Thinking Through Partnership Arrangements with Brent Enders, President of USA Financial

Chris Tanke (00:01.173)
Welcome back to Navigating Abundance. Today I’m very excited to have Brent Enders from USA Financial join us on our podcast where we ask the question, so you really want to start a partnership arrangement? What a loaded question that is for us today, Brent. Thank you. Thanks for being here with us. I’ve known Brent for many, many years and still am involved with USA Financial to some degree on a professional level and got to appreciate his wisdom, his heart, his acumen for all things business. He’s been through the gauntlet. He’s come out the other side. He’s a true warrior and a great guy. So Brent, thanks. Welcome to the podcast.

Brent Enders (00:48.937)
Hey Chris, glad to be here. Looking forward to it.

Chris Tanke (00:50.574)
So I wondered if you could just introduce yourself a little bit. I know you’re real well, but if you could introduce yourself to the audience, and then we’ll, well, we’ll launch into our topic.

Brent Enders (01:02.677)
Sure, yeah, happy to. So Brent Enders, President of USA Financial, which is a conglomeration of subsidiary firms. Chris, for those who don’t know us or never heard of us, what we do is provide services and support to independent financial advisors all around the country. So we help them with operations and technology and marketing and anything we can do to help them as they’re working with their retail investor clients. I’ve been here 30 years as of June of this year.

So, at it a long time. When I started, no kids, no dog, no wife, no house. I had hair. Yeah, was a long time ago.

Chris Tanke (01:32.749)
3-0. 30 years. Wow.

Chris Tanke (01:44.204)
Well, you’ve weathered pretty well. You’ve weathered pretty well. So, yeah, well, as we talk about, offering partnership arrangements and what kind of a big commitment that is, there’s so many things to consider. And I just want to start by saying, boy, isn’t this analogous to a marriage, right? You take your time, you pick the best one you can, because it’s either going to be the best day of your life. Or the worst day of your life when you get married and.

Brent Enders (01:46.822)
Thank you.

Brent Enders (02:12.811)
Very fair.

Chris Tanke (02:14.206)
And I think the same is true with partnership arrangement. you have said, I’ve heard you say it before. It’s really important. And we do this backwards. You should really, hire slow and fire fast. When you build a team, we all tend to hire fast and fire slow. And that’s always pulling the bandaid off slowly. It’s a bad idea. So not to frighten everybody, but of course, a lot of you are listening, your business owners, you’re you’re curious to see the spin on this. Some of you, if you already have partnership arrangements, even though we’re talking about offering one, I think most of this will be applicable to arrangements that are up and running already. but, but boy, what an, a monumental decision to start giving equity shares out, the two purchases or gifting or whatever the case might be.

I mean, you are, you’re going behind a barn in your in your pricking your fingers and you’re mixing your blood for sure when you do that. And there’s a lot of considerations. But the problem is for many of us, we have to do it. I mean, if you have really great talent, that that that has been working hard, essentially, they’ve they’ve earned, in my opinion, equity, the golden handcuff concept or whatever.

They should have a stake in the game, but wow, you gotta make sure that you know who you’re getting hitched to, that’s for sure. So why don’t you describe if you would, Brent, you have a real interesting journey to your partnership development there at USA Financial over 30 years. Could you kind of describe that for the audience?

Brent Enders (04:00.235)
Sure, happy to. So Chris, my first encouragement is as we talk today, there are lots of options to do this, so that’s the good news. think you will help me uncover some of the various ways somebody can do this. But yeah, let me tell my story a little bit. So 30 years ago when I started here, I started as an employee, small company, five employees. I was number five. My now business partner was basically building the company out of the trunk of his car, planes, trains, automobiles, traveling around.

And inside the company, there were some problems going on that he wasn’t aware of and eventually figured it out. And at one point he got rid of everybody but me. So it was just the two of us. So lots of opportunities present themselves when you’re the only person working for a company other than the owner. Yeah, very much. So that was an interesting thing that took place too. But fast forward a number of years past that as the company was growing and developing.

Chris Tanke (04:46.186)
You’re a key employee at that point, right?

Brent Enders (04:57.791)
My now partner came to me and he gave me an opportunity to start earning what a lot of people in the tax or the CPA world would call phantom stock. We can talk about that for a second too. The name is not necessarily the best. There are some other names that are starting to become more common like synthetic equity, but phantom stock is a way to give somebody some value in the creation they’re hoping to build in the company.

without actually giving somebody true equity shares with voting rights and all the legal entanglements that come along with that. So I started out as a Phantom stock owner and I was accumulating Phantom shares. And if you want me to, at some point I can explain how that works. And then a few years after that, my now partner and I decided to start some other entities. And on those entities, I was a true equity owner and investor from day one.

I helped put money into the company, provided capital, so my partner and I launched a couple of other companies where I was a true equity owner, yet I had Phantom Stock and one of our other companies. And for a bunch of good reasons, we decided we needed to create a holding company kind of over the top of all of our entities. And at that point, having me have ownership in some companies directly, but Phantom Stock in another, it was becoming too messy and complicated.

So we both agreed that we’d convert my Phantom stock in the one entity into actual equity. And then we rolled all those companies up underneath the holding company and it kind of adjusted our ownership splits at that point. Because one of the companies I owned 30 % of, one I owned 20 % of, and one I had 10 % Phantom stock in. So it was a little messy to get through that conversion and there were some tax things that we had to work out.

Chris Tanke (06:45.567)
Mm-hmm.

Brent Enders (06:46.315)
One of the things I would tell people listening to this, Chris, if possible, try to start with the end in mind if you’re going to go down this path, because Mike and I, my partner, had never really thought when we started the Phantom program what would transpire over time, and you can’t always predict everything. Had we known that we were going to form these other companies and do a holding company, Phantom stock probably wasn’t the best way for us to get started, but at the time it was a good solution.

Chris Tanke (07:13.834)
Mm-hmm. Yeah, well, I get so much of partnership arrangements are Evolutionary right and It’s it’s very serendipitous the way that a business is going to go You can’t always see the direction the turns the additions the subtractions and it’s it’s just You know, it’s kind of a constant thing to be managed for sure but beginning with the end in mind, so to speak, is it isn’t always the easiest way to go. It kind of depends. Maybe if you’re a manufacturing firm, you might be able to look at at your trajectory a little bit better. But a securities firm, and what you guys were able to build out with the different subsidiaries and stuff. Boy, that’s, I mean, in some ways, you were being pioneers even in the concept of what you were doing.

How do you plan for, you know, stocks, stock options and partnerships and all that kind of stuff? Yeah. Yeah. Well, you survived it. You serve. So how did you survive it? How do you, how do you have these kinds of conversations then if saying, well, gee whiz, I, know, this, let’s go from Phantom stock to, you know, general partnership. How do you, how do you, how do you make that leap? Because there are tax considerations. There are, there is an equity difference. Wow. You’ve you I was gonna say you better know your partner pretty well.

Brent Enders (08:45.641)
Well, yes. So first of all, once the decision was made for me to be a true equity owner and the other entities we established, mean, my now partner had to be comfortable doing that right out of the gate because that is an entirely different relationship than the Phantom stock that he had offered him and providing me prior to that. mean, Phantom stock, one of the reasons people like that option, Chris, is it provides the current owner and primary shareholder a lot more flexibility.

In terms of how the shares are issued, if that person ever departed or they had to part ways, there’s a lot less long-term entanglements. You can claw those shares back. You do a true equity partnership with somebody, if there’s a breakup, you can’t just claw those shares back. They are an owner, even if they’re a minority owner, and the long-term entanglement of a true equity partnership is way different than Phantom stock.

My partner chose Phantom Stock and we later rolled out Phantom Stock to our employees, but it provides a lot more flexibilities in how it’s issued. If things don’t work out, there’s a lot more flexibilities for the primary owner to deal with that and not have the long-term legal connections of a true equity partner.

Chris Tanke (10:08.329)
And so the way these phantom stock situations are arranged, if I’m a key employee and I’ve put 20 years into the company and I can have an equity position or I can have a Phantom stock position, what is the downside for me as an employee to have Phantom stock, not to be a true partner, but to have a Phantom stock position as far as motivation?

Brent Enders (10:40.107)
All now a good question. I would say our experience, well, one, I was a Phantom stock owner at one point, and two, having seen our employees go through that with us, I would say that the two things that can be viewed as more of a perception issue, well, one’s a perception issue, one’s a real issue. The perception challenge is they don’t really have any voting say, because they don’t actually have true equity. So they don’t get to help make final decisions and vote on anything.

And a lot of people don’t care about that as much. I think the biggest perception problem is, it real? I mean, the name itself, like I said, I don’t care for the name, Phantom Stock, and attorneys and CPAs use it. It almost implies that it’s not real. And so there’s a bit of a concern from some people that, is it really real? And then the question is, well, at what point is value actually going to be generated and created?

Brent Enders (11:34.091)
because they’re not a stockholder, they’re not partaking in any net profit, they’re getting any dividends paid to them along the way, they’re truly just kind of riding it out, waiting until the day the company gets sold to get value. So there’s a little bit of a concern of is it real and how am going to get value out of this thing at some point? And for some people, I think they wonder is it ever actually going to happen? It’s that bittersweet moment of, I love the company, I love working here, I wanna keep doing what I’m doing, but they also know to get value out of the Phantom stock, the company someday has to be sold, or they don’t get the benefits. So those are a bit of the negatives. It’s more of a perception thing that has to be managed if you’re gonna give out Phantom stock. The one thing that is real is Phantom stock, when it does pay out to employees, if you get on this path, is it is considered taxable income.

Phantom stock actually operates for the tax nerds out there. Phantom stock falls under 409A of the IRS regs, which is deferred compensation regulation. It’s considered deferred compensation. So when it pays out, an employee, if they have Phantom shares, it’s going to be as taxable income to them as opposed to long-term capital gain.

Brent Enders (12:51.339)
Now on the other side of that coin, they also didn’t have to pay a dime for any of those shares. They didn’t ever have to dig in their pocket, bring money to the table, buy into the company. So I mean, they avoided the front end financial commitment. The trade off is it does get taxed as personal income to them when it pays out.

Chris Tanke (17:07.076)
So if a business owner was considering Phantom stock versus, you know, general equity shares, what are a couple things we probably touched on that a little bit, but what are a couple things that might sway them one way or another in your experience?

Brent Enders (17:24.075)
Sure, I would say I Chris, the biggest decision that somebody needs to make is around control and around voting rights. So do you want to have others in your company have a say with shares, real shares, general equity ownership shares or not? That’s number one. Number two is what kind of flexibilities do you want to have in terms of how shares are earned, how shares get paid out?

Do you want the ability to claw back shares if somebody left or you had to let them go? So I mean, it’s really about control. What kind of control do you want? Are you willing to give up? And also what kind of flexibilities do you want or not care about? Those are the two biggest deciding factors that will usually help a business owner guide them down which path. I’m a big believer that you should explore both and explore the pros and cons of both. And there are like most things in life.

There are pros and cons either way. I think you just got to figure out what are the pros and cons and figure out what path works best for you. The good news is, and encouragement I’d love to give, is either option I think addresses some of the core issues that an owner has. Number one, if they got key people and they want to time up the golden handcuff like you mentioned earlier, it definitely helps create that, which is awesome. The other thing that it does is for the person who receives,

shares, whether they’re Phantom or True Equity share, I mean, they got some serious motivation and skin in the game now. So they’re not just they’re trying to earn a good living and get a good paycheck. They’re really truly building wealth and equity for their family and charities that are dear to them down the road and all of that. So it definitely changes some people’s mindset, which is what the business owner wants. They want other people in their company to think and act like an owner. So the good news is doesn’t matter which option you go, you can get some of those benefits.

The last cool thing I’d say about, regardless of which option you choose, is really important. It puts the current owner and the people they give shares to on the same side of the table. So you’re in the boat, rowing the same way at the same time. You have a lot less of this friction of owners versus employees and who’s looking out for whose interests. And it just helps put everybody on the same side of things, which is great.

Chris Tanke (19:43.177)
Mm hmm. Okay, very good. Let me pivot now if I can. you’ve been a partner for many years. And you’ve been married with Mike Walters, USA financial. And then of course, you had some other children, some other people started getting phantom stock and equity shares and all sorts of stuff along the way as it’s developed. So can you give us some, I guess, tips on how to be a good partner how to how to make sure that relationship is mutually beneficial because you know you’re two different people and so how do you how do you

How do you navigate that to make it work long term?

Brent Enders (20:29.353)
Right, right. It’s a great question. So the way our deal ended up shaking out, Chris, is I ended up in the end with 20 % ownership and everything here at USA Financial. My partner, Mike, that you mentioned, he has 80%. I would say one of the primary reasons why our partnership has worked so well, and it’s been almost 30 years now, I mean, again, we started as Phantom, we ended up with Real Equity.

Two things, even though we’re 80-20 ownership structure, Mike treats me like we’re 50-50, which I think for a lot of business owners would be hard to do, but he does. Yeah, I never forget that it’s 80-20. So there’s that mutual respect there, know, 100%.

Chris Tanke (21:15.042)
It’s mutual humility. Actually, that’s a good word for it, mutual humility.

Brent Enders (21:20.467)
Yep, and I really think that’s why it’s worked so well for him and I because it definitely it is like a marriage and it’s a give and take. And so, yeah, he he he views me and treats me as equal. But yet when push comes to shove, I respect that that he’s the primary owner. And if we don’t agree on a decision, which, by the way, hardly ever happens. But if we didn’t, I know I have to defer. It’s you he’s the primary owner. So it just works for us that way.

Chris Tanke (21:46.274)
Mm-hmm. Mm-hmm. Yeah, that’s that’s very very good Well, you’ve you’ve Let’s talk about if it doesn’t work out Right. This is sort of been a negative podcast. We’ve said most of our time. man Watch out for this but it is it is a sticky wicket It’s it’s when it again when it’s good man. Is it good when it’s bad man? Is it bad and You know people can grow apart somebody can develop personal issues that really affects really the business as they bring it in with them. And I mean, all sorts of things. You are entwined, which is, again, could be great or not as so good. So let’s say that somebody is an equity partner and this is not working out and they’re a minority holder position.

You know, how would Mike might go about firing you? How does that work?

Brent Enders (22:47.369)
Yeah, yeah. So one of the things that everybody always has to remember in these types of relationships is, like I’ll use Mike and I as example, we have jobs. He’s the CEO of the company, I’m the president of the company. And then he and I are owners. And it’s really two different hats we wear. At the ownership level, we’re 80-20 as I mentioned, in terms of a job, I mean, he could fire me.

I could end up not working here and not being president and he could fire me, yet he still has to deal with me on the equity ownership side of things. So you can separate sometimes as working together, but it’s pretty hard to separate ownership if you have true equity partnership. So just remember you got two different hats you’re all wearing and two different things can transpire. So the most important thing in my opinion, to deal with this in advance of a problem. I kind of equate it to, it’s not a good time to ask your wife to sign a prenup when you’re married and you’re already in a fight. It’s too late. Level heads are not there. There’s hurt feelings. People are mad. People are upset. You’re going to have a hard time walking your way through separation if you haven’t clearly defined an advance in writing, if we have to separate how it’s going to work.

Chris Tanke (23:52.305)
Mm-hmm. Mm-hmm.

Brent Enders (24:08.939)
So it’s a little awkward to have to do it on the front end, but that’s when people are excited, the communication’s good. You’re like in the honeymoon, like everybody is, oh yeah, this won’t be, let’s get this figured out now, it’ll never happen to us, but get it written down. So it literally needs to be in your partnership agreements. It’s to, hey, if things don’t work out, know, first of all, I think if you can, and it’s a little bit of a gray, try to define some ways in which you can agree that if these certain things happen. One or both of us have the right to end this partnership. It’s simple stuff. Like if there’s a legal thing that comes up and one partner is accused of or convicted of a crime, I mean, you can define certain things. But if you just have a different philosophy about the direction of the business, it’s hard to define that in writing. But try to define some ways in which you might need to break up. But more importantly, regardless of why a breakup might occur, try to get a definition of how it will work so that you’re not squabbling over it. So for instance, in our operating agreements, it would state, know, Mike can get rid of me as an employee, I have equity ownership, but if we separate whether he wants to or I want to, it is defined how it goes, how he buys me out, the length of the buyout. I mean, you try to get as much of that dealt with on the front end, so if it has to happen, you’re not squabbling over how we’re going to do it. It’s already been defined how it’s going to happen. But most people just assume it will never happen and say they don’t plan for that. Chris, we have a line here. I’m sure you’ve heard me or Mike say, hope for the best, plan for the worst. I mean, you want to get some of this figured out why things are fine and everybody’s happy and getting along, because trying to do it if people aren’t getting along is pretty hard.

Chris Tanke (25:58.388)
So as the business matured and developed and as say you and Mike, you know, develop personally with dreams and aspirations and, and how you can contribute to the firm and, and, and those sorts of things, how often had you go need to go back to that original agreement and tweak it?

Brent Enders (26:16.575)
Yeah, good question. Hardly ever. You know what we do periodically review, and we still do, is how we get paid. How we agree to pay each other as employees of the company. Because like I said, we’re 80-20 from an ownership perspective. Mike treats me more like we’re 50-50. If you looked at our compensation and how we pay each other, it’s pretty close to 50-50. It’s almost like a 60-40. So with him getting 60%, I’m getting 40. So we kind of review that periodically as to how we’re paying ourselves and if we feel comfortable and agree with how we should get paid. And we definitely have periodically reviewed and massage that over time. Because again, as employees, we don’t have to pay ourselves the same ratio as we do as owners.

Brent Enders (27:07.595)
Now if we take dividends out at the end of the year of net profits, well then that has to come out according to our ownership splits, but we massage around how we’re paying each other to make sure we’re both comfortable and feel that it’s fair.

Chris Tanke (27:19.325)
Yeah, very good stuff here. Very good stuff here. well, what else do you have for us, Brent?

Brent Enders (27:29.035)
Chris, you mentioned something a minute ago that just popped in my head. When you get into these relationships, and I talked about try to get some of these things written in agreements in advance, I think it’s important that you get other things written in the agreement, like part of a buy-sell agreement. mean, life happens. What happens if one of the owners or partners, whether it’s the majority or the minority, were to pass away? How are you going to deal with that? Again, it’s not a good time to be trying to figure that out after it’s happened.

So make sure you’re getting good tax and legal advice and teams like yours can help coach people through that with your networking of experts. So it’s important. Get that figured out. I think there should be things in agreements like rights of first refusal. If one partner wants out, can they go solicit an offer to get out? And do they have to give the other owner an opportunity to crack it by him first? mean, it’s best to get all that stuff worked out in advance. if something happens, something wants to exit, there’s an ugly breakup, there’s a death or disability, like how are you going to deal with all those what ifs?

Chris Tanke (28:34.502)
Yeah. And what is the business valuation? How do we determine that? What are the terms? All that kind of stuff. Yeah.

Brent Enders (28:38.187)
Yes, Yeah, nobody wants to be doing that when something difficult or ugly is happening and then trying to get all parties to agree, especially if one party is no longer there. Because now you’re sometimes entangled with somebody’s spouse. Now you’re now in business with the spouse or you’re in business with their estate and the trustee of their estate. So it’s better to get all that as best you can figured out in advance. And you as an advisor and the team you work with, the state planning attorney, CPAs, mean, good advice and it takes a team. As they say, it takes a village to figure this out because it’s complicated. And business owners spend their whole lives building this thing. It’s like a China egg. And the last thing you want to do is drop it near the end and have it break apart. So it’s best to get help and get it figured out as much as you can in advance.

Chris Tanke (29:26.163)
Yeah. Navigating abundance is all about balancing your ledger wealth with your logistical wealth and your legacy wealth. The logistical wealth here, the teams of people, the professional synergies you developed, the documents you’ve created, which we’ve been talking about for business or even for estate planning. boy, you need a plus people on your team and it’s going to cost money and boy, it worth it. You just that’s.

Brent Enders (29:55.325)
It’s totally worth it.

Chris Tanke (29:56.068)
It’s it’s a very valuable part of your wealth is your logistical team. So that’s so much Yeah

Brent Enders (30:03.275)
Right? Chris, I’ll give you one quick example. You know, Mike and I went through a transition a year ago where we sold the majority interest of our firm to another group. One of the outside professionals that helped us with that, there was one word in our agreement with the acquirer that significantly changed how Mike and I were going to be taxed on that. We didn’t know that. One word in a 185 page agreement saved Mike and I a lot of So, so, you know, don’t try to go this alone You need experts to help you and and sometimes, you know, it’s the little things We joke, you know, look little hinges swing big doors Sometimes it’s the little stuff that makes more difference than the big obvious items

Chris Tanke (30:48.626)
Are you able to share what that one word is? I’m not going to be able to sleep at night. If you need to it privately, I’ll call you.

Brent Enders (30:52.843)
Chris, I can’t recall the exact wording, but it was how we were going to have to pay tax. was traditional method versus maybe remedial method. any CPAs or tax attorneys listening, you probably know what I’m talking about. It was the one word, traditional versus remedial or something like that. And we were stunned. like, we had no idea.

Brent Enders (31:22.751)
But you don’t know what you don’t know. So don’t try to go it alone.

Chris Tanke (31:23.451)
You don’t know what you don’t know. Yep. Yeah, for sure. Yep. And it’s wise to learn from other people’s mistakes for sure. So you want to do that. You don’t want it. You don’t want to be the guinea pig or the canary down the mine shaft. You’ve got the any situation that you’re, you’re facing as a business or in partnership has been done thousands of times before. So that’s a great body of evidence then to use to lessen the pain or increase the opportunity as you go through whatever is on your right in front of you. So that’s very good. Very good. All right. Well, Brent, do you have any closing words of wisdom for us here? I think this has been really great. We’re just scratching the surface on this, of course. But yeah, as we come in for a landing here, anything that you can think of that might pop at the top of your head here that we might not have discussed or that you’d like to get out there to the audience.

Brent Enders (32:23.349)
Sure, yeah, Chris, I would say just more of encouragement. I heard somebody say once, you’re gonna get in the bathtub, the water doesn’t get any warmer. So if you’re thinking about doing this, start doing some research on it and learn what the options are and make sure you know why you wanna do it, if you’re gonna look at it. Make sure you believe in it, because you could have somebody tell you it’s a great idea, but you actually have to believe it.

And then you’ve got to be committed to it. So the encouragement is, you know, get started. The sooner you check it out, research it, figure out if it works for you, the better off you’re going to be. And then from there, it’s just getting help.

Chris Tanke (33:09.191)
Yeah, very good. Well, Brent, thank you for your time. Thank you for your wisdom. Thanks for your encouragement. I think that any business owner listening to this should be motivated to make progress wherever they are in the stage of their partnership agreements. been it’s been really great. And thank you for your vulnerability with us today. I really truly appreciate it.

Brent Enders (33:31.625)
You and I both like doing these kind of things just to help people. So it’s been fun. Thank you for having me.

Chris Tanke (33:36.248)
Absolutely right. All right. Well, thank you. Have a great day All right. Bye