Chris Mercer (photo right) is a name familiar to regular readers of this blog. I’ve written a number of posts about major valuation cases in which Chris testified as an expert business appraiser, including AriZona Iced Tea, Chiu, and Giaimo, and about his writings on the subject of statutory fair value and in particular the marketability discount. I’ve also had the pleasure of sharing the stage with Chris at continuing education programs including one upcoming on May 18 for the New York State Society of CPAs.
Chris has distinguished himself not only in the field of business appraisal, but as a deep thinker about how business owners, and especially the current wave of retiring baby boomers, can successfully reap the benefits of their ownership through diversification and careful transition planning. To that end Chris has published a number of books on buy-sell agreements and, most recently, a terrific book called Unlocking Private Company Wealth (Peabody Publishing 2014), subtitled “Proven Strategies and Tools for Managing Wealth in Your Private Business.” The book is a wake-up call for owners of closely held businesses who, caught up in the day-to-day operation and growth of their firms, pay little or no attention to managing and extracting the personal wealth tied up in their businesses and fail to devise rational exit and succession strategies.
In his book’s introduction, Chris nicely captures the credo of the quiescent business owner: Either I own the business or I don’t and there’s no in between. I’ll just keep things as they are until I sell the business or die. An owner such as this, who typically lacks an adequate shareholders or buy-sell agreement, and has no succession plan, is destined to become a client of a business divorce lawyer like me! To that owner, Chris says: “This book is written to help you understand the importance of your illiquid wealth — or the wealth locked in your private company — and present alternatives for helping you manage and eventually realize that wealth.”
The book is divided into three main sections. The first section, Managing Private Company Wealth, lays out and defines the concepts of wealth management for business owners whose personal wealth is largely tied up in their businesses, and teaches owners how to treat their ownership interests as investments. In it Chris advocates the “One Percent Solution,” meaning allocating at least one percent annually of the value of business’s illiquid assets under management to provide the budget necessary to manage wealth, i.e., for financial planners, accountants, attorneys, appraisers, succession planning, etc.
The book’s second section, Tools for Managing Private Company Wealth, focuses on, as Chris puts it, strategies for “achiev[ing] satisfactory shareholder returns during the interim between the current status quo and any ultimate disposition.” Among the tools explained in this section are dividend policies, leveraged dividends, leveraged stock repurchases, ESOPs, minority interest private equity investments, and insurance-funded buy-sell agreements.
The book’s final section is called Perspectives on Managing Private Company Wealth. In it Chris stresses the important distinction between the two kinds of value for any business: value to the owner, and transferable value. The former, also known as investment value, captures attributes of business value unique to each owner, including the right to work in the business, lifestyle, prestige, and key person status. Chris defines transferable value as company characteristics that other investors find attractive and are willing to pay for, and he explains further using the acronym READY, standing for Risks, Earnings, Attitudes, Aspirations, Actions, Driving Growth, and Year-to-Year Comparisons. The section goes on to address the reasons that businesses change ownership, the ways potential investors look at a business, the dangers of waiting until it’s too late to diversify, CEO management succession for private companies, and how to prepare a business for sale.
Given my own litigation practice in dispute resolution for multiple-owner businesses, I was especially drawn to Chapter 13 of the book, entitled Buy-Sell Agreements and Life Insurance. I couldn’t say it any better than Chris when he writes, “Your buy-sell agreement is really ownership transition on autopilot. The real question is whether you, the other owners and the company will land safely when a trigger event occurs or if some or all of you will crash and burn.” The chapter highlights advice Chris has given at greater length in his prior books devoted to buy-sell agreements, including his strong preference for the use of a single appraiser to determine price (as opposed to fixed price, formula price, or multiple appraisers) and the need to pay careful attention to the different considerations for using life insurance as a funding vehicle or corporate asset.
If you’re an owner of a closely held or family business, or if you provide professional advice for such owners, do yourself a favor and pick up a copy of Unlocking Private Company Wealth. Above all, it offers practical advice in plainspoken terms that will convince you the time is now — today! — to start planning for wealth management and the inevitable transition to successor ownership and control.