hmm.

Yeah, and you know, and I’m a big futurist thinker. I always people I always have to tell them that, ’cause they don’t track very well with what I’m thinking when I’m navigating some stuff. But if you were one thing that came to mind when you were talking about that is you know, there are a variety of different scenarios and if you are or have a taxable estate or if you want to

not use any of your yeah if you don’t want to use any of your your exemption. Yeah, if you don’t want to do that, thank you. I’ve just if you give yourself enough time you have so many options. So sometimes a business could be scaling, could be growing quickly. you’re going to sell it in whatever a few years you’re anticipating

Brian Kofford:
Live time exam.

Elizabeth Ledoux:
that you will have a taxable event, a taxable estate by the time you get there. that you’re ready and your kids are ready to have some inheritance now. And it and so, you know, potentially setting up now, putting some of the the shares or some of the value of a company into your children’s names or you know, or making sure that that works today.

Can be a strategy to help save in tax. And yeah, then I I have a different story. This was actually a client. We went in, he and his brother started the business together. They never they never divided up the stock. The brother on the tax returns kept a hundred percent of it, even though verbally the other brother was supposed to have like forty percent of the business.

Brian Kofford:
Yeah.

Elizabeth Ledoux:
And so the business grows and it grows very well. We came in and worked with them on some strategies. And because the brothers hadn’t dealt with it, that had to happen. That forty percent had to happen before they could sell. And so there was a tax event that could have been a zero had they have done it earlier. Right? Just thinking through some of these things where entrepreneurial people are like, yeah, we’ll deal with that later. We’ll figure it out later.

Brian Kofford:
Right.

Elizabeth Ledoux:
And there’s so much you can do if you are on top of it.

Brian Kofford:
Yeah, for sure. Yeah, all the the your your examples, my examples, those things, and maybe I think we were talking a little bit maybe before we started this morning, but from the IRS’s standpoint and in the timeline standpoint, yeah, so many things, there’s just multiple examples of things that are so much better and we’re well, and ha really have to be done in advance. from the IRS’s standpoint, you know, they don’t

want certain things to if they’re ever to audit you and and look at the timeline and stuff, if you the longer the timeline between when you like gave gifted stock to your kids, for example, or created a charitable remainder trust, or did these different things, it’s like the better because they they get a little squeamish sometimes when when they if they look at it and it seems like it’s all just

Well, yeah, they just look at it and they’re like, well the only reason you’re doing this is to save taxes and they’re like, Well, yeah, but anyway, if it’s just to spread it out, it you know, makes it better. Yeah.

Elizabeth Ledoux:
In transparency, yes. Right. But yeah, you’re trying to do that. And yeah. And things I remember back I can’t remember what the year is, you would remember, but they were talking about reducing I think the lifetime exemption was gonna get significantly reduced, like cut in half. And there were all these people that were trying to figure out what to do and you know, it was like September and it was supposed to get reduced in January.

January 1st or something. and all these people were trying to figure out what to do. But every advisor I talked to was like, it’s too late, right? It’s too late to put a strategy in now when you only have three or four months until that tax law is gonna change. And so thinking about, you know, how do you set up not just your business and maybe, you know, getting some of that out of your estate, but also

setting up your entire estate because your business could be eighty percent of it, but hopefully if it’s scaling and doing well and you have an opportunity for a good private equity kind of a situation, yeah, there could be some really cool things that could be done if you start early enough.

Brian Kofford:
Yep, that’s true.

Elizabeth Ledoux:
Yeah. No. Okay. I know. But you know how prepared entrepreneurs are, don’t you? Not very sometimes.

Brian Kofford:
So it’s better to be prepared ahead of time.

Yeah. Not very sometimes. Not very prepared sometimes. Yeah, we just I get it. I’m an entrepreneur. I run my own business and and it’s I don’t know. There’s only so many hours in the day and the week and and you’re you’re wearing a lot of hats, you’re trying to do lot of different things and and so I don’t know how to I don’t know what the magic is as far as trying to get

Get people, you know, get business owners to be aware that they need to prepare more in advance. They need to start thinking about these things yeah, really years in advance and and just be intentionally building their business and making decisions along the way so that they just need to be thinking like, if someone else was looking at this, why would they want to buy it? And so but too often we’re just so caught up in what we’re doing that we only see what we see and we’re dealing with what we’re dealing with, and and we don’t really step

Step off and say, well, what do I need to do so that this is more attractive to a buyer?

Elizabeth Ledoux:
Absolutely. Absolutely. And to me, I think entrepreneurs just love playing the game because I’m an entrepreneur too. And I think they love playing the game. And really what this is is playing it’s a slightly different game, but it’s a very engaging and a very fun game. Once you get into it, it’s just a little different than, you know, just running your business and s and running the business. It’s

Brian Kofford:
Yeah.

Elizabeth Ledoux:
It’s very much it there’s some really great strategy that comes in to playing this kind of the game.

Brian Kofford:
Yeah, I mean, I think what when I listen to you say that, I I think about how I entrepreneurs are like professional athletes sometimes. in that you talk about playing the game and and they’re in the game and they like the challenge and they like the the risk and the rewards, the upside, there’s no limits, opportunities, all the things that make entrepreneurs like what they do. But but then also a lot of times I’ve seen it, I’m sure you have too, where

Part of the preparation for exit is not just numbers and tax and legal and strategy. Some of it is like emotional and just thinking like, okay, I’ve so much of what my identity is and what I’ve done to this point has been my business. I’m the owner of this company and I founded it and this. And then it’s like, well, what about like when you’re not, you know, you that anymore?

Elizabeth Ledoux:
Yeah.

Brian Kofford:
So thinking ahead of what they want the next stage of their life to be like, what does retirement look like? yeah, planning the numbers and the legal and other stuff is important, but I think a lot of times it’s like, and I’ve seen this, you know, I’m a big football fan. So you you you watch like I’ll give you a quick example, like Tom Brady, one of the best quarterbacks of all time, right?

The underdog was regr was drafted like almost the last pick, almost didn’t get drafted, becomes this amazing, amazing Hall of Fame quarterback, or will be in the Hall of Fame if he’s not already. But but I see like it gets to the end of his career, and it’s just so hard for those guys to give it up and to and to shift gears and to be something, have their identity be something else. and so so often Brent Favre did the same thing.

Elizabeth Ledoux:
Yeah.

Brian Kofford:
Peyton Manning, I’m a big Broncos fan. Fortunately, he he went to the Denver Denver Broncos and won it won a Super Bowl. Brady left left New England where he was at for years and years and could couldn’t didn’t retire and goes to Tampa Bay Buccaneers, wins the Super Bowl. So those guys, you know, they they they still have the the ability and they just don’t want to let go of the game. And so that’s something I think entrepreneurs struggle with sometimes too. Well, bro.

Elizabeth Ledoux:
Yeah.

I think you are you are right on with that, Brian. No, no doubt. you know, and that’s why I guess in the work that we do at the transition strategist, that’s why I like to think in long, long, long timelines. You know, it gives it gives a lot of time to go through the tax strategy, a long time to go through that.

emotional shift and how you want to handle it. A long time for successors to figure out what do they need to do. And a successor even to like a yeah, a successor that could be even to a job or a role. You know, how are you gonna let that piece go? And so you can do things in stages, which I think s helps with the idea of, you know, identity and letting go. So.

Brian Kofford:
Yeah. Yeah, anticipating that, preparing for that, thinking about that in advance is all of that I think is maybe therapeutic. But then also just just thinking, I don’t know, goal setting and envisioning what that looks like and looking forward to the change, you know, rather than coming up to it and then all of a sudden like, like who am I? Like if I’m not a founder, entrepreneur, if I’m not a

Elizabeth Ledoux:
Yeah, we hope so.

Yeah.

Brian Kofford:
quarterback in the NFL, like what do I do? Like what do I do with myself, you know?

Elizabeth Ledoux:
I don’t yeah. Yeah, I don’t have purpose anymore, which is sad. Yeah. Yeah. So the the idea of of keeping maintaining fulfillment, keeping it and that you don’t you don’t walk off the cliff, right? The cliff is what’s hard. Especially but entrepreneurs like to do that. They like to walk off the cliff and find the parachute. It’s just hard to walk off the cliff and the parachute’s gone because

Brian Kofford:
Right. Yes.

Elizabeth Ledoux:
You let it go, right? You’ve sold it. It’s gone. And I think those are the big the ones that are abrupt are the ones that are hardest on the family, hardest on the person, the people that are around them, on the company. And I personally that’s my belief when that happens, it’s my belief why two thirds of the businesses that transition to another generation fail. It’s just because it’s too soon. It’s just too quick. Yeah.

Brian Kofford:
Yeah. Yeah. Yeah. There wasn’t enough preparation for the younger generation. I think that’s also a the statistical norm, right? That they don’t prepare the next generation in advance well enough to take it over and value it and and keep it going.

Elizabeth Ledoux:
It is. It is, it is.

Yeah. Well, Brian, I sure appreciate you and your time. I must be long winded today because we went a little bit over our normal podcast time, but

Brian Kofford:
Well you went over your normal podcast time because I’m just a talker. I’m just I’m long winded too, so sorry about that.

Elizabeth Ledoux:
Well, we were well matched today. I know. But I I thoroughly enjoyed this time together and my hope is that the that our listeners will take some good nuggets away from today and some things that might be useful and helpful for you when you start to transition and go down that road. And Brian, I always like to ask last question is what one thing would you like to leave with our listeners today?

Brian Kofford:
Yeah.

You know, I I think it’s this in that like we ex I explained earlier, I’ve I’ve been an entrepreneur my whole life. my dad was one. I’ve worked with entrepreneurs throughout my career. It’s been super fun. the things that we talked about today, I think are are really relevant and and under I don’t know what the word is, underserved people, they’re missed, you know, that that they’re just not they’re not focused on. And so I guess

Yeah, I would leave you with that. Yeah, my my mission and my my goal with the rest of what I have left in my career is just to help people to scale faster and sell their business they work so hard for at as good a price as they can and have that transition be as easy as they can it can be. Because I just I empathize with them. I’ve been there, done that, and I I just know that so much of your heart and soul and energy and your life has gone into your business and it just hurts my heart a little bit when I see

so much so many people not navigate that scale and that exit properly. So they don’t get out of what they invested so much of their time into. They don’t get out of it what they what they could, I guess. And so I don’t know. That’s that’s I guess my parting comment.

Elizabeth Ledoux:
Yeah.

And I love it. I love it. Well, Brian, thank you again. And if you yeah, Brian’s information will be in the show notes so that you can reach out and get in touch with him if you choose to do so. And yeah, I’ll see you next time.

Brian Kofford:
Yes, thank you for having me.

Yeah.

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The Business Transition Roadmap with Elizabeth Ledoux

How do communities thrive? When businesses experience healthy growth and transition. Join CEO of The Transition Strategists, Elizabeth Ledoux as she and her guests identify what makes a successful business transition roadmap. If you know you want to transition or exit your business “one day”, today is the right day to start planning. This show will give you the roadmap.

If you’ve enjoyed this podcast, you can check out other episodes here: Podcasts – The Transition Strategists