Transcription
There's something that is to be said that when you're a a 10 $15 million a year revenue business, you're to some degree flying under the radar, but somewhere between 50 and $150 million in revenue, you are no longer flying under the radar.
I want to kill monsters when they're babies. Now, I know it seems horrible to say it that way, but I want to stop problems when they're small and easy to fix.
A car accident, a truck accident, an infant taking the wrong medication, an infant, an infant opening the drawer of a dresser that falls in a West Texas jury trial with punitive damages. You could be talking a billion dollars. Those are scary times and those things do happen.
Maui Mastermind presents the Business Coach podcast, answering your questions and providing real actionable insights for building a better, stronger, more profitable business without sacrificing your time, life, or freedom anymore.
Well, welcome to another episode of The Business Coach. I'm your host, David Finkele. Thank you for joining me this week. This week I'm joined by special guest Alan Gasman. For those of you who have been following and part of the podcast now for quite some time, you'll seen that Allan and I have had other conversations along the way. We've talked about what are the business risks inside of a company and we've talked about what are some of the succession planning things that you need to be aware of as a business owner. And we've also talked about when you're looking at protecting your family outside of the business, what are some of the steps you need to take as a business owner who really is building quite a valuable asset in the business and outside the business?
This week though, Alan and I were talking from a different frame of reference. We were having a conversation in advance of one of the events that he's going to be a guest speaker at, our big business success summit, which we've been doing now for 23 years out in Hawaii. This event's been going on where we bring our most successful clients out to. And the question of the conversation had to do with what are the things that a company that's now at the hundred million plus revenue standpoint from a legal standpoint, what are the fires that they need to worry about wherein the owner gets so consumed with that business mastrom that they lose sight of operating their business well. And that $1 million, that $4 million, that $900 million company has a major setback.
You know, there's something that is to be said that when you're a 10 $15 million year revenue business, you're to some degree flying under the radar, but somewhere between 50 and $150 million in revenue, you are no longer flying under the radar. You're becoming much more of a target. And things that happen at that scale that pull a business owner away can have fast and really strongly aversive reactions and responses from the business and can cost tens if not hundreds of millions of dollars in losses in the business in terms of equity value and also in terms of actual cash flow. So we'll get in there and Alan and I will be sharing the four that he has had in his experience set.
Now, Allan has been in the world of business law as an estate and asset protection attorney now for over 40 years. Actually, you'll hear on the episode here, he shared it was 41 years he's been doing that. I didn't realize it had been that long. I thought for him it was only 37 or 38 years, but he's now 41 years in there. Allan's been my personal family attorney on the estate planning side. He's also been corporate counsel for entities that I've run for over a decade, and he's done great work for so many people in the Maui community. His law firm has with his collection of attorneys and his other legal staff.
As we get into it, the benefit is that Allen has clients who have built billion-dollar enterprises wherein he can share with you his experiences of the things that have gone wrong from a legal perspective. And what simple steps can you take now? Now, this episode for some of you is exactly what you need today. For others of you, it's what exactly what you'll need in three years or five years time. But learning it today will set you up in a much better position later on. And for others of you, you might have a company that's only doing two or three million dollars a year in revenue. And what you're going to learn about today might apply in 8 years or 12 years as you hit above a certain threshold. But by learning it now, by having the exposure to it now, it's going to make it so much easier down the road. And many things with prevention when we there's a fancy phrase for it. I heard an author once say, he said, "I want to kill monsters when they're babies." Now, I know it seems horrible to say it that way, but I want to stop problems when they're small and easy to fix. Prevent them earlier than when they're a great big fire that's burning and burning and burning.
So, without further ado, welcome to this week's edition of the Business Coach. And now we'll get started with that conversation of Allan and I talking about how can you protect yourself from these four major legal fires for a company that's reached a larger scale.
Allan, welcome to the business coach. I'm so glad that you're here. How are you doing today?
>> Wonderful, David. Thank you for having me.
>> Yeah. What's something that's going on right now in your personal life that you really feel grateful for? I always like to start before we get into the meat and potatoes of in this case we have a very specialized subject to take advantage of your legal expertise. But before we do that, what's something that you, Alan, are just really grateful for going on in your life today?
>> Well, I just spent half of yesterday playing chess with my seven-year-old granddaughter and she let me win. Uh, and then also we built a Nerf ball bouncy thing. Now, it was more fun to build the Nerf ball bouncy thing than it was to throw the Nerf balls around. And then we went to the Verizon store and looked at phones. So, it's really neat to watch somebody become a person.
>> Oh my gosh, how wonderful is that? I can see you playing the Nerf ball side and the chess. I remember when I first started losing to my sons in chess. That was a strange moment. So, she's letting you win now. So maybe by nine she'll start taking back the permission of who wins.
>> Right. Exactly.
>> Oh my gosh. Okay. Well, today Alan I want to pick your brain about this. So we're going to focus in on that on on the higher order business clients that you have that we have the clients who have built companies that are 50 hundred million dollars or more in revenue per year. I want to think to that end why a lot of the listeners of the business coach first of all pretty much all of them have successful companies that are profitable. They range all the way from the low end of a few million dollars in revenue all the way to the upper end of half a billion dollars is the best we can tell that fits who are is in our community. But the place we're going to focus in today is a little bit more on the upper end. Two things for that. Number one, if someone is listening who is in the upper end, it's going to speak directly to their current need. But more importantly, for those of you that might have a $2 million a year company or a $22 million a year company, it lets you know where you're heading. For some of you, this is where you're heading in the next 3 to 5 years. For others of you, it might take 7, 10, 12, 15 years or longer to get there, but this is where you're heading. And so the place I want to start here which is this Alan for those higherend business owners what do you see are the legal things that come up that completely capture all their attention pull it away from their business. They get sucked into this legal mastrom whether it's a lawsuit or other type of thing. They take their eye off the business. The business which was doing so well radically suffers and that dip because the scale is so large costs them probably realistically tens of millions. Forgetting the legal outcome the sucking away the absorption over here in this legal mastrom that pulled them away cost them huge. So what are the most common two or three things that suck them away if in a legal process from actually paying attention to their business?
>> It's accidents that happen. It's compliance issues where the government or an agency of a government or a key supplier or customer discovers a non-compliance or it's a dispute just a plain old disagreement between parties that goes to litigation. And then the fourth one would be a divorce.
>> You know, those are the four categories.
>> We're going to come back into those. As you were saying the first three, I was like, it's interesting. I was going to put divorce in there and then you said that because I think that's the one that I've seen really cause some bad behaviors in business owners parts. They come with that. But let's start with the accidents. Give us an example of, you know, change the names to protect the injured. But give us an example of where a client has had in this significant business. They had an accident somewhere happen probably outside or it could be in the business that somehow started this chain of events that that now has just completely captured their attention. and energy and it's sucked it away from the business and it's hurt significantly hurt the business. Give us an example.
>> A car, you know, a car accident, a truck accident, an infant taking the wrong medication, an infant, an infant opening the drawer of a dresser that falls and a West Texas jury trial with punitive damages, you could be talking a billion dollars. Those are scary times and those things do happen.
>> Yeah. So, what would you say to that business owner today that they can do today to protect themselves from that future accident down the road? Well, take a realistic appraisal, a view of your business and the activities and be realistic about the situations that can happen. Talk to lawyers who defend these actions so they can explain what happens. Try to eliminate those circumstances from your business. and then divide your business into four to five different businesses so you don't get taken down by one truck accident or one building falling on 65 people. So that's and then third get plenty of insurance. Pay the pay for the liability insurance. That's what Lloyds of London is for.
As you say that I remember one time you had given me advice probably nine or ten years ago, Alan, which was, "Hey, David, consider telling your clients to have a really good insurance agent or broker walk their building, walk their shop floor, walk their office building, looking at the business from the perspective of risk and how could they either insure away some risks or for those risks that the the insurance company's not going to allow them to insure away that they're going to put in there as exclusions. or something. What could they do that would mitigate some of those risks? Because the owners, we're optimists. We see that oh, this hasn't happened today. It didn't happen last week. Didn't happen last year. So therefore, it will never happen. But we only have the data set of one company that we're really looking at it for. They are now looking over a 100,000 different companies to tell you statistically, you know, you got a real shot that this is going to come back and bite you. This is going to come back and bite you. Tell me a little more about that because I thought that was really, really good. counsel that you gave me.
>> Yeah. Well, again, you just have to be with the insurance agent. There's, you know, there's thousands of insurance carriers and they're all a little bit different. So, you may have a carrier who really likes your industry, understands your industry, and covers your industry. And then there may be a carrier that really writes not so good policies in your industry with gaps in them and all kinds of exceptions and writers. So you really need to be thorough in the selection of a policy and the selection of the agency who writes the combination of policies. And somebody may say to you, well, you can't get coverage for this. Well, that's not always correct.
>> Yeah,
>> that's not always correct. and having a good broker in there who has some experiences. Hopefully a multi-line a multi-arrier broker who doesn't have a captive I only work with this particular company can give you some other perspectives about where your gaps might be and how you might deal with them from an insurance standpoint which I think would be good
>> right and then when they walk the property with you they may point out hey you know a child in a crib could probably die right over there if you don't put a rail there hey your kitchen is way close to your bathroom you realize an employee may you know there there's just logistical things and you go back and say, "Oh my gosh, I had no idea. Never would have thought of that until the accident happened."
>> So, I'm hearing that's a great step. And I heard earlier, which is the step of how do we insulate the asset such that, you know, if I've got, you know, company that's doing $162 million year in revenue. If I feel like I could lose everything, that's going to suck up every ounce of my attention for years of that litigation. If I felt like, well, hang on a second. The vehicle risk has been pulled out. You know, our fleet of 98 trucks is owned by this company that leases them back, and you know, our real estate assets for our six locations are owned by these separate entities, and the intellectual property, including our patents and trademarks, are owned by this company. I'm still scared of losing. I mean, that's a human response. It's a visceral clenching of your gut. But when I have my attorney now can calm me down and say, "Look, worst case, this is what you have at stake. This is what you have protected outside of that. You and your family are going to be okay." It still might feel unfair. I know that's the response I felt when I was in my first lawsuit. This isn't right. It feels unjust. I'm agrieved. How could this happen? But when I calmed down and saw that my family's future was not wrapped into the outcome, it became less consuming than if I thought everything was in there.
>> That's right. Another thing, David, that sometimes complicates this is that lawyers can complicate it because lawyers, litigation lawyers are warriors. They're great at fighting. They're not great at settling all the time. Sometimes you have to call in a second opinion and make sure that you understand because you know we make more money if we fight more, right? That's why they call it multiple party litigation because the lawyers are having multiple parties because of all the money that we can make. So, you really, you know, you really have to make sure you're using the right professionals and that you take a realistic approach to the situation because you're right, like Mark Twain said, most of the things that I've worried about never happened. But it is a tremendous distraction when you're told that there's a 5% chance that you could lose your whole company to a West Texas jury. That's not a pleasant that's not a pleasant two or three years for an entrepreneur.
Let's go to the compliant the compliance side. So, you know, for example, maybe this is a medical practitioner that that has, you know, 15 clinic locations and they also have a couple of other ancillary businesses that maybe some surgery centers or some imaging facilities and now the government comes in and says, "Hey, you have some issues with compliance with, you know, kick anti- kickback laws or some other things." Tell me a little bit about what that might look like and how we preempt or protect oursel there.
>> Well, I've had clients write big big big checks to the government. For example, well, we have nine radiology centers, but accidentally didn't register one of them. But we did all the radiology work. We did everything that everyone wanted us to do. We just forgot this one little certificate. Okay. Well, write us a $15 million check and hopefully you won't be prosecuted criminally. that that type of thing happens all the time. I mean, you read, you know, you read the Wall Street Journal about a company's just getting taken down. And that's real. And a lot of times it's just naivity. It's naivity on the part of the business owner. It's naivity on the part of the board of directors. It's naivity on the part of the lifelong lawyer, best friend of the entrepreneur who grew, you know, beyond their level of incompetence. So, you know, the IRS comes in and sees that you haven't been complying with certain rules. That can be a very large distraction.
>> As you say that, Alan, here's what came to my mind, which was when we're a 1020 million company, we're for the most part, unless we're in a very small town, we're flying under the radar. Things can go wrong, but the odds of things getting scrutiny are lower. But as we start hitting a point 100 million, 200 million, 300 million, not only are we now much more obvious in the communities that we're in, but we're probably starting to eat into some other players in the marketplace's lunch, my competitors, and my competitors have some incentives to cause me trouble. And so sometimes that might be an adverse party calls in to someone they know at a regulatory body and say, "Hey, you know, you should check. Are they really doing it the right way? I've heard some rumors and and they cause some issues with that part." But the moment you start hitting over certain thresholds kind of your head is now beyond the clouds. And I think what happens is these business owners, I've seen it with our clients, they've gotten so good at running it the way they have that they didn't realize that they are now hitting a scale that their old way of running it is no longer good enough. Because a small thing that might have caused them a bruise at $18 million a year of revenue could cost them the company at $180 million of revenue. And so your comment about they they've outgrown their adviserss. I see that all the time. I see that where they've outgrown their employees. You know, Sheila was really great when we were 10 million. She was okay when we were 30 million. She is woefully out of her depths at $112 million. We really should have upgraded along the way. Not that Sheila shouldn't still be working for you, but she probably has reached a ceiling of where she's capable of. And even if she's capable of growing, if we have a rapidly growing client, she's not capable of growing fast enough to not be a risk or a constraint on that growth. So jumping sooner to better people from the outside and the advisor side, you know, Allan, I'm not sure if you've noticed this, but I've often told clients, look, you need a third party in here, forgetting the fact that they're going to tell you really good insight as a professional that you're relying on their information. the very least I want their insurance to help protect me that I've taken good faith efforts to dot all my eyes, cross all my tees. Can you talk about that? This idea of using consultants and or other third parties as a defense at least against the criminal side and to lower our liability and what those judgments might be,
>> right? for medical practices and medical businesses. We commonly hire a consultant under the attorney client privilege to go in and and spend a day and try to find problems. And sometimes they do find problems and then it's it's interesting to decide how to change the situation. The other thing you need to realize is one of the great ways to become wealthy in the United States is to be a whistleblower. you know, the US government's glad to pay you 10, 15, 20%. And if the Justice Department or your local state attorney won't take the case, there's a way that you can get a private lawyer to file that suit on behalf of the US government. It's called a whistleblower action. It dates back to the Civil War, and it can be a civil war for a business. We've seen small insurance carriers that were fibbing to regulators about their financial statements. It seemed like an innocent thing, but it was not taken that way by the government. And you know, you end up that that moves into death threats when your company loses money and your shareholders aren't happy. It moves into divorce. It moves into alcoholism. And you know, these shortcuts, well, it would have cost an extra hundred,000 a year if I had called them employees. I saved a h 100,000 a year calling them independent contractors. Okay. Well, now it's going to cost you $10 million because you did that. They're going to shut you down. So, if you're taking those little cute risks, talk to a lawyer who defends those cute risks and make sure you understand the risk and how maybe you can patch it up.
That's great. I'm curious for you on the whistleblower side. What's one or two things that I as a business owner can take that would mitigate or reduce that risk of a whistleblower action? What have you seen that have been the things that either cause it to happen more frequently or might reduce the odds of that happening?
>> The whistleblower is usually a pretty brassy person, kind of a troublemaker who you really wouldn't want in your inner circle. But that being said, the main thing is don't leave yourself exposed by ignoring the law. Mo most whistleblowers have an email that says, "Ah, forget that. It doesn't seem important. I don't need to register that center." And the government, forget the government. I'm not worried about the IRS. You You have emails like that. And the whistleblower gets that email, talks to her brother-in-law, the lawyer, and the next thing you know, you're toast.
Wow. Last two here. So, disputes. What are the most common disputes that suck in the energy? Is this the two partners arguing over this or is it a dispute with someone from a completely outside part over the property line between two two houses?
>> It's usually not two partners. th those are unpleasant, but usually it's a supplier or you accidentally used somebody's intellectual property and they get an injunction to close you down because they are vindictive or you've interfered with somebody's contract with somebody else. You knew they had that contract and you just thought you'd get away with it or you believe the other party's lawyer. Those types of things can bring a business down and cause a lot of embarrassment and cause a lot of loss of attention to the core of the business. Violating antirust laws, price fixing, you know, your salespeople have to know that there's three biders, so they get two of their buddies to bid against them, and it turns out that their buddies were intentionally coming in high. you should have known about it. Maybe even you kind of did know about it. That's a type of thing where the attorney general would just like to come in and shut you down.
>> Talk about this interference in someone else's contract. Give me an example what that might look like. That might not be as intuitive as we think about as a business owner.
>> I'm working on one right now where Mr. Agreed never to be involved with a particular kind of project or arrangement. It was a non-compete. And Mr. B was his friend and his landlord and Mr. B went ahead and did the project. Mr. A bragged to his friends that it was m really Mr. A's project. So the client who had the benefit of that non-compete sued A and B, shut the project down, killed it.
>> So you know when somebody else has a limitation, you should pretty much stay away from them. They're it's almost leprosy, especially when it's the 800 pound gorilla that has a contractual right to stop them from doing something. That 800lb gorilla is going to be jumping on you. And it's one thing if they're going to go ahead and and person A told me about something and I'm going to take my own independent action on it, wherein person A has no direct or indirect compensation or involvement, that's a different matter. But then person A is going to get a kickback or a piece of it under the table. That's a big issue.
>> And some lawyer will say, "Oh, well, just pay him a royalty. It's fe it. There's no problem. You know, we'll defend it." And then the law firm makes a million dollars defending it. Then you lose the suit and the law firm says, "Oh, well, the judge had a bad day." So, just really be extra careful.
Let's talk the last one here, which is divorce. It strikes me that if I've looked at where a lot of clients that have built substantial companies have gotten into issues somewhere in the late 40s to early 60s, it seems that those relationships as kids are now out of the household and the balance of these relationships has changed. That's been a riskier part especially if there's been some earlier liquidity event that's caused people to wonder. I'm curious what do you see and talk a little bit about divorce not from the framework of protecting a party or the other party but more about people seeing the hidden cost of that and what you've seen your happiest most fulfilled business owners of the larger enterprises doing that just seems so obvious but isn't at the moment when people are making bad choices.
>> Well, I mean, almost anyone could make a bad choice. It's good to have plenty of cash and other assets beside just the business. If the judge is going to divide everything up between the business and the other assets and give the entrepreneur the business and the other spouse the other assets, it's a good idea to have other assets
>> and not put everything back into the business. But I think the one thing we see with class acts, people who are highly highly successful is they're very respectful of their spouse. And mostly what spouses want is to be recognized and to be appreciated. So, you know, if that's what it takes, that's what you do. If it takes a whole army of psychologist to convince you to do that, it's probably, you know, money well spent. But also at the by the same token, don't play dirty. I mean, you see people who do get divorced and they were disrespectful to their spouse both in and outside of the business. So, the spouse has the ability to set your business on fire and watch it burn to the ground if the spouse may be that whistleblower or the spouse causes tremendous bad publicity. So, you know, be respectful of the spouse.
>> Yeah. I think sometimes I've observed it as what I found out after the fact was just a dumb behavior along the way. And I mean I know that behavior might be oh there was someone who was interesting to them and they found that person compelling and something happened and you know that bad choice was the wrong choice. And what I commonly would tell someone is you shouldn't wait till the moment of choice. How can you set the environment up so you're not around things that would be more likely to lead to bad choices? Whether that be alcohol or other substances and or you know who you're around or being alone with or in a small environment with, you got to be careful about those things too, I believe anyways,
>> right? And then if you do something like something sneaky like, you know, give them $50,000 from the company in a sneaky way and then the family judge gets upset and decides that you're a complete criminal and that that's just not a good position to be in. So I think bringing this full circle here, Alan, what we were talking about in this particular episode was something that that I think is important because by just having some earlier thoughts about it, we can structure our business and our lives to preemptively prevent some really bad things from happening. And it's hard, right? We know what it costs to fix a fire. You know, it cost us, you know, a thousand people hours to fix this business fire and it cost us this much for the water or for the materials. But how much did it cost us to prevent that fire to begin with? It's hard to see the value of prevention. I say to somebody, well, what's the cost of the fire? What's the likelihood of the fire? And from there, we can work our way backwards, say, what's it worth for you to prevent it? Right? If it's a 10% of businesses have these types of issues and the cost is $50 million, then you probably the cost of prevention, it should be worth somewhere five million or less is probably worthwhile with that part. So we talked in here about accidents, compliance issues with government agencies, disputes or other legal situations, vendors, suppliers, etc. And then number four, we talked in here about divorce. So bringing us full circle here, what if you had any last two or three pieces of advice to a business owner who is either at that larger scale or ascribes to be aspires to be at that larger level, whether that be in two or three years or in 20 or 30 years. What would your last two or three really coaching suggestions for that business person as they make that progression?
I >> I think bring in new fresh eyes to look at each of these three risks, people who have done it before. You know, it may be a Wall Street law firm. It may be a high-powered consultant. It may be the ex vice president of your biggest competitor. bring them in and ask them to look and help you see these things out there that you may not have noticed yourself or whether you know a coach, a professional, a CPA consulting firm that they've been through it, they've spotted it, they'll tell you, they'll find it much easier than you ever will. And then just have peace of mind that you've done it. I think that's probably a very practical solution.
That's great. I'm going to add my two coaching suggestions to this is first one's going to dovetail with the bringing an outside sets of eyes, which is the timing for those outside set of eyes. You know, early on those outside set of eyes might be inexpensive sets of eyes, like an hour or two of a consultant, or it might be your insurance broker walking your business with you, or it might be having an hour of your coaching conversation be about risks that are inherent. Later on, as you start hitting the threshold between being a small business at 10 million, 12 million, and start getting to the point where you're getting into a midcap company, which happens, depending how you want to look at it, somewhere between 20 and 50 million, you're probably in the front end of what you're now starting to be a little bit more known. It's worth some money to say business as usual worked to get us here, but to get past a h 100red million in revenue and beyond, we're going to need to do business better than how we've done it in the past. So getting that outside part there and recognizing that to fix the issues there, you can prioritize them. That is going to require some budget of time, talent, and money. But the flip side is you can't do that work once the fire has been set. Too late to do it. So you need to consider and my second coaching advice that I would give Allan, it's something I know I've learned from you, which is you talked about at the very beginning here, which is, you know, have multiple bomb-proof baskets so that you never have everything 100% at risk. that no matter what, you have enough in the other bomb-proof baskets that you and your family will be protected to have a good lifestyle for the rest of your days, whatever that looks like for your values going forward. I think that's a really important part because it allows you to recognize that even when the crap hits the fan in this area, we're still going to be okay. I can breathe. You know, I need to take care of my health. I need to take care of my relationships. I need to take care of my communities. and I need to take care of the business too, but I can't let the business totally consume me.
>> Good advice for sure.
>> Both ways around here. So, Alan, thank you for spending the time with us here in the business coach. It's wonderful to be able to pull you in periodically to take advantage both of your legal expertise, but also you have a very wide ranging over what has it been 37 years now in the legal profession for you? I believe it is now
>> 41.
>> 41. You look too young. You look too young to have 41 years in legal profession. But 41 years, you've accumulated a lot of different cases inside of your sample size. You know, the average business owner has a sample size of six. Their business plus their five closest friends, right? But you have in the tens of thousands of what you've seen over those years, which means things that are lower percentage odds to happen, they've happened because you have a large enough volume. You've seen it. And so does it surprise you anymore or does it seem like that's just of course someone today is going to have this happen somewhere in this city, state or country?
>> Yeah, it becomes more, you know, it's it's less and less of a surprise when someone shows up on my doorstep and says, "The most unbelievable thing that you've never seen before just happened." And yeah, I've never seen a python eat somebody's child, but that type of stuff does happen. So, be careful out there.
>> Allan, thank you for joining us. I so appreciate it. For all of you who've been part of this week's podcast, I hope you've enjoyed it. Pulled a few lessons from that simple coaching suggestion for you. Take one thing that Ellen or I have shared with you today. One thing that's going to take you less than two hours to take that next step and do that somewhere in the next 30 days or certainly even before you listen to the next episode. Thank you everybody. And Allan again, thank you for joining us on the business coach.
>> Thank you.
>> Bye everybody.