It’s not every day you get to talk about investing and food in the same conversation, and this week, refinancing, restructuring, and investing in niche businesses is on the menu with Adam Tkaczuk (@Adam_Tkaczuk). Adam is a tax consultant, project CFO, and private equity investor. He raises debt, equity, and government subsidies for projects and helps business owners reduce the tax liability on the sale of their business.

In this episode, Adam and Jeff get into “The Greatest Show on Earth” and discuss investing in distressed companies, just what deep value means, food processing and Philly cheesesteaks (we’ll take a Whiz with onions, please), private vs. public equity (is the juice worth the squeeze), the true heroes of finance, tax strategies for business owners and so much more! Plus, we’re playing two truths and a lie with Adam where he throws in a coffee roasting twist — SEND IT!

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Check out the complete Transcript from this week’s podcast below:

Don’t Call it Private Equity, Seeking Value (and Tax Alpha) in Small Business with Adam Tkaczuk

Jeff Malec  00:07

Welcome to the Derivative by our RCM Alternatives, where we dive into what makes alternative investments go analyze the strategies of unique hedge fund managers and chat with interesting guests from across the investment world. Happy National junk food day everyone. I think I’ll go with a bag of cheddar and sour cream ruffles. I was like those. Maybe the Cool Ranch Doritos too, but one of those will be good. Got a bunch of non-junk food coming your way on this channel with Brian Portnoy on next week, and Ben Eifert and certified talking through options literature following that, so stay tuned and make sure you’re subscribed so you don’t miss a beat. Under this episode, I’ve been wanting to talk to some private equity peeps about how that asset class is holding up amidst the public equity sell off. And that’s how I found our guest Adam to cook. But this talk isn’t that it’s in many ways more interesting as we talk through what deep value means the interesting world of processed food, whether tax incentives and state tax arbitrage and opportunity zones are a net good or bad for society, and how someone can have so much concentration risk but still think they’re being conservative. This was a fun chat, so send it This episode is brought to you by RCM ag services group who helped people like the food processors we talked about here manage their risks with hedges swaps and other OTC trading. Go to RCM ag services.com to learn more. And now back to the show. All right. Welcome, everyone. We’re here with Adam Tkaczuk. I had to ask how to pronounce that. Are you a fellow what’s what nationality is that my Malik is bohemian, which is kind of checked out. So back in somewhere around there.

 

Adam Tkaczuk  01:48

My dad is Polish. And apparently, they’re telling me that the spelling of his name is Ukrainian. So I guess if you the UK at the end is Ukrainian if it were EK, it would be polish. But as we’re seeing now that border can shift and has people have gone from Poland to Ukraine and back quite a bit over the years.

 

Jeff Malec  02:11

So we’re just talking before we’re getting started. You’re out of Connecticut, but hanging out in Calgary right now for the stampede. Correct?

 

Adam Tkaczuk  02:18

Yeah, we got family up here. And the stampede is I think they call it the greatest show on earth. rodeos, pancake breakfasts every morning and go. Some civic group has free pancakes and sausage and coffee every morning. So yeah, we’ve taken our family to a few of those. And now I’m like, oh, too much.

 

Jeff Malec  02:37

Canadian sausage, there’s probably pretty good. Wait, is it actual Canadian bacon? Is it the ham?

 

Adam Tkaczuk  02:42

You know, they’ve had to a few different versions. I like the links. But they have had this like, I think it was a pre process to thing that they just sliced up and gave me one and some of them are a little more. Just like just get through the line, kind of like a food camp or something. Yeah, you’re in a parking lot at a mall. It’d be full of like 5000 people getting food? And it’s it’s something to do when you’re up here for sure.

 

Jeff Malec  03:08

No, it’s on my list to do one day. Make sure you make it over to Lake Louise area. That’s beautiful over there. Absolutely. So I had this big idea to have you come on and talk private equity, and talk about valuations there and all this stuff. And as we’re talking in our pre roll we’re like and it’s not exactly what we do. So give us a little background on how you kind of fit into the quote unquote private equity world. And I think everyone will find the other side of it is just as interesting as if you were a big huge did the billion dollar firm.

 

Adam Tkaczuk  03:47

Yeah, sure. Vaughn two industrial holdings were a group of, of individual investors. And we find businesses that we would like to buy. We figure out how to finance an acquisition, we buy them, they’re typically distressed, mismanaged when they are so it’s a deep value perspective at this. And then we turn them around, grow them to profitability, it often means hiring and firing management a few times so you find the right person or group that can run the business for you. In fact, sometimes they’ll say the less we actually are on site the better you know, nobody on the shop floor wants to see Connecticut or Massachusetts east coast. owners that are young walk through it’s just not not good optically. But um, but yeah, we’re more of a holding company than we are a private equity shop directly where we we don’t we haven’t today taken outside money to invest in projects or businesses. We have no outside investors, we, but we do have banks that we work with, and we have our own equity that we put into projects. And yeah, that’s a quick intro to,

 

Jeff Malec  04:54

to what which is awesome. Yeah. And so Vaughn to I’ve been watching my 80 hours at Twitter. Francis month is that from Mount Vaughn to, which is one of the stages in the tour.

 

Adam Tkaczuk  05:05

It is should you ever talk to Peter our he’s a big cyclist, as am I we both have share that. That hobby or passion. So absolutely. That’s where it’s from.

 

Jeff Malec  05:17

Do you take do you watch the tour all month?

 

Adam Tkaczuk  05:21

This year? Not yet, but admittedly, sometimes you see the same people winning over and over and over again like Indurain. Yeah, and others and so on, it gets a little boring. But

 

Jeff Malec  05:33

this one’s been exciting because the tide a Pro guitar was supposed to be that again, he’s gonna win third time in a row. Now it’s gotten a little mixed up spoiler alert for those who haven’t seen the last stage. But yeah, gets a little mixed up and some new talent in the in the mix. So it’s been fun. Yeah. All right. Good. So a few things on pack there. So deep value, let’s talk what that means. What do you when you’re saying deep value? Whose price? Is that based off? Right? That’s, that’s a loaded question. But what is it?

 

Adam Tkaczuk  06:03

All right. I mean, I don’t want to turn away prospective sellers to us. But I’ll just say like, I think paying four times earnings is expensive. So you’re buying a business that could be in bankruptcy in a few weeks, and often they may be going through a bankruptcy proceeding, and part of the court process is to find a buyer. So that’s an example of something we’ll get involved in. And maybe that’s just a quick answer to your right now, like at that point, what’s the value of the business if you can’t get a key vendor that maybe hasn’t been paid in six months? And you need that vendor to keep the business going? What’s the likelihood of you negotiating a contract with that vendor going forward? The new payment terms? And that’s, that’s risky. So the price goes way down as a result. And sometimes it’s not the owners of the business that are involved in a sale, but more or less like it’s a bank owned property? Or are the investors that are actually making the sale? Not only is the actual owners of the business themselves? Gotta make the decision about what they sell for.

 

Jeff Malec  07:09

Yeah, right. So in that case, many more ways like distressed, which you’ve also mentioned distressed debt. But it’s not necessarily debt just distress company overall. Because a distressed debt hedge fund has kind of a different mandate, they don’t really want to, I guess it’s the same or what are your thoughts on? Is it similar to a distressed debt hedge fund that’s buying up that debt cheap? Are you the more active role, possibly

 

Adam Tkaczuk  07:31

often we’re refinancing, we’re restructuring all the financing in it. So apparently, we haven’t really worked with that hedge funds. Typically, it’s the bank, or sometimes it’s the There’s equipment that’s been collateralized will work with the equipment, lease, the lease holders, and whatnot. And it’s not always distressed like that, you know, it’s not always that bad. But if we can find a niche business, in an industry that not many people know about, there may not be a lot of buyers, in which case, we might be able to have an advantage to work out something that this is where I come in is something from the tax angle. My role with the firm is to help find food processing businesses, that’s an area that background in but also if we can reduce the tax liability for a seller, you know, let’s say someone’s gonna get $5 million at the sale, but they owe 2 million in taxes, if we can reduce that tax liability to 500,000. Or maybe only a million, our net after tax benefit to selling to us might be higher than someone else. And so that’s that’s another angle that I personally bring to the table.

 

Jeff Malec  08:41

We’ll dig into that in a sec. So and that was your background was in the food. You just mentioned food businesses. So yep. Before this, you were doing food stuff. What does that mean? Yeah.

 

Adam Tkaczuk  08:52

Yeah, so um, if you look at my Twitter profile, or wherever I have some public stuff online, you’ll see that I am a tax consultant, private equity investor and food processing business owner. So one of my clients was was a gentleman who had built up a business, he came into a food processing business that was doing about 600,000 a year and EBIT da, within five years. He grew that to 7 million EBIT, da and so he just blew, blew the place up. I can get into details about that. And they ended up selling it to a business that is now Tyson Foods, and he had a non compete in place. So he called me up and said, Adam, I know you’re doing you help raise money for projects, right? Like, yeah, he’s like, Alright, I want to restart a food processing business as soon as my noncompetes over. So when the noncompetes over, let’s talk. And so we did. And I helped them finance a food processing business. And I was sort of the startup CFO, if you would. So we started that and we acquired a competitor. Merged businesses with them, and now we’re operating. We’re going to do an expansion soon because we’re at full capacity, but it’s It’s a food processing business. And chicken beef, I can get into that if you’d like. But anyway, that that background in the food industry,

 

Jeff Malec  10:10

it kind of has a bad connotation, right? food, processed food. But what’s your take on it right of like, well, that’s how it has to happen, right?

 

Adam Tkaczuk  10:19

First of all, there are levels to this, you can actually use really, really good ingredients. Like, for example, the Philly cheesesteak sandwich that I have, you know, I have an International House of Pancakes. When they ran our cheese steak sandwich on their menu, it was the best cheesesteak sandwich you could probably buy in Philadelphia, hands down, and in terms of the quality and quality of the steak and the cut of meat that’s involved in the the quality of the ingredients matters a lot.

 

Jeff Malec  10:50

That so that wouldn’t play well on the front page of a Philly Inquirer, whatever

 

Adam Tkaczuk  10:55

it it wouldn’t. But you know, talking to my partner, he’s like, yeah, that was actually we gave them top quality product. And they they had a really good run with that. And they would sell that across the country. And that’s something we would provide. But yeah, if you’d like Philly cheesesteak sandwiches, let’s keep eating them. We love them. I buy them when I see them. And in my part of Connecticut, they’re not a common food item, but I will. My family’s like yeah, hey, there’s there’s Cheesesteak. Let’s go get some. And so

 

Jeff Malec  11:24

I would love them except them off the bread mostly so that it’s hard to eat them without the bread without the roll. It Correct. Correct needed cheesesteak, but didn’t like food products? What are other examples of food products? Like mechanically separated chicken and things like that?

 

Adam Tkaczuk  11:40

Sure, sure. So you have slaughterhouses? And yeah, heck, if you want to talk about the COVID impact on on the meat industry, I could I do know a little bit about that as well. But, um, food processing, and I want to break this up into like, where in the value chain you are. food distributors are typically very low margin, high volume, you’ve got a warehouse and you’re just taking product and shipping it out to customers. That’s low margin, your margins can be 234 or 5%.

 

Jeff Malec  12:08

And that is Costco, not Costco. But Costco, right? Was the like, yeah,

 

Adam Tkaczuk  12:14

yep. And so we will sell to Costco. And they have like, we have customers that are captive to them, and we’ll sell our food products to them. But when you’re in food manufacturing, your margins are closer to 10% can be as high as 15. But you’re depending on on the mix, you’re in a higher margin business, you can, your ability to own customers is better. So if you have a good sales team, if you have good recipes, if you if you can connect with the market better, you’re able to it’s a higher margin business, and you’re just adding a lot more value. And, and then there’s the cook side of the business and the raw side, for example, we are right now on the raw side of the business. And what that means is we’ll there’s no expectation that the food product, even though it’s a USDA certified site, we have a license from the USDA, there’s no expectation that you can take the package and just start eating it like you can with cook sausage. And so that actually means that the regulations are a little bit less stringent, because it’s expected that you’re going to cook this and sanitize it when you’re cooking it and that’s what we’re focused on right now. But at the end of the day, it’s it’s it’s sausage, it’s beef chicken. I don’t think we do a whole lot of pork though, but

 

Jeff Malec  13:31

that seems counter to it seems to me like there should be more restrictions around raw than around because it can do more damage. It’s raw, but I guess the logic is no everyone knows it’s raw so they know they gotta do something.

 

Adam Tkaczuk  13:45

Exactly. You know, you buy eggs imagine buying unpasteurized Well, that’s wrong. That’s that’s the wrong analogy. But yeah, you know what you’re buying is not a prepared food item. So the it’s when you have a raw plant with a cooked plant. What we ended up doing what you have is a wall going down the middle of the plant if they’re sighted together, you’ll have your employees will have different uniforms, one might be aware blue smocks, another will wear yellow, the bathrooms, the entrances, the exits, the parking lots are completely separate the only thing that can

 

Jeff Malec  14:18

sorry they call it a Chinese wall like in the financial industry, no no wall PC anymore.

 

Adam Tkaczuk  14:24

It is it is not the case, the only way to get from one side of the plant to the other including HVAC and everything is to get in the tunnel often, which is basically a conveyor belt that will cook you if you were to ride through it and it’s a big tunnel about 50 feet long. You get in one side and you are cooked as you go through that’s the only way to get from one side of the building to the others to the cook off and the tunnel off and they call it and then the food has been cooked and sanitized at one end and I can get you know, I gotta go in and sterilize the plants. And anyway that’s my food background. Oh I’m looking for manufacturers of food products. And folks who take raw ingredients like vegetables and protein, make some sort of a package, packaged item and sells it. And I’m not looking for white labeled manufacture of somebody else’s manufacturing on want them to own the manufacturing resources, and own the customers. I’m not looking for distributors, though it’s okay. If you have a distribution facility involved in the project. We’re looking for that value add in the food chain,

 

Jeff Malec  15:34

it seems to me that it must be a smaller and smaller subset of available companies, right? Isn’t it like, Is it like the rest of the world of the bigger get bigger, right, it’s a winner take all type scenario, it’s

 

Adam Tkaczuk  15:45

not it’s a very fragmented into go go to the grocery store and take a look at all the food items that are there. And then

 

Jeff Malec  15:52

you also see that we’ll that pops up from time to time of like, actually, this whole aisle is actually just Nestle and Tyson, like, a lot of brands are owned by a conglomerate. But I

 

Adam Tkaczuk  16:03

don’t know that. And that’s what they do. A lot of folks have bng foods, I think is what it’s called Nestle, others are just going and buying all these all these companies. The reason they do it is because it works. And one of my colleagues, I know in the industry, what they’ll do is they’ll take like, example, I think it’s Italian sausage, alright, or some some Italian protein. Individually, you might get a family business that does 1020 30 million in revenue, and that might sell for six seven EBIT da or so. But if you buy them and you buy all the other Italian sausage companies, and you merge them together, you can then sell this for 1213 times EBIT, da. And that is that is a private equity play that’s been done many times with folks that we know in the industry. And we get calls all the time ourselves, Hey, would you like to sell we want to, you know, oftentimes we’re looking just by my partner, honestly, someone who knows how to sell someone knew how to build a plant. And so, yeah, there’s ways to make money in this industry.

 

Jeff Malec  17:12

Yeah. Well, I was telling my wife keeps wanting these Mediterranean chicken skewers from Costco, not not the other Costco, Costco, right. I’m like just in throw them in the car, and I just there like $18. And I looked down at the, I think it’s $15 a pound. And it’s chicken. Right? So it’s cooked and spiced chicken, but it’s chicken, and it’s $15 a pound. So I’m like, Alright, someone’s making a ton of money on this thing, right? They just process it, put it on a stick, cook it, put some spices on it. Maybe it’s tasty, but I don’t know if it’s what because what’s normally chicken pens like $3 or something for you know, yeah,

 

Adam Tkaczuk  17:52

yeah, actually, that’s not far off. Probably a little less than that. Now,

 

Jeff Malec  17:58

what, five 6x, just to cook and put it on a stick?

 

Adam Tkaczuk  18:01

Yeah, one of the things that happened for us, and I’ll jump into it since COVID, still kind of in the rearview mirror, when the commodity prices were going up, we would buy, I don’t know, several 1000s of pounds truckloads of beef or chicken. And we would start processes again, it might take a week or so to go through the inventory and get it out to a customer. What would happen is, let’s say our price points $1 a pound, which it wasn’t, but let’s just say it is by the time we’re selling it to a customer, the price for that raw material has gone up to two $3 a pound. And so we take the income, you know, revenue from the sale the the beef or chicken, and then you have to go buy back and buy more and it’s expensive. And so it’s the commodity prices are moving so quickly. And contracts were not up to speed. You know, most contracts weren’t, hey, we’re gonna charge you X dollars a pound plus some index based on the meat market, which is not the way it happened. What ended up happening is we were just like breaking even for a little while just because prices were going up so quickly. And we figured that out since I thought what they’re telling me now are that like chicken, for example. Apparently, the flocks of chickens that are out there is going to take a while to come up back to speed. A lot of a lot of farmers and folks who are growing cattle and pork were slaughtering animals because they couldn’t, you couldn’t feed them. You couldn’t get them corn, you couldn’t get the grains. And then if you had the pigs, you couldn’t take them to market and sell them because the slaughterhouses were shut down. And so all of these flocks and herds have been greatly reduced. It’s going to take a while for those to come back up to pre COVID levels. Just biology really,

 

Jeff Malec  19:54

which is part of those huge umbrella supply chain issues right but that’s part that Oh,

 

Adam Tkaczuk  20:01

yeah. So we expect meat prices to be elevated for a while going forward, notwithstanding what the economy does.

 

Jeff Malec  20:08

You need a good hedger in the meat space. I know. I know. Yeah, we

 

Adam Tkaczuk  20:13

were talking about that earlier. Yeah, we’ll have that conversation. But yeah, if you’re in the meat industry, and perhaps Jeff E or someone you want to talk to you about hedging.

 

Jeff Malec  20:29

So going back a little you said, so you’re, you got this food company, you started Vaughn two or joined the group of guys have gone to? So just curious from a personal level of like portfolio construction? How do you think about that of like, oh, this is my job, or this is my investment? You know, like, basically, you’re kind of putting 100% of your investment into this distressed debt type thing? Versus Do you ever sit there and read Jason Buck tweets and say, like, oh, I should have some more diversification into trend or volatility or some of this other stuff? You’re like, Alright, I’m all hog. What’s, what’s the term? Hog Wild? Hog Wild? Yeah. I’m going full hog, high on the hog on on food companies.

 

Adam Tkaczuk  21:15

I think Jason’s cockroach portfolio is awesome. So if if you’re doing portfolio construction, so even stepping back, I worked with alpha architect for a while, if you’re familiar with them, Wes Gray in the group. I’m a big believer in trend following and long volatility. It just makes a lot of sense. You might sit there for four or five years of underperforming and having this, this bleed, if you will. But when you need it, it’s there. And if you do the math, you really are not trying to hit homeruns. You’re trying not to strike out. That’s what you’re trying, are you trying to keep the inning going even, it’s okay, if you strike out a couple times, but you just want to keep getting people on base. That’s how it works in baseball, that’s how it works in investment, you don’t want volatility to work against you where you’re you lose 50%. And now you have to make 100% to get back to where you were. And I’m sure your other guests you’ve touched on that many times. So that being my background, I look at this. About 50% of I guess from my global portfolio is in private businesses. Maybe 25% is 20%. All just about all of my what is a tax sheltered accounts are in a trend following strategy. So you know, I can go in and out and it makes trades. There’s no tax liability. I mentioned I have a automated trading system that probably trades about 5% of my portfolio. And then I’m about 25% in cash. Wait, wait, hold on, that doesn’t work out. Right. Alright, so I’ve got 50% of the investable portion, I’ve got that spread out between trend following value buy and hold index funds, you know, it’s all that is

 

Jeff Malec  23:12

that? Do you view that 50% as equity as your equity bucket or as stock exposure, but just in the private space? Like how do you it’s just kind of right, if you sat down with a financial advisor be like, Oh, wait, you got way too much in these private businesses, what are you doing but also, right, we could pull up 1000 stories of like, the people who make true wealth have that concentration, right? They share a big job bigger on the bets they believe in?

 

Adam Tkaczuk  23:39

Yeah, I’m just I mean, I invested. So first I got equity when I started the business with with the folks there. And then I invested in the business soon after that once we were up and running. And it’s multiplied three times since I invested. So

 

Jeff Malec  23:57

yeah, so I guess that’s the point. Right?

 

Adam Tkaczuk  24:00

It is equity. And it’s also cash flowing. You know, I get distributions from it, which is that’s personally how I invest. I’m not into buying dreams. And I don’t like to take market risk. Like, I know people are gonna be buying chicken and beef, like the Philly cheesesteak sandwich, people are gonna be buying that forever, and Philly and so on. So there’s always going to be a market. This particular industry, I’ll just throw this out for the food industry when when the economy goes poor and there’s a recession very often people are still going to keep buying comfort foods. And so a lot of times these are recession proof industries. I like that I like knowing that hey, I’m gonna buy in this business and I can understand it. I don’t need I don’t need a presentation. I get it. People buy these things. We sell it for more than we make it makes sense to me that I’m comfortable with that I’m not comfortable with Tesla for example, though. I think Tesla has made a big difference. other car companies are making electric vehicles. And so there’s there’s definitely a societal impact that that company has had. But um, I don’t really trust the revenue or their their income that I see from there. And I don’t know if it’s going to be around in four years.

 

Jeff Malec  25:18

Right, which is fascinating because a lot of people would be like, what you’re going into some private business whose customers could disappear overnight, and all these right private business risks, versus this publicly traded thing that is on everyone’s tongue, and you see them all over the place. So it’s just interesting to me mindset shift of like, in your mind, you’re not taking much risk at all. Right? And if not, you sat down with 10 Financial Advisors, I’m sure eight of them would say like you’re taking a ton of risk on these private company bets.

 

Adam Tkaczuk  25:46

Sure, and let’s just look at like P E ratios. For example, if you cobbled together, an investment of 10 businesses, an average private business is going to sell for 678 times EBIT, da, you know, so an earnings might be a little higher than that, say, you know, but right now, the s&p five hundreds, I’m guessing 1520, I haven’t looked at it, since the market really crashed here. But I think it’s down to like you’re buying, you’re buying revenue at a very lower lower price than you could otherwise you do get management risk, and I’m not gonna I don’t want to downplay that. That that’s, that is critical, and a lot of these private businesses are managed for the benefit of the owners. And that just takes like a good legal view of this of like, Alright, where’s this business gonna go how as a as a passive investor, and I’m not passive in the business, because I’m on the financial side. But I’m not, I’m not an operator of the business day to day selling meat and whatnot. So part of the thing that

 

Jeff Malec  26:48

I don’t want to see him, like the little hoodie, and the gloves, you’re

 

Adam Tkaczuk  26:53

sure, you want to make sure that the owners of these if you’re, if you’re an investor in a business like this in private equity, and you want to buy these businesses, but not operate them and own them to be in control, if you’re non controlling minority owner, you want to make sure that the owners can’t take, they can’t bonus out all their cash flow and things like that you want to look

 

Jeff Malec  27:18

at closely. But then it also opens up and you wrote a little white paper and said, your notes to me tax alpha. So how do you view it seems in this private structure, there’s a whole lot more opportunity to do some hit the right buttons to get these different kinds of alpha in terms of tax and opportunity zones, and all these different things that maybe aren’t necessarily available in the publicly traded space? Absolutely, yeah. Or do you view it as like, those are available, but it’s already all priced into the stock? Where maybe in the if I find a private company that hasn’t pulled some of those levers, yet? It’s not priced into their true value?

 

 

 

 

Adam Tkaczuk  27:57

Yeah, that the latter, it Yeah, public companies now, like GE definitely takes advantage of these, you know, every publicly traded company is out there, and they’re negotiate when they build a new plant, they’re going to be negotiating with the state and local tax authorities to reduce their property tax abatements and any liability. And they do all that. And that’s part of my background. I did that for years, helping fortune five hundreds reduce their tax liability when they expand? Does it impact the bottom line? Yes, and no, because it’s what really matters more is access to employees and customers when you’re citing a location. So it’s called the site selection industry, you know, you’ll you’ll hire someone like myself or in my former life, we would go and look for 100 acres and a metropolitan area with a certain number of employees in the labor force availability and negotiate all the incentive packages, we could offset the cost of a new plant by up to 30% or more. And I’m working with one private business right now. It’s a family owned business, and they are building a $60 million galvanizing plant. So far, we’ve secured 30 million in subsidized subordinate debt and tax credit equity. So instead of it being a $60 million project, it’s more likely it’s a $45 million build, after after all the grants, and then you’re asking banks, not for 45 million or whatever, you’re saying, look, we’ve got 15 million of us in the project, but that’s subordinate to you. So the you hear about capital stacks. This is actually more of like a collateral stack. You can you can piece together a capital and collateral stack in such a way that the investors get increased returns. And it also works when you’re selling an asset. There’s ways of like opportunity zones, 1030 ones and structured sales that you could use to reduce defer, or sometimes eliminate tax liability when you’re selling In the business,

 

Jeff Malec  30:02

let’s dig in. Yeah, I jumped to the, what’s your view on? Is it a win win, like so this steel plant is getting built, who’s who’s giving away the subsidies, they’re the local the county or the state or federal, state

 

Adam Tkaczuk  30:18

and state and federal. So in this case, I’ll get into specifics this, this involves New York State’s brownfield tax credit. What it is, it’s a former Exxon site, I believe, and Exxon vacated the site. But there’s some oil leakage on the site. So what they’ve done, the the owners and sellers of the property, have remediated the site through what they call the Brownfield tax program in New York State, that’s managed by the Department of Environmental Conservation, I’m talking, trying us hit you with too many terms. Yeah, but you clean up the site, you remove the contaminated soil, you’ll bring down fresh, clean topsail. And then you get a certificate of completion. And in New York State, there’s various versions of this law. And this particular site that you have. The the subsidy is a 22%, cash refund for all tangible property placed in service on the site. So if you’ve got a 40 million $50 million of tangible property and machinery and equipment, real estate, all of that, that the state will view it as though you had overpaid your taxes by 10 million, and we’ll cut you a check for $10 million. And that subsidizes the project. And the idea is but for these incentives, this site would remain a contaminated site with no economic value. And a lot of these government subsidies are based on that. They typically are in Vail, available in distressed sites, economically distressed, environmentally distressed, or so on and so forth. And the beneficiaries are those that make investments, create jobs, create housing, medical services, colleges, universities, nonprofits. So there’s there’s, there’s a whole gambit of ways that you try to take advantage of these and how you qualify and whatnot. But in this case, yeah, I was

 

Jeff Malec  32:19

just gonna ask, do you think the New York State taxpayer is getting their money’s worth there? Like an overall it seems it right, when you look at it from the investment lens, I was feel like it’s almost taking advantage of the of the government’s right, of the subsidy programs. But surely, there’s some argument on the other side of like, No, this is a good thing. And that would just be sitting there contaminated and rotting.

 

Adam Tkaczuk  32:41

I’ll tell you an example of when it when it did not work, it used to be in New York City, under the old program rules that someone would take a lot that had a gas station in it. This is Manhattan, you clean up the gas station, you know, maybe cost you a few million dollars, now you get 22% of a skyscraper refunded to billion, and then yeah, so it was an uncapped program, then they started placing caps and restrictions on it. You’re not allowed to double dip, New York State has a 5% investment tax credit. So if you’re a brand new business in New York, you get a 5% uncapped refund on all investment you make in the state, if you’re a manufacturer, and they said you can’t take that tax credit plus this tax credit for the Brownfields. I’ll admit, sometimes it’s debatable. I mean, this is how I make I support my family, you know, and a lot of times, I’ll come into a project and I’ll get paid to generate these tax credits and call it tax credit equity and bring equity to a project that’s free. But a lot of times I look at it and go, Man, this is this is so complex, and sometimes the transaction costs can be very high. Both like folks like myself get paid lawyers, accountants and whatnot. Sometimes it’s not worth it, frankly,

 

Jeff Malec  34:03

even for the whoever’s building the plant, you’re saying,

 

Adam Tkaczuk  34:07

oh, for the plant, it’s always worth it, to do a cost benefit. So from a, from a political standpoint, I think the simpler you can make these programs more as of right, you can make them meaning you don’t need to apply or get approved. There’s no governing body, taking a discretionary review of your project and approving you or not. It’s almost like a line item that you file on your tax return. I think those are very efficient and very useful. So definitely tax policy matters, and it drives investment where you want it to go. That’s good. If it’s done, right. The for the business, you’ve got to determine if the juice is worth the squeeze. And I’ll give you an example. A few years ago, New Jersey was giving an incredible amount of money away to companies that would locate in New Jersey. I’ve had clients that were received $35 million in grant money to relocate from Philadelphia to New Jersey and Camden, New Jersey, for example, we

 

Jeff Malec  35:06

just like to run across the room. Yeah, yeah, exactly.

 

Adam Tkaczuk  35:12

And states do this all the time. And I think it’s good in some ways. It’s like when you go buy a house or a car, you’re gonna negotiate, you could kick the tires, and you know, you’re a consumer, you’re your customer of the states and these taxing jurisdictions and you have the right to negotiate the fees you pay when when you commit to a particular location, I think that’s all fine. But like in New Jersey that are here’s, here’s $30 million. Okay, so that’s, that’s a tax credit that you would sell for 25 million. All right, we’ll just use that number. So it’s $25 million, then you pay tax on that at the federal and state level. That brings me down to like, I don’t know, call it $15 million. Net, yeah. Then New Jersey’s charging you $400,000 more a year in property taxes. So over a 10 year period, take 4 million off that end, you add up all these other disruptions and you get a benefit. You absolutely get a benefit, but it’s not the 30 million not

 

Jeff Malec  36:11

a windfall. Yeah, I sometimes have an issue with that, like, good Chicago, we’ve been losing lately, right? Like, Boeing left citadels leaving all these groups are leaving, quoting crime, but I suspect it’s taxes more than but it’s like, where does it end? If everyone just keeps playing this game, and just the right the companies just keep circling the the country over 100 years timespan, they just keep circling and getting the best deal and never paying what there should be paying at any one location, right? So yeah, it’s it’s a tough nut to crack. Ah,

 

Adam Tkaczuk  36:45

I’ll say very often, though, you only get these funds, if you perform. So you’ll enter into a contract with the municipality or the state and say, like, I’m going to hire 500 employees, I’m going to invest $40 million, or whatever those numbers are. And unless you do that, they’re not going to give you any money. And then on a year to year basis, they’re digging into your Department of Labor reports, your 940 ones, all your tax returns to make sure those employees are on site. You certify and there’s a whole whole process of verifying that you are still in compliance, and they’re still getting a benefit. And they’re, the states make more money than they lose. I’ll make that absolutely great. Okay, good tax revenue, far outweighs the benefits that they’re giving you, which tells you how much revenue they make on taxes, you know, payroll tax, corporate income tax, property tax, the jobs and it goes from there.

 

Jeff Malec  37:47

Mind jump back to we’re talking about the public versus private like Google, Amazon, the Irish twist all that stuff, right, where they’re putting their revenues through a subsidiary and their effective tax rates, like whatever it is five 6% or whatnot. Do you think the those huge players have way bigger advantage of what they can do? Versus a small private five to 10 million EBITA revenue company? Right?

 

Adam Tkaczuk  38:13

That’s that’s an interesting question. Because yes, on one hand, these companies can offshore their profit centers and not the call situs. You know, where’s your revenue and profits site? They can recognize all that income offshore and not pay taxes unless they Patriot that money. So that’s an advantage. What a small to medium or family owned business can benefit from and I’ll get it I think they’re my heroes. I want to touch on that in a moment because i My heart polls for for the family business. Yeah, you’re in a position where I think most of the tax code in the United States has been drafted to your favor. You can take advantage of so many tax benefits depreciation, solo 401 K’s retirement plans just just so much that you benefit from from owning a business like like this food processing business this year. You are advantaged in the tax code, five to one over what a W two employee can do. You’re able to shelter so much of your income, build wealth without it being taxed. And you will make I was in Manhattan. Here’s here’s a great example. Midtown Manhattan consultant working with the fortune five hundreds of the world I had partners in this I wasn’t a partner in firm but I had partners in this firm. We’re making say a million dollars a year. Yeah. Our customers, my customers were folks in southern New Jersey that were like a cement manufacturer. All right. I don’t even know if he had a high school degree or not or passed High School. But just An honest guy, he and his wife started a cement manufacturing company in southern New Jersey, because he was a construction worker. Alright, he’s a construction worker looks at the world and goes, Oh, they’re taking prefab cement and putting it into the foundation of this, this house next door, and they’re done in a day. And I’m taking it take me four days to pour this foundation, he makes some calls and then ends up becoming a major prefab, precast. Net manufacturer. And I’ve probably given away too much information now already, because people could probably figure out who it is. But I’ll say I’ve had business owners that started a business in the 80s with their family. They make signs for the New Jersey roadway, they make sauces that goes to Campbell’s. They make meat like I’m involved with they dig ocean clams out of the ocean. These folks are financially better off than most of the finance people I met in New York City when I lived there. Three to one,

 

Jeff Malec  40:59

three to one from a revenue standpoint, or just are all the advantages you’re talking about after tax

 

Adam Tkaczuk  41:03

income, like how much they put away each year, the value. And beyond that equity of their business. They’re a bit they have a $20 million business they built and they might make 2 million a year. And

 

Jeff Malec  41:18

who was that article was just didn’t was that a Wall Street Journal, op ed or someone who was like, there’s people making money, all these weird ways in the middle of the country. Who knew? Like,

 

Adam Tkaczuk  41:28

that was on Twitter. And it’s like, I had no idea that my plumber who has 15 employees makes more money than I do. And I’m a lawyer. Yeah. at a law firm or something? Yeah, like, yeah, that’s the way it works. You’re a W two employee at a law firm, partner, maybe not. But it’s hard, you just, it’s very difficult to accumulate wealth as as an employee, in my opinion. And I think business owners, small business owners are my heroes. And this is why when I was a consultant, working with Fortune five hundreds, my customer, my client would be a middle market manager, a middle manager, he’s just concerned he or she is just concerned more often than not in their career, building up their resume. Within a few years, they often are moving from role to role business to business. And they’re leaving these commitments in their their wake, like are we just committed to Ohio that we’re going to create 50 jobs, you know, where we’re gonna get $5,000 a job. You know, this is a fortune 500 dealing with $5,000 a year and, you know, it’s gonna cost $50,000 A compliance costs to deal with that 50 people and fill out the reports for the state of Ohio. But you got a few million dollars that you can recognize on a on a on your annual review earnings. They get promoted. They’re not thinking long term. I think the only people in our economy that are thinking long term are family owned businesses. They’re thinking if I moved to New Jersey, or to Ohio, or build a new plant, or hire these bison equipment, how is this going to impact me in 10 years? Like what’s the value of this business in this decision to my family and to my employees, and they care a lot about their employees? Like, they’re every business owner that I’ve I’ve talked to them? How does a client has said Adam, like I am proud of Jake, or Pamela over there. They came to me when they were in high school, and now they’re making $200,000 a year. And I’m thrilled with them. Which brings up I just think they they care so much about the people they work with, they care more about their employees, their communities, and the longevity of their business than a lot of publicly traded companies do. Do you

 

Jeff Malec  43:46

think that’s dying out? Right? Like everyone now wants to be I’m going to be an engineer at Google or Amazon or right have these? These high paying software design jobs are probably a little too far in that world are reading the wrong Twitter feeds, right. Like people still need the other jobs. But there are stats I’ve seen of like the formation of independent businesses is way down.

 

Adam Tkaczuk  44:10

Where I said, if you’ve heard of entrepreneurship through acquisition, is that a term you’ve seen on your Twitter feed at all? Yeah, all right. So that my my Twitter feed is filled with people trying to buy these businesses who are trying to quit their nine to five and start start a plumbing company or something. Yeah.

 

Jeff Malec  44:29

It’s funny you said my good buddy from college has He’s four kids in Manhattan, Wall Street, right? He I don’t even want to know what his annual burn is. Private schools in Manhattan but he’s he’s like, I just want to we’re having beers. He’s like, I just want to tell my kid like, forget all this. He’s like, I just moved this money around and it’s just mumbo jumbo like go do something real like be a plumber. Right own a plumbing business. He wasn’t even thinking of it from like the the revenue and the money inside. But he was just like, do something real with your life help people out? Is he just

 

Adam Tkaczuk  45:05

alright? Alright, so I don’t know this gentleman, but what was this maybe three beers into a melancholy? Like, I wish the world were a certain way.

 

Jeff Malec  45:12

I think it’s a little bit of like, what what am I doing? What have I done with my life? I’m just right, like, and he lends money to private equity actually. So I think he was just like, what are we doing? And he probably sees those real businesses on the other side like that would that looks like a good path? But it probably is also a little bit of like, how much further can this go like? And that’s back to the overall piece, right when they’re paying 2025 30 multiples for private businesses? Right, which seems to me like the only hope of making that work is that you’re gonna get another PE firm to buy it at a higher price from you. Yes. So anyway, we’ve lost the script there a little bit, but

 

Adam Tkaczuk  45:54

you’re here. No, but

 

Jeff Malec  45:55

exactly, it is Friday, we should start doing that Friday, Friday beers. So come back to some of the the tax stuff for that business owner. I don’t know if you can give away too much of the secret sauce in the playbook. But what are some of the strategies they can use there to lower that sale and below your

 

Adam Tkaczuk  46:20

tax? Well talk to your CPA and accountant. So first of all, my I’m not a CPA, an accountant or a lawyer, I work with a lot of them. But so none of this is tax advice. And frankly, in three years, some of the tax advice that is right, today will be wrong, because the laws change. My background is actually in physics and business. So I’m not a I’ve learned all this on, you know, just Just do as I progressed in my career, but if you’re a business owner, try to figure out you’re taking advantage like in those PPP loans, for example, things that come up in your industry, take advantage of those at the government level, the real incentives, real tax starts to kick in in two areas. One, if you’re expanding your business, you’re hiring people, you’re building new physical plants, or relocating or moving or expanding, growing. So that’s that’s one bucket. The other is when you’re selling your business, and you’re gonna hit a massive tax liability at that point. There are strategies that we could chat about, or I could just allude to that that will help you reduce that. Because those are the two times and you’re in a position of power, I’ll say or you have influence, you have influence in negotiating and deciding what taxes you’re willing to put up with. And take advantage of all these incentives that these governments make available to you.

 

Jeff Malec  47:43

Go ahead, how do you have any influence on the side when you’re selling the business? Seems like you just get this all this money? How do you have influence with the tax authority?

 

Adam Tkaczuk  47:52

A lot. So the further out you plan, the better you have. It’s almost like a mad You’re probably familiar with like a state tax planning. It’s similar. And that letter, I think, I’m going to sell my business, I may pass away, how do I start structuring my estate so that it transfers to the rightful owners, whoever I want, reducing tax, that that’s going to take some tax planning and some forethought. Same thing, when you’re selling a business, you could, for example, move the business into a trust off and located in Nevada, and let it season for a few years and then sell it now the now the trust is actually owns the business for you, not you. And because it’s in Nevada, you pay no state tax on that. Or you could move your business or a portion of your business to a lower tax state, like Florida, Texas, whatnot. And when you sell the business, a portion of your business is taxed in the low tax state. And a portion of the business is taxed in the higher tax state. These all take a lot of time and planning. And the truth is people don’t plan and it’s very, very rare. You’re going to find someone who actually goes through this process.

 

Jeff Malec  49:06

Or you have some of your things, right. They’re distressed, they didn’t think they’re going to sell and now five years later, it’s they’re in trouble. And they need to say,

 

 

 

Adam Tkaczuk  49:13

yeah, I really liked the opportunity Zone program. For a lot of this. I actually don’t mind paying taxes, I advise just about everybody look, you’re going to sell the business maybe gonna get 30 million in capital gains, the larger one but you know, 3 million whatever, like capital gains taxes or like generational lows right now just pay the tax, move on enjoy life. Don’t don’t deal with all this. But if you’re someone who hates taxes, or just doesn’t want to give the state of California $10 million, or whatever it is, then you can start planning. How can I how can I structure this in such a way that I’m keeping more of this money than the government? And I’ve got a white paper that you could perhaps link to it’s on

 

Jeff Malec  49:58

my show notes. Yeah, yeah.

 

Adam Tkaczuk  50:01

The smaller your businesses, the more options you have, you could do structured sales. So you could, you could sell a part of the business every year for a few years. And that would put more of the, this, you recognize more capital gain or income, or capital gains from the sale under lower tax brackets. That’s one way. One way I really like that I think it’s creative, is you sell the business to a buyer. And sometimes there might be an urn out, we’re like, look, you’re gonna stay on and being an employee helped me do a transition. And then we’re going to pay you an urn out or some some money over the next couple of years, as you perform against that contract. You could say, look, Alright, I’m gonna sell the business to you, but I’m going to become an LLC, consultant to you right now going forward. Now, I’m not generating w two income from you from the sale, I’m generating business income. And my wife, oh, she’s going to be part of my business as well. So we’re going to be a consulting firm, because we, and we will, we’re going to charge you 500,000 a year to consult. And we’re going to take that 500,000. And we’re going to put it into a a defined benefit plan, a pension plan, and you can pretty much get most of that tax free into effectively an IRA. And that that’s a great way to avoid taxes and grow a nest egg tax free.

 

Jeff Malec  51:25

But the OPTIO backdoor Roth IRA, yeah. They trying to close it? Or did they close it? What was the

 

Adam Tkaczuk  51:33

I don’t know, I was actually reading an article about it almost retweeted, like, you know, this is, anyone can do that. If you have access to a company that’s like, gonna grow 100x. First, you don’t need, you don’t need your IRA, you’re gonna do fine. Right. But yeah, you can have a self directed IRA. So these 401 K’s as a business owner, you can have a solo 401 K, it’s your own 401 K. And you can have it in a self directed account, you can invest in real estate and businesses and commodities. As long as it’s not a business or real estate that you’re participating in, in a material way, or you can put it in the house you own but or live in as your primary residence. And there’s certain tax rules around it. But yeah, you could do whatever you want with that money, you know, freedom, you can do what you want. I really liked those. When you get into a defined benefit plan, where they define the benefits, you have an actuary it’s a pension plan, you could you can take hundreds of 1000s of dollars a year, and put it into this 401k. And you can you can manage that as you will as well. And so there’s there’s lots of freedom you have when you own these retirement plans for your business. And where we’re going with this

 

Jeff Malec  52:51

overall tax strategy, but what do you ever? I’m very leftist and all this pot. But do you ever feel like it’s a disadvantage, right? If you know all this stuff, you can earn all these benefits. And then the rest of the world is like, No, I’m just toiling along. It’s a W two employee, and I never get any of this stuff. So it’s like, I don’t know how to, is that a societal problem? Or it just is what it is? How do we fix

 

Adam Tkaczuk  53:17

this? I think it is, yeah, you’re basically telling the business owner, the first 100 $200,000 you’re if you’re self employed, you can put that away into a tax free account. But if you’re an employee of a business, you’re limited to like 18,000 a year. Sorry. Yeah. Yeah, it’s, I dislike it. Now. There’s a lot of rules that if you if you’re a business owner, and you have 50 employees, you generally have to offer all the employees the same benefits that you have. Yeah, so it’s a little harder to do that. But if you’re selfie parlor. Yeah, exactly. So I’m left with you on one way in terms of I really wish the tax code allowed people to build wealth better if you’re an employee and and that just isn’t the way it is. And I wish it were the case. What’s that?

 

Jeff Malec  54:11

Is there an easy way to solve that?

 

Adam Tkaczuk  54:14

Crypto solves everything. Everything’s been solved by crypto.

 

Jeff Malec  54:17

But then you can see now when some of those like what else are these people’s was they can’t they can’t get ahead because they don’t have these these tools. So like Alright, I’m gonna YOLO it on these crypto trades.

 

Adam Tkaczuk  54:29

That’s actually an interesting motivation. Yeah, that crypto outside of starting a business. I mean, there are people like let’s just start a plumbing business charge a few $100 An hour build equity. I anyway,

 

Jeff Malec  54:45

yeah. But when it comes to going I’ve been a for just had that bullshit. He op ed in the financial where was it? I don’t remember what but it was basically like, yeah, of course these 20% yields on some defi thing or bogus. And of course this is, but you can see the appeal of it of like, oh, I don’t want to go start a plumbing business, I just put this cash over here. It’s like owning a business, I get this dividend, I get it paid out. Of course, it’s all BS. But anyway, back to the we lost the script once again, as always makes for good, you know,

 

 

 

Adam Tkaczuk  55:20

it’s fine going on those tangents, I’ll just throw this out for getting getting back to, to selling the business, the opportunity Zone program is really good, provided you can reduce the fees, transaction costs, like anything in finance, you know, back to Ben’s point, like, if you’re a retail private equity shop, you’re charging a lot of money for these, like two 3% a year to manage money. That’s about what the benefit is three 4%, depending on how good the underlying investment does, and we don’t have to get into details about the opportunity zone. But if you do sell a business, and it is capital gains, you and you do know of an investment that you like, like this galvanizing plant I’m working on, it’s in an opportunity zone, you could throw money in there. In fact, the money we have raised is from an opportunity zone investor.

 

Jeff Malec  56:09

There are no famous quick opportunity zone breakdown. It’s okay, it’s rundown poor areas, essentially.

 

Adam Tkaczuk  56:18

Okay, I’ll try to do this in two minutes. If I go too far, I’ll be back. Alright, so opportunity zones, you sell an asset and you generate a capital gain, you can then roll the capital gain into an investment in a distressed census tract called an opportunity zone. In each state, the governors determined where their opportunity zones were. And sometimes they’re not always really distressed. They were locations and census tracts that could reasonably be expected to attract capital, and they wanted to give a boost. And so regardless, each Governor determined you there are plenty of opportunity zone maps, you can go into and see if there’s a location that works for you. Then you can either put a business there or invest in real estate. And those are really just some qualified opportunities, own investment or opportunity’s own business that you could invest in. There’s rules around it. And it should you do that you don’t have to pay taxes on the capital gains that you’ve rolled into the fund and into that investment. You could defer paying taxes on that until I think it’s April 2027. So right now, it’s about five years. So you get the ride the government’s money for tax free for five years, and then you pay that capital gain and 2027. From there, you never pay tax on that investment. Again, this is all federal level, by the way, each state either conforms or not varying degrees. So should you say buy a multifamily apartment building or invest with a real estate developer that’s building that does something like that? Maybe they invest 10 million in today, and then 10 years, you sell it for 20 million, you would generate a $10 million gain. But you don’t pay tax on that 20 That $10 million gain, if you’ve held it for 10 years. The other benefit is if you structure the opportunity’s own fund correctly, as an investor, you can take dividends and reimburse all the cash flow coming off of these these investments and roll that into another opportunities on investment and kind of keep all that money tax sheltered. My going back to earlier comments, it’s very great on two minutes. Good word. Okay. It’s difficult to take advantage of this program. If you’re not a high net worth person, you know, if you’ve just selling stock and you got $20,000 in capital gains, where are you going to put that? I think there are some real estate groups online that will take small checks. But more often than not, it’s high net worth investors, selling businesses, that’s primarily the folks I’ve been working with in this world, you know, they sell a business and they just want to go put it in a real estate diversify. Sometimes they want to roll it into an investment like a an ongoing business and operati