Every Tuesday from 6–7pm, Baltimore’s CBS Sports Radio airs AHA! Business Radio, a show produced by Allan Hirsh Advisors. Hosted by the eponymous Allan Hirsh, AHA! Business Radio offers expert advice to business leaders and features interviews with visionary regional executives, founders, entrepreneurs, innovators, and changemakers. AHA! Business Radio’s February 18, 2016 broadcast featured a conversation with Michael N. Mercurio, Chair of Offit Kurman’s Business Law and Transactions Practice Group. Mr. Mercurio is an accomplished business attorney, corporate advisor, and speaker who helps entrepreneurs and business owners through all stages of their organizations’ lifecycles, from formation and expansion to sales and transfers. During the show, Mr. Mercurio and Mr. Hirsh discussed what companies of all sizes, including family businesses, should do in order to plan a successful exit strategy. If you missed the episode or would like to read the transcript, we are pleased to present Mike’s interview, in 4 parts. This interview has been edited and condensed for clarity.
ALLAN HIRSH: Like I ask everybody, and when you were here last I asked it: What motivates you to get up in the morning and go to work?
MIKE MERCURIO: It’s a good question. I’ve thought about that from time to time. I really love what I do. I help real people with real problems. As you know, I’m a business attorney. That’s a broad topic, but business attorneys help people with employment law, contract law; they help people sell a business, buy a business. They help people with every part and every component of the lifecycle of a business. Every day is something new. I don’t just look at the same contract every day, or deal with the same problem every day. I deal with businesspeople and their problems. Some of them are good, some of them aren’t so good, but I deal with real people and that’s fun. You know, people call lawyers when something really good has happened or something really bad has happened. And it’s my job to be there to give them peace of mind that “we got your back; we’ll help you get through it.” That’s what makes it fun.
Q. As a former business owner myself, I always liked to make sure my attorney knew what was going on, because as you said, you go to the attorney for business when you have problems or when something’s very good, but if they know what’s happening it mitigates that real problem because they sometimes can help you. A good attorney like you can help individuals and business owners not have the problems because, before you get into the problems, they can be there to help and support what you’re doing.
A. Without a doubt, proactive legal advice is always the best course of action. But in the end, you know what I and other lawyers do is really simple: we manage risk. My job is to tell my business client or individual, “here are the risks.” And their job is to say, “Mike, I don’t care about that risk.” Or, “Mike, I really care about that risk—what can we do?” That’s my job in a nutshell.
Q. Let’s get onto the subject tonight, which is exit planning. One of things I learned a few weeks ago and it’s a statistic—I don’t remember where I got it—but I believe that approximately, as of 2014, 66% of all businesses were owned by baby boomers. If you think of that number, in the next 10 to 15 years you are going to have billions and trillions of dollars of transition of businesses going to the next generation. So, exit planning, for at least for those 66% of the businesses—if not the rest, who we can talk about—succession planning and business planning and future planning is all about exit planning, in my mind. So, what are some of the things that a good business owner should be really thinking about when talking about exit planning?
A. When we say exit planning, sometimes there’s a negative connotation. I find that many owners I say, “Have you made an exit plan?” They say, “Well, Mike, I’m not exiting.” Well, of course, you may not be exiting now, but all of us exit our businesses one way or another. Even if we go out through death, we exit our businesses. And so, there’s no time better than the present to plan. The earlier you start planning for your exit, or succession, or transition, or even contingency, there more options there are on table. The later that you wait, the fewer options there are. It’s not to say that you can’t plan at the 12th hour, but it’s not optimal to plan then.
Q. I remember vividly the last time you did the show, we were talking about corporate business structure, and you were talking about partnership agreements and membership agreements. That’s a great time to think about exit planning—when you start the business. You said “If you had a partner, do you want to be a partner with that partner’s spouse?” Because if you don’t begin the plan for it when you start, that’s a possibility. A. Absolutely. The perfect time, as you just said, is to do it when you start, to have a clear vision as to where you’re going with your business. So many people get involved in business, and they get caught—listen, I understand it. There’s a lot of pressures to running a business. We’ve got to make payroll. We have to deal with vendors and suppliers. We have to deal with lawyers and bankers and accountants and deal with taxes. So, sometimes, much like in our own individual lives, we all know we should have a will and we should plan for our transition in life. Likewise, in business, I think most people intuitively know that they probably should plan, but it gets put
A. Absolutely. The perfect time, as you just said, is to do it when you start, to have a clear vision as to where you’re going with your business. So many people get involved in business, and they get caught—listen, I understand it. There’s a lot of pressures to running a business. We’ve got to make payroll. We have to deal with vendors and suppliers. We have to deal with lawyers and bankers and accountants and deal with taxes. So, sometimes, much like in our own individual lives, we all know we should have a will and we should plan for our transition in life. Likewise, in business, I think most people intuitively know that they probably should plan, but it gets put onto the back burner. If you don’t do it, you might end up with your partner’s wife as your business partner.
Q. Even in the business itself, trying to plan what you’re doing or at least think about why you do what you do, why you’re in business, what your personal dreams and goals are. I deal with business owners and they don’t even think about their personal goals. Things come in and they make a decision. But if you don’t make a decision understanding both goals and dreams as you set for yourself and for the business, you’re going to make decisions that are going to take you through all kinds of curves, bad roads, good roads, but not get you where you want to go. And you need to make sure you understand, and that’s part of the planning: understanding where you want to be so you can get there. Part of that is “Where do you want to be in retirement?”
A. For so many business owners, their business becomes their identity, and they can’t see themselves doing anything else. That’s a trap. For one, you can’t transition a business where the business is really all about the owner, because if the owner isn’t there and there isn’t a business—well, that’s somewhat problematic. But beyond that, I think that many owners hold on longer than they should because they’ve never really thought about life after the business. They’ve never developed a hobby, for example. They’ve never developed other interests. So, it’s quite scary for them to say, “I’ve been working in this business 20 years. I really don’t know what else I could do or would want to do.” And so they hold on too long.
Q. What are some of the things you have to do to get started? We talked about, when you start a business, you should think about it. But, you’re in business—it’s 10, 20 years, you’re in your 50s—what are some of the things you need to think about in order to plan for that exit strategy?
A. I’ll give two points on that topic. One is to have a roadmap. To know where you’re going, you have to know where you are. Most people are involved in business because this is their financial well-being. For most business owners, their wealth is locked up in their business, and they’re counting on the business to fund their retirement or thereafter. One of the things I recommend is to get a valuation. That is, go out and figure where your business stands in terms of your goals. Because, if you don’t know where you are, you can’t know where you’re going, and too many business owners say, “I’m going to sell my business for $2 million.” But they do not realize that their business is worth $200,000, and they have quite a shock at the 12th hour when they have come to learn that. That’s not the time to learn that your business is worth $200,000 when you need $2 million. So, get a valuation. It doesn’t have to be a full-blown IRS-defensible valuation, but find out what’s your business worth. If it’s worth less than what you think it is, now you can outline a plan to get to where you need to go. If it’s worth what you think it is, now you need a plan to protect what you built so it doesn’t go away.
Q. No matter what, you’re right, you need a valuation. You need to know what it’s worth. And that’s in real terms—not what’s in your gut. I mean I was involved in a transaction—it could have been worse, it was 2008, could have been worse in 1929—but the value that this person, because he was ill, was trying to get for the business was worth nowhere near that. I ended up buying it and paying about 30% of what the value was, because he had not done any planning. He was the business. It just didn’t have the value. He did some other things, but you need to know the value, so you know where are you’re going. Part of that is to me is understanding what the future really is: Is it just about you? Is there family that’s involved in the business and who wants to be in the business? Is there management within the business that’s interested in taking it over? It’s not just necessarily about selling the business, but even if you do one of these other things, how do you preserve the income that you need? You still need a valuation on anything you do.
A. I agree.
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