Aloha GirdleyWorld,
We’ve just crossed 16,000 subscribers, which means it’s survey time! I want to know what you’re interested in. Take this 2-minute reader questionnaire, please?
Today’s agenda:
- Reader Questions: changing people, and finding the right level of involvement in your businesses
- How QSBS can save you millions in tax (literally)
- 3 things that caught my eye this week
Let’s get into it!
---
Question Time
Two weeks back I asked you all what your biggest challenges were. I got some great responses, so let’s look at a couple.
One person runs turnarounds, but they’ve run into a leader who is extremely resistant to change. They asked:
➡️ How do you get someone to change who thinks they’re right about everything?
This is a difficult situation.
The EOS system (from the book Traction) talks about how great employees have three things (CWG):
- C: They Can do the job (right skills, mental rpm, etc)
- W: They Want to do the job (grit, desire)
- G: They “Get It” (culture, mindset, mission, etc)
In this situation, I start by figuring out what part of the GWC framework they’re missing, then work backward.
For example, is the resistance because they’re scared they won’t have the skills needed? Or do they not “Get It” about where you’re trying to take the company?
This is a process where you, their leader, need to dig in by asking questions. What are they scared of? Why do they resist the changes you want to make? Treat them like a real human being and listen.
Hopefully, they can open up and provide answers. Then you can work to unblock them either through improved resources or coaching. If they don’t open up, you likely need to start finding them a new role, either in your company or in a new job where they can thrive.
Good luck!
---
Another reader is facing a challenge I’m very familiar with in the HoldCo world:
➡️ What's most difficult for me as an operator/CEO is turning into an investor-style owner of multiple businesses and not being involved with the details.
For example: this year is a bit more difficult, and I'm not sure what is the right level of involvement from my side. Should I just wait patiently? (that's super difficult) Should I fire the leaders I have and find new ones? How can I decide if it's their shortcoming or just a macro thing? Should I dig deep and get to know all the little details and make decisions myself?
This is one of those “it depends” style answers and something where experience and experimentation pay off.
Early in my HoldCo efforts, I would be too removed from details and operations when things got tough. Later, I swung back in the other direction to be too involved too much or too quickly. Over time, I gave myself room to make some mistakes in both directions – and apologize when I screwed up.
My mentality on companies these days is to “trust but verify”. In other words, hire people we trust but be OK making sure things are going as they should. Good managers will recognize that’s what you are doing. If a leader has a problem with it, you likely need a new leader in place!
Back to your specific question, some thoughts:
- A HoldCo only scales if you give leadership the rope to run. If you can’t do that, it’s time to rethink things. So, no, you shouldn’t know all the little details but you should know the bigger picture and be up to speed.
- If your leaders are not thriving – or don’t have a path to thrive – in their role, you have a problem. Don’t tolerate average. Your company (and you) deserve better.
- There are times when you must lean in and don’t be scared to do so. It’s your company after all. These are usually very important and time-critical issues. I recommend you approach this as a support function for the leaders. Get involved but don’t neuter their authority.
Hope that helps!
---
How to sell your business and pay no tax
In 1993, the US created a tax incentive called Qualified Small Business Stock, or QSBS. It was pretty good. But in 2017 it suddenly became amazing. (For complicated reasons we won’t get into here.)
*Disclaimer! This is not professional tax advice. Listen to a legit tax attorney and accountant, not your goofy internet uncle Mike.
Here’s how it works, in 3 steps.
- Buy stock in a US C-corporation.
- Sell it after 5 years.
- Pay 0% federal capital gains taxes on the greater of $10M or 10x your investment amount.
If you’re a small business owner/investor, this can make you millions. Let’s look at the requirements, then a few examples of what this is good for.
Requirements
- You need to buy newly issued stock directly from a C-corp. So, you can’t buy via a stock market or from another investor.
- Stock must be bought with cash or property.
- Individuals and things taxed like partnerships qualify as buyers (like LLCs, S corps, LPs, etc). The buyer cannot be another C-corp.
- 80% of company’s assets must be used for the business. I know what you’re thinking: “Just put this building/stock/etc in its own C-corp and sell it tax-free!” Not gonna work.
- The company must be in tech, retail, wholesale, or manufacturing. So no hotels, law firms, financial corps, farms, mines, etc. Here’s the actual text from Sec 1202 (another name for QSBS), with all the stuff you can't use it for:
- The enterprise value must be less than $50mm. Above that, you’re no longer a small business. But no problem if you’re starting a new business, or investing in a startup!
Using QSBS
Here’s two examples where QSBS is a perfect tool.
- Starting a new software company: You invest some money in initial costs. You plan to reinvest profits for years to grow it. As long as you make it a C-corp at startup…
If you sell after 5+ years, the first $10mm is cap gains tax-free.
- Buying a roofing company: First, you create a new C-corp with investor money. The new corp takes out a loan to buy the assets. That starts your hold period.
Sell after 5+ years… you know the rest.
This is an easy scheme. You don’t need to submit any forms. You just claim it when you sell it, and save yourself millions.
So what’s the catch?
Basically, C-corps have higher effective US IRS tax rates. So if you’re planning to just cash flow permanently, QSBS is a bad bet.
Have you used QSBS? I’d love to hear your story! Hit reply and let me know.
---
Three things that caught my eye this week
Appetizer: We’re having our first Girdley Media offsite, and we rented this baller lake house for a few days. What goals should we set?
Main: The guys behind HoldCoConf (where I’m a speaker in September) did a survey of over 100 HoldCos. Two stats that jumped out:
- less than 20% of HoldCos raise funds on a per-acquisition basis
- the average HoldCo only operates in about 2 industries! (I’m way too restless for that.)
You can see all the results at holdcosurvey.com.
Dessert: Finally my modeling career is taking off (screenshot for non-Twits):
That’s it for this week!
Thanks to everyone who sent in their stories last week. It’s definitely given me some newsletter topics to put in the pipeline. And a reminder, if you haven't yet: please fill out my (very short) reader survey!
Have a great week.
Michael
