Transcript
Stephan Shipe: Welcome back to the Scholar Wealth Podcast. This week we open with a founder who built a regional medical staffing company and brought on a minority partner three years ago when he was burning out. The partnership worked, but their visions for the next five years have split, and the buyout clause in the operating agreement leaves the valuation method open to interpretation. Then we hear from an orthopedic surgeon with five to seven good years left in his hands trying to plan a retirement where the date isn’t fully his choice, and most retirement calculators don’t know how to model such a big income cliff. And in From the Field, we’re joined by Brendan Weed, co-founder and CEO of Arux Group, a physical security firm built by former U.S. military and law enforcement SWAT operators, for a conversation about personal security and executive protection as wealth and visibility grow. So let’s go ahead and get started with question number one.
Question 1 – Buying Out a Minority Partner When the Operating Agreement Leaves Valuation Open to Interpretation
Stephan Shipe: I own a regional medical staffing company doing about $20 million in annual revenue. Three years ago, I brought on a minority partner. He owns 22%, because I needed his operational expertise at a point when I was burning out. He delivered, but over the past year, our visions have diverged significantly. He wants to scale aggressively and take on outside capital. I want to grow steadily and sell in the next five to seven years on my own terms. Our original operating agreement has a buyout clause, but the valuation methodology is vague. What are my realistic options for buying him out without destroying the business relationship?
So I think we take this in a few different pieces here. The first is how to solve this without having to go to the operating agreement or having to do any type of buyout. Next, we can talk about valuation, and then we can start talking about some of the cleanup advantages of this. So the first way we want to handle this — there’s no real easy way to jump into this one. It is going to be a pain if you’re going to try a hostile takeover of your minority partner here with such ambiguity in the valuation metrics. And the problem there is that if you go down this road and things sour quickly, there’s zero chance that your partner’s going to be willing to have a wonderful conversation about what he believes his 22% is worth. And I would say that’s even more of an issue in your case, because while he owns 22%, he’s focused a lot on growth and scaling the business up, which means that he sees a lot of upward potential in the business. And the valuation of a business is based a lot not only on past cash flows, but on future growth and cash flows of the firm. So that’s where you’re going to run into problems. You’re seeing this as the stable business that’s going to grow at a normal rate. He’s seeing this as a business that’s about to explode. So who’s going to actually put a higher valuation? He is. So you’re not going to want to pay the same amount of money that he’s going to want to sell his 22% for.
So that’s where we’re trying to avoid. We don’t want to get into that area because that’s going to be a mess. You’re talking about a lot of legal fees, valuations, and you’re doing $20 million a year in revenue. Let’s say even if you’re doing 30% margins on something like that, that’s $6 million a year, you’re talking about 18, $20 million on a multiple of three. And he owns 22%. So you’re looking at coming up with $4.5 million or so to buy him out on a reasonable valuation, which is going to be a little tricky here.
So let’s start first with this whole idea of the operating agreement. Whenever you start any type of partnership, the day you revisit those operating agreements is generally a bad day. And you are in that bad day, or at least attempting to go down that road. Of trying to get into what that operating agreement really means and what does valuation look like and all this, because you’re already saying that there’s a problem. Now, maybe you’ve already tried it before, but I think your best line of action here, or your first line of action, is to go and find out whether or not you can both come up to some way of agreeing on how you see the next few years. And maybe you can grow without the outside capital. Maybe you take on a little bit of outside capital, meet somewhere in the middle of this. Because if everything has worked well in the past, ideally it would continue to work well for the next five to seven years. You just have different ideas of how that needs to operate. So if you can pull that back in and find some middle ground for how that can work, then that is your ideal scenario.
I recommend having the conversation anyway, because even if you haven’t had the conversation yet, then you definitely don’t want to go into a random meeting and say, hey, by the way, I’m planning a hostile takeover of your 22%. So I brought in an attorney to start doing a valuation. It’s not going to go over well, and it’s going to catch them off guard. So at least if you start those conversations, then it’s an easier way to say, you know, we’ve been talking about this and we’ve gone through all these different ways and we just aren’t seeing eye to eye on the direction of the company. So because we’re not seeing eye to eye on that and we seem to have very different directions, then let’s go ahead — why don’t we bring in an attorney, see what the value would be, and maybe we can work something out where I can buy you out of your 22%. And start to have that kind of conversation.
Once that happens, if you’re going down that route and you’ve gone through that door and we get into valuation, this is where it’s going to be a mess. And the reason for that is you’re going to try to bring in somebody independent to give a valuation of the firm. And the problem with this is usually operating agreements never want to dictate what appraisal method is going to be used, because they would rather have it negotiated at that point. Not because it’s going to create a bunch of tension, but because there are so many unknown factors that you don’t want to say in your operating agreement, if we ever break our partnership, you have to buy me out at three times EBITDA or something along those lines. Because we don’t know what the growth rate would be at that time, what the environment looks like. It might not be worth three, it might be worth six. You have all these different issues. So you bring in somebody independent to create a valuation. Maybe you both agree on that and say they’re truly independent. But at the end of the day, you’re going to have to have some agreement where you both are going to have to say, yes, this independent evaluator is valuing this business appropriately. And if one of you believes they’re not, then that’s where you’re going to start having the negotiations of selling that 22% to you and buying it.
One advantage of this that’s easily overlooked is everyone focuses so much on the appraisal aspect — I got an appraisal, it’s worth X amount, it’s worth $20 million for the company. The buyout structure itself can change that drastically. So in other words, instead of paying $5 million in cash, you may say I could pay $3 million in cash and $2 million paid over the next five years, depending on the performance of the firm, or allowing them to maintain some of the shares in the company. And that could be an option anyway. He’s a minority partner, right? 22% that he owns. I don’t know how much control he has over the company, because you’re likely having an issue of a blended agreement where not only is he an owner, but he probably has some sort of employment agreement with the company. So maybe there’s a situation where he’s no longer employed with your company but still owns the 22%. And because it’s a minority, he doesn’t get a say anyway. And that’s last resort, right? That you go ahead, you have some sort of cause, which is going to be difficult. And now you’re getting attorneys involved and firing an employee because you don’t agree — it becomes a mess really fast. So we’re going to try to avoid all that at all costs.
Now, one advantage of this before we wrap this one up is if you are to go through this quagmire of a situation, the advantage to you is that you’re looking to sell in five to seven years. So it’s a good time, if you’re going to go through a messy legal battle, for this in a worst-case scenario, to have that done five years before you sell, as opposed to fast forward five years and you’re trying to sell and now you have this messy ownership battle. Because I’ll tell you, no buyer’s going to come in and say, you know what I want is to already take the risk of buying this company, and I love the fact that the owners have this big feud going on where they’re both trying to sabotage each other. No one wants to be anywhere near that. So if that happened five years ago and I’m a buyer coming in, that helps me sleep a little bit better at night, knowing that I’m not going to have to deal with any drama the day I buy this business.
Question 2 – Planning Retirement When You’re an Orthopedic Surgeon With an Income Expiration Date
Stephan Shipe: I’m 58, an orthopedic surgeon, and my hands have maybe a handful of good years left, which is just how it goes in my specialty. I’m at about $5 million saved, but my spending assumes a $900,000 income. That has a hard expiration date. Most retirement calculators don’t understand this. How do I plan for a retirement where the date isn’t fully my choice?
So the big concern right off the bat in my mind is how much of this $900,000 you’re actually spending versus saving. So that’s the first thing — before you have any of these conversations, you have to figure out how much you’re actually saving here and actually spending. And the reason for that is because you’re going to have a huge loss of flexibility at some unknown time in a few years. So if you have a few years and your income drops to zero from $900,000, you’re going to shift completely over to your financial market assets for your living expenses. And you could argue that you have some part-time income or something like that, but it’s going to be minuscule. You’re going to make $900,000 doing consulting and doing some expert witness type scenario — maybe you clear fifty, a hundred thousand dollars doing something along those lines, and your options for locum positions are likely going to be low as well. So we have to be careful about any type of planning that incorporates additional income out into the future.
So we’re looking at, let’s say, five years, and at those five years, income’s complete. That means everything you have — you’ve got $5 million saved, right? $5 million, even if we ran some fast math on this one. Maybe you’re spending $175,000 on a withdrawal rate from that one. You could argue the 4% rule, but you’re going to have to be more conservative because you have no flexibility. So $160,000, $175,000 of spending is all that you’d be able to afford. But that would assume that right now, if you’re earning $900,000 and you’re paying, let’s say, 40% all in — we don’t know what state you’re in, so we’ll say 40% in taxes — you’re taking home $540,000 of that. You subtract out your spending now, let’s say $180,000. So you would need to be saving $360,000 today to make this even work remotely, to prove that your spending today is staying at around $160,000, $170,000.
If it’s not, then you have to save heavy. I mean, you’re going to have to put another couple million dollars in the bank over the next five years, which seems crazy. But if you assume rule of 72, your money should double every 10 years or so. So you’ve got maybe, let’s say, $7 million, $8 to $9 million total if you’re saving aggressively during that time. And you get pretty close to a good $250,000, $300,000 in spend. But there are a lot of ifs here in this situation. And that’s what I’m really worried about, because your sequence of return risk is going to be through the roof, which is just — sequence of return risk, just the idea that when you retire, you don’t want the market to drop 40% the year you retire. That’s bad, right? That’s going to end up really bad for your whole future of cash flow, because now you’re still spending heavily in early retirement. You’re pre-Social Security, all of these factors are working against you, and you’re spending really heavily out of an account that’s now lost 40%.
So the way you manage sequence of return risk is to soften up the portfolio. Get a little more conservative, build up a cash buffer of a year or two. In your case, probably two years’ worth of cash on hand, and then have a softer portfolio and ideally some flexible income — but you don’t have the flexible income. So number one on this scenario is we have to figure out exactly how much you’re spending, because if you’re spending an amount anywhere close to three or four hundred thousand dollars, you don’t have the money to be able to actually spend what you’re spending now in retirement. So you’re either going to have to plan for a potential lifestyle shift until you know for sure how long you’re going to be working, or start to save aggressively now.
From the Field – Personal Security and Executive Protection as Wealth and Visibility Grow
In our From the Field segment, we’re joined by Brendan Weed, co-founder and CEO of Arux Group, a physical security firm founded by three former U.S. military and law enforcement SWAT operators. Arux provides executive protection, site security, and private investigations for corporations, executives, and high net worth families across the Pacific Northwest and beyond. Brendan and his co-founders built the firm on the same principles of trust, discipline, and mutual accountability they developed as SWAT teammates.
Stephan Shipe: To start off, give us a little bit of your background, how you started the business, how you got into this with the Arux Group, with you and your co-founders.
Brendan Weed: Yeah, it’s actually kind of — we actually kind of fell into it about three years ago. My other two co-founders were on the SWAT team out here locally. And we had a guy we knew, a business associate through a family friend, who reached out and was like, hey, do you guys want to leave law enforcement and come do protection for me and my close friends and fly around in private jets and travel the world with us? And we’re like, absolutely, that sounds better than what we’re currently doing. So the three of us got together and we started really with no knowledge or any idea of what we were getting into, and formed the business and have just been kind of pivoting and learning as we go. We found quite a bit of success and traction out here in the Portland metro. There’s been a vast need for private protection, just with everything that’s been going on with law enforcement out here. It’s been a wild ride.
Stephan Shipe: How does that come to be? So when somebody calls you — obviously that was how it all started, somebody says I need someone to protect me. But now the business is growing like crazy, you’re starting to expand into different states. Is there a catalyst event that happens where people say, I’ve got to take personal security a little bit more seriously? Or is there a certain level of — well, what do you see? Because I imagine the first phone call you get from someone who wants to use your services, they probably start sounding the same, right? In the sense that there’s a certain thing that’s going on. So walk us through when somebody starts to consider physical security.
Brendan Weed: The general phone call that I get more often than not — that even I just took again last night — is somebody has some sort of issue in their life, whether it’s in their business or their personal life, that has involved law enforcement and law enforcement hasn’t been able to assist. And so we come in, and we have the ability to solve a lot of those proactive problems that law enforcement can’t solve for them today. And so that is generally how the whole conversation starts. It’s like, hey, this happened to me, this one catalyst incident. And it may have been the first time — they’ve either been a victim of a crime, or they’re dealing with business partners that are stealing money, or whatever it could be. They’re coming to us with a problem that law enforcement can’t help them solve, or that attorneys can’t help them solve. And we get to come in and be creative and come up with solutions with them to help address those issues.
Stephan Shipe: So give me an example of that. What is an example of a problem — as much as confidentiality allows — of something that the police and legal system can’t help somebody solve, but that you all are able to come in and say, we have a solution for this for you?
Brendan Weed: Yeah, so again, with the confidentiality, I can’t explain who it is, but we’ve had a client in the past who owned a very successful business, very, very wealthy guy, in the billions, and had a family member who was harassing and causing issues within his business. He was an employee at the business who was terminated, let go. And so after that termination, that former family member — former employee — was harassing the employees, following other employee vehicles, just causing problems, posting on social media, all sorts of issues, just trying to really ruin the brand reputation of this client. And so we were brought in to help mitigate a lot of that risk because he was escalating in his threats and his behavior. Law enforcement was being called, couldn’t intervene, right? The level of crimes weren’t enough to get him incarcerated for a long enough period. And so we brought in a full team of multiple protective security specialists where we had an agent in charge assigned to him and his family. We had four principals all the way down to some of his grandchildren. And we had a surveillance team and an intelligence team in place conducting surveillance on the individual, making sure that if there were any family members or employees around, we were able to mitigate and get them away from that situation.
So a great example — they were out one night. We kind of have a basic pattern of life of where this guy was going, where he went to work, what he did on the weekends. And he ended up diverting from his pattern of life and traveling down a route towards our client. And our close protection team was with him. Our surveillance team relayed into our close protection team that they’re on the same route, that they’re on their way to cross paths. And so our close protection team just took a different route, an alternate route around the city really, to divert, and it was never even an issue. So the person of interest wasn’t even ever notified that there was anybody watching him or that there was any sort of issue with the principal, and the principal had no idea that that person was even coming towards him. So again, our work doesn’t ever really go recognized, because we’re in the business of inconvenience mitigation. We want to take any sort of inconvenience out of your life to make it so you can just focus on the things that make you successful, whether that’s your business, your family, hobbies, whatever it is that you enjoy doing, and not have to worry about those small things that are consistently bugging you in your life.
Stephan Shipe: Yeah, that’s a perfect example of why that would start. So does that level of need for protection stay, I guess, or are these shorter-term engagements where somebody says, I’m taking a trip and I’m unsure of the environment I’m going to, so I want to bring security? Or is this permanent security where you’re traveling with your clients?
Brendan Weed: It really varies. We’ve done both. I have clients where we have fully embedded agents with them 24-7. So they travel with them, they go on their private jets, and they fly to multiple states to multiple homes. I have clients who come to us with a specific problem, right? Like they’re involved in some sort of legal case, whether it’s with attorneys and something going on in their business, or maybe it’s criminally, and they’re waiting for some sort of resolution to occur. So they may engage us for three to six months with the ability to extend. And so sometimes we’ll wrap up an assignment and maybe it’s four to six months. Other times we’ll plan for three, and then the cases are going on, or there’s still some civil litigation going on, or maybe the person hasn’t been incarcerated yet, hasn’t had sentencing. And so they’re waiting for that and that gets extended. So we’ll just continue to extend.
In my experience over the past few years, we always come up with a plan. Typically this is usually a short-term thing, and it always ends up turning into a much longer, long-term thing. I would say usually about double the amount of time that people expect it to. So it ranges. Some people like to have us around all the time — those people have a lot of resources and a lot of ability to do that. A lot of companies like having us around — it helps with insurance and some of that mitigation aspect. And then some people really enjoy having us around, they get accustomed to the lifestyle of us planning out where they’re staying and planning out their dinners and making reservations for them and everything, and so it just becomes part of that higher-end lifestyle that some of these people are accustomed to. So again, I guess it varies, just depending on the needs of the client.
Managing Security Across Multiple Residences
Stephan Shipe: How do multiple residences come into play here? Because that seems to be a whole additional level of complexity, when you’re having somebody move from one residence to another or they’re going somewhere for the summer. Are you sending out teams ahead of time to evaluate everything, to make sure everything’s set? Or is it just done as the principal or client is showing up?
Brendan Weed: Yeah, at our line of work, everything is done in advance. So we’ll always send people out ahead of time to conduct an advance on their property or residence or wherever they’re going. Now it can even get more complex than that. So sometimes we’ll go out ahead of time, do a complete advance on their property, maybe where they’re staying, who they’re associating with, and then come back. We’ll even have a forward team that’ll receive them when they arrive there.
The best that we’ve had, and kind of what we’re finding now, is by having multiple teams in those locations. So a great example — a client will leave one state and one residence where he’s got protection 24-7, and then that team escorts him to his plane where he’s flown from there out to us, where we have our team ready to receive him. And we just kind of volley back and forth with the team. But that comes with a lot of trust building. That takes a long time to start getting used to working and training together and understanding the dynamics of working in close proximity like that, and then having the ability for guys to interchange. So maybe there’s a person on vacation from that team from that different state. So now our guy has to go from the typical state, say Oregon, to maybe Idaho, and work there for a few days because of the short staffing. So it’s very dynamic, it’s very fluid. But the biggest thing is always to make sure that there’s somebody there when the client arrives. That’s the big thing.
Technology, Data Protection, and Counter-Drone Measures
Stephan Shipe: So how does technology come into play with all this? Because I know even just over the past few years, I’m sure a lot of the stuff you’re talking about — not only communications, but tracking and online and cameras, you name it. What are the big uses that you’re seeing for technology, and maybe some of the changes that you’re seeing over the past few years?
Brendan Weed: Yeah, it’s really kind of changing the landscape. We’re trying to keep up with it just as much as law enforcement or any sort of government agencies are. The big things we’ve started noticing — obviously everyone’s attached to their smartphones nowadays. I mean the little things, right? Like we put data blockers in our vehicles for our clients. So that way, when they’re plugging their phones into their car to charge, when they’re going from the hotel to their business meetings or whatever, that data isn’t being uploaded into the car. And then all their phone numbers, their connections, all that stuff isn’t sitting in that car’s computer. That’s a small thing that a lot of people overlook.
And then you can go into Faraday bags. So there are all sorts of abilities for certain signals intelligence. I’m not a signals intelligence expert by any means, I just know a little bit about it, but there are capabilities like stingrays that people use to collect data on phones. And so utilizing Faraday bags when maybe you’re out in a large crowd — they have little silent bags that you can buy on Amazon, they’re really inexpensive, that completely block the transmission of your phone. So we utilize those depending on where we’re going and the amount of people that are going to be around.
And the big thing that we’ve been seeing is the use of drones and those capabilities. We’ve had some issues with drones coming onto some of our clients’ properties. And so finding a way to have some counter-drone technology has been rather difficult. We can’t just go out there — we’re in town, right? We can’t just blast drones down from the sky because they’re coming onto people’s properties. So figuring that out and finding ways to mitigate that has been challenging. So I’m currently talking to different drone companies, trying to figure out ways that we can start utilizing some stuff in the field to help secure our clients’ residences, especially at night.
So those are just a few of the recent tech things that we’ve seen, but it’s really the phones and the data protection. Even so much to say smartwatches — people wearing Apple watches or Garmins. There’s been some stuff out in the media lately of guys wearing digital garments when they’re on runs, and that stuff is all tracked to the cloud and can all be hacked and found out. My guys, when they all work in the field, we all wear analog watches. That’s just kind of the way we operate. So you’re starting to see that kind of going back from very much a digital presence to more of an analog type thing. So really mitigating that digital stuff. There’s a great company out there called Black Cloak that does digital executive protection. I’ve got no affiliation to them, I’ve never worked with them. But those are who we kind of refer up for that type of stuff. But physically on the ground, there’s a lot of different things that we can do for them personally, day to day, that’ll help really mitigate a lot of that risk.
Common Physical Security Blind Spots
Stephan Shipe: And the digital side seems massive. When you’re talking about what you specialize in, which is the physical security, what are some of those common blind spots that people have that when you show up, you look at it and say, this is going to be a problem? That you recognize quickly, but you’re seeing people walk around all day with these issues.
Brendan Weed: Well, I will say the biggest thing that we’ve noticed is — when people build their homes, especially people who come from the high net worth, ultra high net worth, they build these big, beautiful homes and there’s lots of windows and glass and everything’s very, very well done, but it’s extremely vulnerable. And so whenever we get brought in, we do site assessments all the time, threat assessments. We get brought in and we look at people’s homes. That’s kind of the first thing that gets overlooked, that we notice with people — they’ll build a big door, but then there are these massive thin glass windows next to it, right? And so we work with companies to come in and put film on, so they can’t break through the glass. We work on hardening the door frames. So some of my guys on my team are former breachers from the SWAT team. And so they’ve got extensive knowledge on how to harden and secure any sort of entry point. And so they’ll come in and we’ll find ways to give advice to the clients, like, hey, here’s how you can strengthen this, here’s where we can maybe put some cameras to make sure that your residence is at least safe.
That was probably my biggest thing that we see on a consistent basis — people’s homes are extremely vulnerable, even in safe neighborhoods. I can tell you that the criminals know where the good neighborhoods are, and they’re out there casing them just as much as the other ones. And they know when people are leaving out of town. That’s usually when all the burglaries happen. And a lot of these clients have lots of high-end art, lots of gold and silver or whatever they’ve got in their homes. And so you really want to make sure that that residence is well taken care of and protected.
How to Evaluate a Security Team — What Actually Matters
Stephan Shipe: So if I’m out there looking for a security team, or somebody’s out there trying to interview a bunch of people — there are thousands and thousands of options of people that say they will provide security for you. How am I going to determine whether or not I should be hiring somebody, or whether somebody’s just going to look like they could protect me but they’re not actually going to be able to protect me whatsoever?
Brendan Weed: Yeah, I can tell you that’s probably the biggest thing in the industry that has caused issues. It’s personality, let’s just put it that way. Every client has a different personality in what they’re looking for and what they want. That starts with a good initial assessment and meeting with the client and figuring out, who is this person and what do they want? I mean, is this person — are you looking for just somebody to help get you from point A to point B who is very highly skilled? Or are you looking to have somebody who’s integrated into your life and is involved with your wife and your kids, bringing your kids to school? You have to really kind of figure out what it is you’re looking for. So I have some clients where it’s all about customer service. They would rather have less on the skills — maybe they don’t want a Navy SEAL or a Green Beret who can shoot really well, but they want somebody who can hold a conversation well, who can talk to their other C-suite executives, who blends in well, who can sit in an office building and doesn’t look out of place, who looks more like an executive assistant. And then I have some people who are like, I want the six-foot-four, jacked guy for intimidating purposes, for the look.
And so that really starts with — and what I always tell clients is, hire for values, hire for moral character. These people are going to be in your life 24-7, 365. You want to have good people around you. The hard skills as far as the shooting and like that, yeah, you need to be able to do that. That is a baseline requirement. But a lot of the skills of close protection, executive protection work can be taught, just like anything else. But you can’t teach somebody to be a good person, to have good values, and have good customer skills, and to be a nice human being. And that’s what I would tell people to look at first — who they are, what their values are, and is it somebody that you can have around in your life, because this person is going to be there. All of my clients that are in the higher end, we try to always meet with them beforehand. I give them all of our bios, and then I encourage them to do interviews with the people that they think they want. And it’s funny — usually the people that they pick on paper, and then they meet them in person, they’re like, not really a good fit. And they end up going with other people. But again, it’s just like anything else. It’s like hiring for the company that they may have — who’s going to be a good cultural fit in your family or a good cultural fit in your business. And that’s what I would tell people to look at, not so much the hard skills as far as, you know, are they jacked and can they shoot well.
Stephan Shipe: It makes perfect sense, especially in a service where trust is so foundational. Well, Brendan, thank you so much for coming on today. Learned a lot. Should be very helpful to those listening.
Brendan Weed: Thank you, Stephan. I appreciate the time.
Stephan Shipe: Absolutely. That’s our show. Thanks for listening, and we’ll see you next week.
Outro
Disclaimer: The information provided in this podcast is for general informational and educational purposes only, and is not intended to constitute financial, investment, or other professional advice. The opinions expressed are those of the hosts and guests and do not necessarily reflect the views of any affiliated organizations. Investing in financial markets involves risk, including the potential loss of principal. Past performance is not indicative of future results. Before making any investment decisions, you should consult with a qualified financial advisor who can assess your individual financial situation, objectives, and risk tolerance.