Learn More Earn More Business Growth Podcast
Host: Brian Webb
Episode 6: Deferred Comp - The Secret Weapon To Retain Your Best Team Members
RESOURCES & HELPFUL LINKS
Before we jump into today's episode, I want to quickly share a very special promotion we have going on here at Whatbox Digital. It's been said that the best time to plant a tree was 20 years ago. The second best time is today. Having an executing and effective marketing plan for growing your business is no different. Between now and June 30th, 2021, we're offering a $1,600 discount on our Marketing Strategy Playbook consultation.
Normally priced at $6,500, which is still well worth it. You can allow our team to help you stop wasting money on marketing that's not working and give you a new plan for growing your business for just $4,900. If you're catching this episode after June 30th, 2021, this is still a worthwhile investment that will generate a return for you and your business. I provide more details later in this episode.
I strongly urge you to stop waiting and start growing your business and revenue with proven marketing strategies that actually work.
TRANSCRIPT: Brian Webb: Before we jump into today's episode, I want to quickly share a very special promotion we have going on here at Whatbox Digital. It's been said that the best time to plant a tree was 20 years ago. The second best time is today. Having an executing and effective marketing plan for growing your business is no different. Between now and June 30th, 2021, we're offering a $1,600 discount on our Marketing Strategy Playbook consultation. Brian Webb: Normally priced at $6,500, which is still well worth it. You can allow our team to help you stop wasting money on marketing that's not working and give you a new plan for growing your business for just $4,900. If you're catching this episode after June 30th, 2021, this is still a worthwhile investment that will generate a return for you and your business. I provide more details later in this episode. Brian Webb: I strongly urge you to stop waiting and start growing your business and revenue with proven marketing strategies that actually work. Again, I share more details later in the episode, but for now, we'll jump into the show. Hey there, everyone. Welcome to the Learn More, Earn More Business Growth podcast. I'm your host, Brian Webb. This podcast is your premier place to learn the frameworks, secrets, and growth hacks to grow and scale your business in revenue faster. Brian Webb: Whether you're an aspiring entrepreneur or a thriving business owner, this podcast is designed to produce just for you, so you can learn from the best industry experts in the world. I'll bring you exclusive interviews with authors, thought leaders, and successful business Titans who share their stories and business journeys, so we can draw insights and learn from their successes and struggles together. Brian Webb: As you're working on growing your business and pursuing your dreams, I'll be here to help you make better decisions and avoid costly pitfalls and expensive mistakes along the way. We'll have some fun in the process. Let's go ahead and jump into today's episode. Luke Cheatham, I am thrilled to have you on the podcast today. You and I have known each other for a year, year and a half or so. Brian Webb: We've had the opportunity of working together for two of your businesses. One of which is Diamond Client Group, and the other is we're talking about is Good Bull Investments. For those in our audience that don't know who you are share with our audience a little bit about who you are and what you do. Luke Cheatham: Well, I'm a recovering analytic is one of the ways I like to describe it, but I went to A&M for engineering. Have an engineering degree problem solving and yet got out of school and did all sorts of interesting things with some other ventures. Along the way, got into the financial services industry, which is an interesting story. Now, I get to focus on solving problems for others, for business owners and individuals in the high net worth space. I love it. Brian Webb: I'm going to ask you because I'm curious just as your friend and I think the audience will be as well. How do you go from engineer to the brilliant finance guy that I know and get to work with? Luke Cheatham: Well, it is actually a crazy story. My father came down with stage four, kidney cancer. When I got that news, I was actually operating a different venture and had just sold some interest in that and had some time on my hands and some money in my pockets. When we got that sucker punch to the family and basically told him, "You focus on the medical stuff and I'll pay attention to your business and see what we can do to figure out transitioning it. Luke Cheatham: See if we can develop and those kinds of things." Along the way, interviewed maybe 20 different people in financial services from attorneys to business brokers, financial folks, anybody I could get my hands on, really just to try to solve that problem, was really disappointed by that path and that road, so to speak. Most of the advice we got was all transactional. Then, finally met a tax structure attorney who gave us some great advice. Luke Cheatham: Actually, one of the strategies that we might talk about today, which is deferred compensation. I had no idea what that was. It's 409A in the tax code. He basically said, "Look, there's a way for you to incentivize these managers that my dad had in the business with a future bonus program." It wasn't cash out of our pocket today. It wasn't stock of the company today. I thought I was going to have to give up one of the two, either cash or equity. Instead, we found this solution. We put it into place. Luke Cheatham: It worked out beautifully for that business. Incentivize the managers that we had to kind of step up and take on additional responsibilities. That just got me thinking anything that specialty and that valuable that people don't know about. I'm entrepreneurial. I started doing some research and looked into it and decided, "You know what, not enough people do this for small business. I'm going to jump in." Brian Webb: Tell us a little bit about how you help businesses to grow their business by scaling their team. Luke Cheatham: Well, as you start to solve the marketing conundrum, if you can figure that thing out, then the next question is likely how do you service them? Especially, how do you build a team appropriately for that infrastructure? That's something that we specialize in helping small businesses with interesting way. It's all about how do I bring them aboard? What's the incentive package and really, how do I keep them? Luke Cheatham: Those businesses that I meet really just know what they've been told, which is, you can offer a 401(k), and then it's all about how you pay somebody. And it's always cash now. We focus when we structure compensation, typically on a salary, a bonus schedule, hitting certain benchmarks, but it's paid out this year, or benefits like the 401(k). All of those things are today. Where we come in, as we say, "Well, really, what would you like to get out of this person over the next five years?" Luke Cheatham: If you knew they were going to stay with you for five years or 10 years, how much more would they be worth five or 10 years down the road than they are today? If we could incentivize that position, to hit these benchmarks along the way that you have in your head, then how much more valuable would it be? We're structuring and instead of thinking of it as a salary arrangement, I think of it as the pot at the end of the rainbow, if I could have a future salary arrangement. Luke Cheatham: In other words, "If you work for me, Brian," I might say, "You know what, Brian, if you get certain sales targets, then you'll get this bonus. If you stay with me for five years, you get this bonus. If our company grows by X amount, you get this bonus. I can really make that plan specific to your position within my company, maybe as head of marketing or head of sales or someone that's very key that I might think about giving equity to, or really big bonuses to." Luke Cheatham: Now, I tied it to a time element. Five years from now, how much more valuable would you be if you were still in my [inaudible 00:07:08] Brian Webb: What would be an example, a specific case study, where it was a win-win, where that was actually deployed, that you've seen in your years of doing this? Luke Cheatham: There's tons of applications for it. One is if you have large turnover or you're worried about turnover about losing someone, and here's why the numbers become so compelling. Imagine you have your VP of sales, just to put a position there. They're highly impactful to your organization because they're driving new dollars in. You definitely want to keep that person as they've gotten to know your business, they know all the key customers. Luke Cheatham: They're just very instrumental in driving to the bottom line. Let's just keep the numbers easy. Let's say they make $200,000 a year. That's what they make in salary, but you're worried about losing them. They're really, really good. There's somebody else that might pay him $250,000, and if you don't have a plan in place, you know, people can leave sometimes for just a couple of dollars more or $210,000. Luke Cheatham: If I instead came to that person and said, "Listen, I'm going to put aside an additional $20,000 per year into a deferred compensation plan. That's 20,000 per year. You're making 200,000 a year. If you left then, after the first year, and we'll make this a five-year plan to keep it simple and we'll have it vest than 20% per year." Your one is 20, then 40, 60, 80, 100." Well, then what that means then is that $20,000 bonus that they're receiving. Luke Cheatham: If they left after that year, then it's 20% of 20,000 or $4,000. They would get $4,000, they would leave on the table, an additional $16,000. That's hard to walk away from when you make $200,000. Brian Webb: Do you find that deferred compensation is used more in one industry than another or in businesses with a certain amount of revenue or higher or is it broad? Luke Cheatham: Well, sadly, what you're bringing up is true, it's really reserved today for large companies. They have CFO and financial people that are guiding them. You'll hear it a lot in engineering or attorneys, attorney firms, these large organizations that may have also restricted stock or Phantom stock of an organization, employee stock purchase plans. You don't see it much in small businesses and that's because there's not a sales team out there promoting it. Luke Cheatham: That's really the only reason that's true because if you think about everything that I'm saying, as it relates to deferred compensation, it's really made for small business. Once my business has 1,000 employees, well now 401(k) makes sense to give a plan to everyone. As a small business, I don't have access. I'm not stock-driven and I don't really want to give incentives to absolutely all of my employees when I have maybe 50 or less. Luke Cheatham: If I could direct specific dollars to those key personnel, that would be hugely valuable for me. Deferred compensation is really made for small business that just most of the time haven't heard about it. Brian Webb: What is a first step? What is the costs look like, let's just say you have a business. Let's just assume they are at a couple of million dollars a year for the sake of even numbers. They're a team of 10 and they're wanting to deploy this or initialize this, what steps do they take? What does that cost look like for getting that moving? How long does it take for that matter? Voiceover: We'll get back to the show in just a moment, but first, a quick word from our sponsor, Whatbox Digital. Do you want to grow and scale your business better and faster? Make fewer mistakes and stop wasting money on marketing that does not work? I already know that you do. Like so many others, you are tired of relying on a failed hope marketing system. Hope marketing is when we spend valuable time and money on marketing and we hope that it works. Voiceover: You've worked so hard to get where you are. Like most business owners and leaders, you're frustrated with wasting money on marketing that doesn't work. You've thrown tons of money towards marketing mistakes and failures and you wish you could get all of that money back, but you can't. 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Voiceover: Again, just go to whatboxplaybook.com and give us your info, or you can text the word playbook to (832) 324-2432 and you'll be on the way to making better and smarter marketing decisions that will actually help you grow your business more effectively. Imagine a life where you'll never have to worry about generating leads and acquiring new customers ever again. Don't waste another day or another dollar on failing hope marketing strategies that don't work. Voiceover: Go to WhatboxPlaybook.com or text the word playbook to (832) 324-2432. To take advantage of this promotional offer. It will save you $1,600 on the consultation and it will save you a fortune on the money you're likely wasting right now on marketing that's doing nothing to grow your business. If you want to grow and scale your business better and faster, and with fewer mistakes, you're in the right place. Let's get started today, right now. Brian Webb: What is the first step? What does the cost look like, let's just say you have a business. Let's just assume they are at $2 million a year for the sake of even numbers, they're a team of 10 and they're wanting to deploy this or initialize this. What steps do they take? What does that cost look like for getting that moving? How long does it take for that matter? Luke Cheatham: Well, here's actually one of the biggest rubs, Brian. It's cheaper than administering a 401(k). Think about it, if I have a 401(k) and I'm a company and you bring me a plan of 20 people or 50 people, am I going to make much money off that plan? No, because I've got to wait for that plan, especially if it's a new startup plan. I have to wait for these people to save money consistently for a long, long, long period of time, before it's really worthwhile for me. Luke Cheatham: All I care about is assets under management. Once that plan gets to $500,000, then $1 million, then $2 million and really most companies, the big companies wouldn't say a plan is cost-efficient until at least has $5 million under assets. If a plan doesn't have $5 million under assets, they still are doing all the same steps, regulatory filings. They have an account that they're managing, a portal that they're giving for employees. Luke Cheatham: All those steps are still done, whether there was five people or 1,000 people, that's just technology. That cost gets passed on somehow to either the business owner for the cost of the plan or to the individuals participating in the plan. One of the two. A lot of times it's not real transparent. Here's an example, I can, as a plan, put the costs under the ongoing management fees of the underlying holdings of the stocks, so the stocks. Luke Cheatham: If a stock was going to gross return like this last year, the market did really, really well. Maybe that stock performed at 20%. I'm going to take a haircut of 1% or 2% off the top of that to help pay for the 401(k) plan. I'm still just going to report that the plan made 18%, the person looks down at the plan and they say, "You know what, this is awesome. I made 18%." They didn't realize they could have made 20% if their plan was larger. Luke Cheatham: Now that may sound like a small difference, but think of 2%, if you knew that you were going to pay 2% on an account, most people wouldn't take on that account because there's ETFs, there's mutual funds that costs less than 10 basis points or a 10th of 1%. Why would you pay full 2%? It doesn't sound like much when the market makes 20%, but what if the market only returned 5%? That's one of the places the cost can be. Otherwise, the business is paying for some of those costs. Luke Cheatham: Maybe they're paying $500 for the right to have a plan or $1,000 for the right to have a plan. If the plan had a thousand employees, they wouldn't pay anything because the plan was large enough that they don't need to. That's sounds backwards, but if you just think about it from the standpoint of the company, that's why that occurs. A 409A, however, my only real cost is the initial setup of the legal agreement. That's my biggest cost. After that, it's a general asset of the company. It could be cash. Luke Cheatham: It can be an investment account. It can even be insurance contracts on those key personnel. There's lots of things that we can do to fund the plan, and because there's no additional regulatory filings that we're having to do on an ongoing basis, like the 401(k) has, it's significantly cheaper. Brian Webb: That makes Sense. Is there a threshold in terms of size of company, either based on head count or annual revenue where beneath that threshold might not make sense above that threshold is where it starts making sense, or is there a threshold at all? Luke Cheatham: There's actually the easier way to answer that question, the biggest threshold that people don't even think about is there should be a threshold for 401(k)s. I don't believe a 401k really makes sense unless you're wanting to incentivize all of your employees equally, or if you have 50 or more at a baseline, really it should be 100 or more. At 50 is where we start thinking about it. Luke Cheatham: If you're in an industry that just to be competitive with your peers, you have to offer one, then you have to offer one. Just understand it's going to be expensive. You may not have thought of it as being expensive, but compared to other instruments and other plans, it is. For a 409A, my only question would be, is there a single employee that you would like to incentivize differently than your other employee pool. Luke Cheatham: Whether that you want to incentivize them to stay, you want to make it mimic stock of your company equity in your company, or basically you want to incentivize someone around growth, anything like that would be a great reason, even if it's a single employee to put in place a 409A plan. Brian Webb: That makes sense. You talked about the legal fees and the filing being the expense. How long does it typically take the process from start to it is done and being executed, if a business wants to go step into this kind of a plan? Luke Cheatham: If you knew what you wanted, you could do it within a week. Most people don't really know what they want and that's the art. They need to meet with someone at our team. Someone like us and get through what the options would be because there's a problem with flexibility. Well, if this much flexibility, you can get paralysis of analysis. You need help and guidance on what are my options? How should I think about constructing the plan? Brian Webb: Obviously, this is something that I know you do at Diamond Client Group. Take a minute and tell our audience about Diamond Client Group and not just this, but maybe a little broader paintbrush spectrum of what you do for the clients that you work with. Luke Cheatham: There's four ways that we help our business owner clients. The first is tax reduction. Where a CPA can take a company and the financials, the decisions that we've already made and try to optimize all the available deductions, we're instead helping that company steer. We're looking forward and planning out what their tax impact would be. The second area is employee incentives, what we've been talking about today, we're able to put in place 401(k)s and I've been talking bad about them, but we do a lot of 401(k)s. Luke Cheatham: We do phantom stock, all the things that you could think about, it's just the biggest impact is this 409A space because it's the most underutilized in the small business space. Putting together programs, making sure that the key dollars or incentive dollars are going to where that business owner wants to incentivize the actions of the people that they want to incentivize. The third area is how a business is structured or the leverage of the company. Luke Cheatham: A lot of times companies, aren't sure if attorney long time ago told me to be a limited partnership, or they told me to be a LLC. I'm not really sure why, but that's what I've chosen to do. We re-look at that, especially under tax reform, if someone has not taken a look at your structure after 2018, then all the rules changed, then. They might be changing again, who knows. With that, it's someone taking a fresh look and saying, "If you could gain some efficiency by being structured a little differently, and then how you're saving your assets is part of that." Luke Cheatham: Where you save money too and how you do your treasury management or your cashflow management, instead of all that just being in cash earning zero, I'd rather you be earning 3%, 4% or 5%, maybe even 6% or 7% on a fixed basis, then having it laddered to come available every month. Instead of it just being, sitting in a checking account. Treasury management, those kinds of things as part of that structure. Luke Cheatham: Then the last is every business owner's dream, it's the exit plan. We all plan for an exit, whether we mean to or not, because if you don't have a plan you're planning to close, that's the hard reality and it's unfortunately what most business owners will face is that final exit. There's some fantastic if we will plan, if we're willing to sit down and make a plan for the future, whether we're wanting to sell externally very few businesses do by the way, but that's what most people think they're going to do is sell to someone else. Luke Cheatham: Then where we are specialty really comes into place is if you do an internal sale, which is how most of the offices are actually passed on, either internally to family members or internally to employees. The deferred compensation we talked about is actually a fantastic, we couple that with our exit planning, think about this as an application. If I know that you, Brian, we're going to take over my company, but you didn't really have the money to buy me out. Luke Cheatham: I say, "Well, Brian, if you can work for me for the next 10 years, I'm going to set aside every year, this big bonus pool it's going to grow, and it's going to sit there. 10 years from now, we're going to use that as the down payment towards you buying the company, unlocking some of your pricing in and based on today with stock, I can even loan you 25% of the company, let's say. Then that deferred compensation is paying off the loan. Luke Cheatham: That means, look, if the company grows faster than the loan, which I'm incentivizing you to do, then you'll actually get the benefit of valuing that stock today instead of 10 years from now. All that growth is on your side. On top of that, once you get to a certain point, if you already had 25% of the company and you walked into a bank, you got a much better shot of getting a loan for another 26%. Luke Cheatham: Well, that's the important threshold, because now you're at 51%. If I can, within the sentence and time, get you to 51%. Now, you're easily bankable and we can finance the purchase of the rest of the company. Brian Webb: Well, everything you've shared with me today is interesting, compelling, and brilliant as every time I get together with you when we are working together. I'm really, really glad. I'm guessing the audience will be really glad as well, that there are Luke Cheatham's in the world, because as you explain, it definitely was making sense, specifically, as you were speaking to the deferred compensation and the strategies that you've spoken to around that. Brian Webb: At the same time, I recognize my limits. As I'm sure everyone in our audience will as well. Let me ask you this. If someone wanted to connect with you or find you to talk about how to deploy a deferred comp plan or any of these other strategies into their business, what's the best place for them to reach out to you? Luke Cheatham: My email's great and easy, which is just my name, Luke L-U-K-E @DiamondClientGroup.com. Brian Webb: We'll put that in the show notes as well. Your website is www.DiamondClientGroup.com, obviously. Luke Cheatham: Yep. Then my cell phone is (281) 773-2280. They can just shoot me a text. I'd love to chat with them. Brian Webb: Well, thank you so much for being on the podcast today. Do you promise you'll come back on sometime in the future and do another episode? Luke Cheatham: Yeah. I'd love to. It was funny. We were talking about this and having a marketing show and I said, "Well, Brian, I'm a finance guy." Then as we were talking through it, having that ability, marketing is all about growing your sales and bringing more business in. A lot of people struggle with how do they structure that? It does make sense and I was happy to be on and thanks for having me. Brian Webb: Absolutely. Teaser, you and your lovely wife, Ashley and business partner, will be starting a new podcast called Small Business, Big Podcast. You'll have to come back and tell us when you've got that launched. Do you have an idea when you're launching that podcast, by the way? Luke Cheatham: Hopefully, we're talking weeks, if not months, or any longer where we're lining out all of the guests. I'm super excited about it. It's going to be fun. Brian Webb: Awesome. Thanks again for being here today. You've made a huge impact towards what we can learn as business owners and entrepreneurs. Thank you for being here. Luke Cheatham: Thanks for having me. Brian Webb: Thanks for joining me today and listening to this episode of The Learn More, Earn More Business Growth podcast. We can be found on all the major platforms like Apple Podcasts, Google Play, Spotify, Pandora, Stitcher, and even Amazon Music. I genuinely hope you enjoyed today's episode. If you did, I'd be honored if you subscribe to the show and leave us a rating and an honest review. Brian Webb: I'd love to connect with you on Instagram. You can find me at @BrianWebb and the show sponsor Whatbox Digital can be found at, as you might guess @WhatboxDigital, you can also find me in Whatbox Digital on Facebook and LinkedIn with the links in the show notes. This will allow you to stay up to date and never miss out on exciting new announcements, events, special offers, and opportunities. Brian Webb: You'll be in the know when we drop a new episode of The Learn More, Earn More Business Growth podcast. If you'd like to send me a DM on Instagram to say hello, or share your thoughts on how we can make this podcast even better for you, I'd love to hear from you. Again, thanks for listening. Let's go and grow together. I'll see you on the next episode.
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