How an 831b Plan can IGNITE your Business with Van Carlson

0:01Boom! Shake the room, Fire Nation. JLD here and welcome to Entrepreneurs on Fire. Brought to you by the HubSpot. Podcast Network, the audio destination for business professionals with great shows like Systems Saved Me. Today, we'll be breaking down how an 831B plan can ignite your business. To drop these value bombs, I brought to Van Carlson into EO Fire Studios. Van is the founder and CEO at SRA 831B Admin. He is an industry leader in enterprise risk management solutions with over 25 years of experience, along with the responsibility of bringing SRA's new products to market. He helps clients achieve their financial goals to aid in protecting a business's assets through times of uncertainty.

0:42And Fire Nation, today we will be talking about an 831B plan. We'll be talking about how to mitigate risk using it. We'll talk about a business succession plan and oh, so much more. And a big thank you for sponsoring today's episode goes to Van and our sponsors. DTC Pod, hosted by Ramon Berrios and Blaine Bolas, is brought to you by the HubSpot Podcast Network, the audio destination for business professionals. DTC Pod is a podcast about all things direct to consumer. Ramon and Blaine cover everything from starting, growing, and optimizing e-commerce stores and DTC brands. If you're interested in the stories behind your favorite consumer brands, this podcast is for you.

1:20One recent episode on how the best brands are built is a must listen. Listen to DTC Pod wherever you get your podcasts. van say what's up to fire nation and share something that you believe about becoming successful that most people disagree with you know i think in the beginning that the idea of wearing all the hats is kind of a fallacy i think you should trust your people right away and hire the best you can and and be ready to spend money fire nation play with a players hire fast if you need to fire fast but make that happen because you need to focus on your area of expertise and And guess what that is for van?

1:58It's something called an 831B plan. So we're going to be talking about that because I love starting with the basics, van, especially for Fire Nation so we can really set a foundation to go forward here today. So let's talk about a tool that every single Fortune 500 company uses that is now a tool for small businesses as well. So what the heck is an 831B plan? An 831B plan is really, it's a federal tax code. It was created in 1986. You know, we're going on almost 40 years, and a lot of people still aren't aware of it. But very similar to what's going on in the marketplace today with traditional insurance, it was going back on in the mid-80s.

2:41And what basically happened, Congress got together and created an incentive. If you're going to self-insure risk, how do we create an incentive for you to manage that risk more effectively and efficiently? And that's utilizing an 831B. So an 831B really is part of the tax code that allows you to expense money out of your operating company, dump it into an 831B plan, left under that tax code, and those dollars don't become taxable. So it's like buying a piece of equipment that you accelerate depreciation on, but meanwhile, you still have the dollars. And that's a significant incentive for business owners, especially in the marketplace we're in today, when more and more business owners are paying more money for the traditional insurance and getting less for it.

3:26And it's the new PPP plan. It's all of those things that are wrapped out there that business owners find themselves self-insuring risk for. You mentioned Fortune 500 companies. Most Fortune 500 companies own a lot of insurance companies because nobody's willing to sell Microsoft, for example, product liability. There's not an insurance carrier that's willing – there's not enough premium to charge there, right? And Microsoft, why do they want to spend all that money when they can just go out and self-insure it? And to your point, with the price points of where they're at today, it's becoming more and more attractive for business owners to look at these kind of vehicles as to do the risk financing that they just have on their own books already.

4:06And it's one of those things we call unfunded liability, right? So if I have this risk and I'm self-insuring that risk, that's unfunded. I can go out and buy an insurance policy and trade it for premium dollars. I've transferred that risk to them. That's a form of risk financing. However, in the market and to the complications since 1986, when it comes to supply chain risk, brand protection, dispute resolutions, the cyber stuff that we have to deal with today, they're finding themselves self-insuring risk more and more. And then, of course, you fast forward to 2020 with PPP, and you really come to realize that, you know, you are self-insuring a lot of your risk today.

4:45And it comes down to one thing, John. Do you want to use after-tax money to do it or pre-tax money? And that's really what the 831B allows you to do, is use pre-tax dollars, build your own war chest, your own rainy day fund, and be in a better position when the unforeseen happens that you have these dollars sitting aside there to weather the storm. So let's be frank with Fire Nation here. Let's call a spade a spade. Because being an entrepreneur, it's risky enough as it is. so we have to find ways to mitigate risk as we're going forward with our business. So how the heck can we mitigate risk with traditional insurance?

5:24The biggest one right now, I mean, what they're staring at people in the face is, is really they're taking on more first dollar risk. And what I mean by that is, is they got deductibles, they've got limits in their policies. They're not buying enough coverage or they can't get enough coverage. Arts is cost prohibitive to get enough coverage today. And so you're finding that. And I'd also say this, especially with entrepreneurs, the more niche you are in your industry, more niche you are just in business. You know, the traditional insurance company, they have the one glove fits all mentality, right?

5:55They're going to write a policy and it's going to be here it is. If you're they're going to classify you as a retailer. But are you a retailer? And the problem is, is the more niche you are of a business, the more gaps you're going to have in that coverage. because there's just things that you do uniquely to you that you're not going to have coverage for. And again, this is where the 831B allows you to, you know, nobody wants to give up capital and that kind of stuff. And truthfully, you know, what I witnessed in OA when I got into this thing full time, I was risk manager leading up to that. I had a successful property and casualty agency.

6:29And then when the Great Recession hit, I just saw a lot of my business owners go out of business because they knew leverage. They knew all about the accelerated depreciation. And entrepreneurs, you know, they want to grow businesses. They don't want to pay taxes. I mean, they want to minimize their taxes and grow their company as fast as possible. You know, and the problem is leverage, that almost creates, I wouldn't say bad behavior, but it creates behavior where you're kind of letting a tax tail wag the dog kind of. And you're just betting every year is going to be better than the previous year because you took on more debt when maybe you didn't need to.

7:02and that's what I witnessed in 08, 09 and that's when I really had the light bulb went on for me man there's a ton of financial risk business owners take and so to me it's getting back to the basics of what is your business we do a full-on analogy of our business owners you know you look at cyber today cyber is a huge expense to us today we used to say hey collect all the data you can now now data is like man do we really need this data do we need to know people's data births? Do we need to know? There's a ton of things out there that we've been doing over the last 10, 15 years just in the cyber stuff that you're going to find insurance not covering it anymore or they're going to be excluding it.

7:41And again, it's one of those things where your reputational damage is huge today. We do everything we can on creating content, bringing awareness to our brand, bringing consumer confidence to it. It's one of those unfortunate things. And the smaller to middle market business you are, the more of an impact it is on you, especially if a local company where you've got some negative PR going on because something happened. You know, there's so many variety of things that go on, especially with being doing this for almost 30 years. I can tell you different scenarios that you wouldn't even think of and how it was detrimental to the company's brand, you know, and where's those dollars going to come from?

8:17You know, I call it the double negative. You got customers not coming into your door now because you're making local news about something that's negative about your company, but your expenses are going up. And so the fact that you can have these dollars set aside to go, again, weather that storm is the difference between living and dying. So we've talked a lot about risks in general, but I want to get real specific now. So let's talk about one or two maybe real specific risks that you are seeing businesses are facing that this can be used for that we're talking about here today. I mean, I know you mentioned a little bit about regional and brick and mortar and stuff along those lines, but let's get specific.

8:54What should Fire Nation be concerned about? General liability. General liability today, I see clients that buy general liability. They think they're going to be covered for your normal slip and falls, but also the contractual stuff I'm seeing. There's a right to defend in your clauses of your general liability policies. So you're going to get sued. The longer you're in business, you're going to get sued. And whether or not that's going to be covered under your policy or not is going to really depend on the fine language inside your policy. And a lot of times you don't know how good or bad your policy is until you need it.

9:25And just to be able to fall back on that. So we have a dispute resolution that we create for our clients, meaning that if you get served a lawsuit, this pays for your legal bills and anything in any punitive or any damages that are found against you. That's a backup to the GL. I think GLs do a traditional general abilities do a really good job if somebody was a slip and fall on your property, right? But beyond that, it's going to be a lot stickier out there. And it's been shocking to see the industry get off some of these clauses in the past, the judges okaying it. It's been surprising to see, but it's going on every day.

10:02I'm in the throes of every day with our business owners that are saying, hey, this isn't covered and here's why. When I was selling traditional insurance, quite honestly, I would say 40, 50 % of the time I was telling the clients that wasn't going to be covered or hey if you turned it in here's what's going to happen wow it's gotten a lot worse since i stepped out of that traditional insurance i mean a ton a ton worse you look at uh actual cash value minus depreciation on roofs today more and more business owners are finding their commercial buildings you know if you got a 20 year old building it's depreciated down to nothing that thing blows off to a hurricane you're on the hook for all of it because it's depreciated it's actual cash value minus depreciation uh that roof is basically least you're self-insuring the roof.

10:42Those are all things that it's just going to come out of your cash flow of your business. And then you fast forward to PPP. And this is one thing I've been very helpful for us, unfortunately, John, is PPP. It's that if you were relying on PPP to stay alive, what are you doing differently about it today? And are you going to rely on the government the next time? Or should we rely on the government the next time? And I would say too that because of that, Congress is definitely getting a lot of attention on this code too as well. More and more Congress folks are learning about this code for the first time.

11:13It's been on the books since literally 1986. But most business owners don't know about it. And so I really appreciate being on your format and getting the word out because we find ourselves just being educators right now. We're an admin. So we make it very simple for business owners to participate in these plans. No different than the 401k administrator does. We're an 831b administrator. That's what SRA it does. We admin these plans. We are the largest administer of these plans in the country. We have over 800 plans currently, and we'll probably end up over 1 ,000 easily by the end of the year.

11:49And yeah, of course, there's tax incentives involved in these programs. But the reality is, is more and more business owners, and you just got to ask them, you don't know, I'm not covered for this. And this is what I'm losing sleep over. And it gets back to the question, do you want to use and all after tax money is is operating cash flow pre-tax dollars is dollars you spent the previous years and there was a risk profits and you would pay taxes on them the operating cash flow is key to keeping making sure the business stays live it's why ppp had to come into existence right um you know if you erode your cash flow you can't afford to reopen and that was a big concern of the government obviously and that's why they brought out those programs but again what are you doing different about it in the future?

12:32And just being aware of this, I think, makes you a better business owner. I totally agree. And listen, we thank you for taking the time to come on and just making us aware of this, of the risks, of the opportunities to mitigate that risk, and what's actually available out there for entrepreneurs, for small business owners. And Fire Nation, we have a lot to talk about on this topic when we get back from thinking our sponsors. Marketers have never been spread so thin. Trust me, I feel it too. Between creating content, launching campaigns, generating leads, nurturing your prospects, and more, you barely have a second to breathe, let alone do your best marketing.

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13:48Stop Stop spreading yourself thin and start making major moves with HubSpot. Visit HubSpot.com slash marketers to learn more. Van, we are back and I want to talk about business succession because a lot of entrepreneurs don't think about this and then it ends up being an absolute disaster as a result. So let's talk about what a business success and plan is and then share yours. What we're seeing, what we've dealt with a lot now in the last couple of years, really going up to 2019, we're seeing a lot of it. and it kind of tempered off, it's the merger acquisitions. And I would tell you in the last year, we've seen a huge spin-up of merger acquisitions.

14:25I think it's, you know, when people talk about the transfer of wealth in our country, it's really the small to middle market business owners that are family ran or have a couple partners in them and that need to, you know, they're getting up in age and they want to sell, they want to merge with another company or their competitors. And, you know, how do you structure all that? And then fortunately, to your point, John, you know, a lot of times when you start out, that's not really on the forefront, right? So your operating agreements, the way things are written, it becomes important when you go to sell.

14:55And the other things that business owners love to do is because of the reputation in the community that are operating in, they give out a lot of warranties. They give out a lot of implied warranties and a lot of extended warranties, service warranties and all those things. And that's one of the things we talk about with business owners all the time because if I'm buying your business and you've put out a lot of warranties out there in the community, I've got to honor those warranties. I'm going to devalue your business. And we see it all the time. And one of the things that we'll go and do is we'll build either the client or he hasn't one of these plans in place, the 831B in place, that's already handling his warranties, already funded the warranties.

15:31That's a hugely unfunded liability on most business owners today. But if they've been utilizing an 831B, they've been funding it, which means when they go to sell, they'll use those dollars to honor any warranty as they run off. And so they don't get a devaluation on their business. If anything, they get a premium on their business because a new owner doesn't have to worry about their dollars honoring that. That's huge because most of the time you're selling your business on blue sky, right? I mean, you got fixed assets and everything else, but if you're contractual, intellectual properties, reputation in the community, that's what they're buying.

16:04And that's really what most business owners value, right? It's not the tangible assets, the intangible. And unfortunately, traditional insurances don't do a really good job insuring the intangible assets, although most business owners value those more so than the tangible. They don't value the building, the equipment, and the cars as much as their contracts or as much as the product that they're out distributing or selling or manufacturing. That's their value. And traditional insurance falls down on that. And so that's really where we see a lot of merger acquisitions. We see a lot of contracts where business owners are going to have to carry the notes for a while.

16:38We definitely have dispute resolution in there because there's clawbacks all the time. We call them carve-outs and clawbacks. You know, you're going to have those in your contract when you go to sell your business. And depending on how good or bad you negotiate, but you're always going to have carve-outs and clawbacks. And how do you want to mitigate that risk? And if you can take some of the selling proceeds of your company, dump them into an 831B and have a rainy day fund in the event of that you've got to utilize those dollars to either enforce the contract or somebody's suing you now because the rep and warranty that you that you promised was there isn't panning out for them and now they're going to sue you you have the dollars to again weather the storm and that's key to that that situation what i tell people is when you look at merger acquisitions or any of those types of things or you're selling your product your business we can form like kind of like a bond you know that's the way we would utilize an 831b is like a bond where basically we're doing some backstops.

17:37In the event of this happening, here's the dollars that we'll set aside to really help mitigate that risk for that new buyer. And that's really what we can help have the sale go through because of the way we can structure these types of tools. And that's a big benefit to both parties, the buyer and the seller. Everybody wins in that situation. Everybody's comfortable with the deal because there's a structure in there with the 831B and there's a backstop there in the event of. And that could be the difference of selling your business or not. Fire Nation, this is so important to really understand and to absorb because again, this could mean millions and millions of dollars down the road if you do this right for you or potentially against you if you do this wrong.

18:23And now I wanna hear not super in depth because we really have to focus on the next topic as well, but I'm always curious about how people get into an industry. I mean, you're obviously so passionate about it, so knowledgeable about it. What exactly is your origin story into this industry? I'm a risk taker too. I'm an entrepreneur. I own four operating companies. I never thought I'd have as many employees working for me today. And I know the risks I've taken to get here. And I'm not afraid of risk, obviously. This is a tax code the IRS doesn't like. So we always have their attention. But I'm willing to take that risk every day long because I believe in this product.

19:02from a lot of different ways. But, you know, the reality is we're not making more risk takers, in my opinion. And if I can bring tools like this that helps mitigate risk for business owners to even embolden them to take on more risk, they're the ones that drives our economy. They're the ones that bring the innovation to the program. They bring innovation, which brings down cost. And most of our entrepreneurs are really conscious employers. I mean, they want to take care of their people. They're not a number to a big corporation, right? So these are the type people I want to help. And so to me, it's, and I saw it, I saw it through 08, 09, 2010.

19:41You know, I was a very successful property casualty agent. You know, I didn't golf, thank God. I'd probably have a low handicap and, you know, work 20 hours a week is the, you know, the big dream for property casualty agents. And, you know, I wasn't there. I was, I was a workaholic and I enjoyed the work and I enjoyed helping business owners. And then when I I saw them, you know, unfortunately go to the auctions. I mean they were going out of business. And, you know, that's when I thought, okay, you know, I can make – I do very well financially. I'm blessed by my wildest imaginations. But the fact that I can – one of the best compliments you can get as a risk manager is when a business owner tells you, man, I just sleep better at night knowing I've done your program.

20:21And quite honestly, John, from my point of view, on a level of professionalism, you can't ask for anything better than that. Because honestly, we lose a lot of sleep. I sleep by crap. Because my mind's always working, like most entrepreneurs' minds are. And the fact that you can just lessen that a little bit, and like I said, embolden them to even take on more risks. Because those are the guys we need out. Those are the people we need out there pushing the envelope. Fire Nation, are you going to be one of those people that's pushing the envelope? Because you have the tools, you have the information.

20:56Now you have the right process to go through. Be that individual pushing that envelope. And we've talked about the present van of 831B. What the heck is the future? You know, one of the things that I speak all over the country, I'll be speaking in Omaha Monday, actually. It's going to become a normal business practice. And it's no different than 401k. We compare this code a lot to the 401k. It has the same rules and regulations, quite honestly, as 401K. And so I think it's become a normal business practice. I can tell you this. The faster you adopt these types of programs, it gives you a competitive edge, quite honestly, in your sector, in your industry that you're in.

21:33Because if you're not doing it, your competitor will be doing it. And so I feel like we're in a great marketplace. Unfortunately, the traditional insurances are kind of driving the bus right now because what's going on with them. They're either completely getting out of markets or they've got so much exclusions in these policies today that they know they're not going to cover anything. And meanwhile, you've got self-insured risk going on. And so for me, from what we're seeing, the amount of traction we're getting in the marketplace, it will become a normal business practice. And it's not because of the tax incentives necessarily.

22:07It's more out of just simple risk mitigation. And that's why the code existed. That's why it started back in 1986. If you go to the March 1986 Time magazine on the very front cover, it says, America, your insurance has been canceled. It's very similar in the marketplace we're in today, almost 40 years later. And I don't see this market changing anytime soon. We just got hit with two more hurricanes down in Florida through the Carolinas. It's going to put more pressure, not just in those states. All states subsidize each other when it comes to insurance premiums. So everybody can expect to pay more and get less.

22:43Meanwhile, is your business really covered the way you need it to be? And that's why I encourage business owners, entrepreneurs, they hate talking about risk. They look at insurance a lot of times as a necessary evil kind of thing. But honestly, you owe it to the risk you took. You owe it to the employees you employ to utilize all the tools that are available to you. And looking at your risk and looking at your policies and understanding them is critical to your business. because you don't want to find out at the wrong time whether or not you had the right insurance or not. Because when you need insurance, you need insurance.

23:16So Van, you've talked about so much awesome stuff today. Give us just one key takeaway you want to make sure our listeners get from our conversation today. Tool to toolbox. There's no silver bullet here. There's some risk involved in these when it comes to the four-part test and all the other things that we do as administrator. We're not here to complicate your life, but again, you owe it to yourself. You owe it to the risk you took. You owe it, you know, taking an idea and running it and making it a profitable company, as we all know, is not easy. Sometimes darn near impossible. But when you do that, now how do you mitigate the risk you took on the back end?

23:56And again, the 831B allows you to do that. It's not a silver bullet by no means, but it is a tool in the toolbox. And for the right business, the right client, it's a fantastic tool. Van, give us a call to action. If Fire Nation wants to connect with you, wants to learn more about what you and your business has going on, where do they go? We own 831B.com. So we have 831B.com. On there is educational videos. They can absolutely reach out to me. I'm van at 831B.com. And we're happy to – we work with a lot of advisors all over the country. We have a lot of strategic partners all over the country that represent our products.

24:32And, again, it's just an education thing. It may not be the right time for you, especially if you're in a substantial startup or growth mode. But we have different ideas out there for you to create additional revenue under these codes. We'll educate the client. The awareness is the big key to us because I know if not today, eventually you'll have tools like this that you're going to want to turn to. And we want to be the ones that you think of first. And so I think you've got to go educate yourself. And I think starting on our website, 831b.com is the best way to do that. We've got videos on there.