Succession Planning and the Importance of Business Valuation

Companies across the globe are leaning more readily on regular business valuations, particularly in the sector of small and medium-sized enterprises (SMEs). Business valuations are conducted for a variety of reasons. Whether an organization is considering restructuring the business, dealing with relationship issues, looking into transactional retirement planning, or proactively preparing for a sale, business valuations are instrumental in today’s evolving marketplaces. Determining the fair market value of a company means setting assumptions aside and doing the real work to identify a business’s true value.

As a business owner, thinking about the future of your company without your involvement is difficult to do, especially in the case of first generation family businesses. Business owners who have worked their entire lives to build their company are naturally averse to considering life after the business. However, this activity is paramount to planning for retirement. The fact that approximately 70 percent of SME companies are family-owned means that succession planning is absolutely critical. Unfortunately, however, many family-owned businesses do not have a plan for the future and are therefore leaving their business vulnerable to unforeseen changes. When considering a succession plan, the three most common options to contemplate are as follows:

  1. Transfer ownership to an employee
  2. Transfer ownership to a family member
  3. Dispose of the business via management buy-in/buy-out, a sale, or a voluntary liquidation

With the goal of avoiding making assumptions, conducting an objective business valuation is amongst the most critical initial steps when beginning succession planning. Family-owned business owners are usually quite emotionally invested in the company and almost always believe that the business is more valuable than it actually is. As such, those closest to the company are often ill-equipped to execute the valuation. Seeking professional valuation services is the best course to take in order to ensure an objective and accurate result.

Other factors to take into account are issues like estate tax liability and inactive heirs, which will impact business valuation during succession planning. Regardless of how or when the business valuation is conducted, succession planning must be focused on preserving the business, maximizing its value, minimizing transfer taxes, and facilitating a smooth ownership transition. Between the structural elements and the financial elements, the process of succession planning is complex and daunting. Consequently, beginning the process prior to a health scare or other unforeseen event is imperative.

At Ellrich, Neal, Smith & Stohlman, P.A., our trained valuation analysts have the qualifications and experience to value a business for a variety of purposes, including the purchase or sale of a business, divorce of an owner, estate and gift matters, business and contractual disputes, eminent domain condemnations, and to assist in financing. The valuation of a closely-held business requires more than the application of a simple rule-of-thumb formula. All aspects of the subject company need to be considered as well as consideration of economic, industry and other outside factors that may increase or decrease the value of the entity. If you are a business owner considering the next steps of your life, contact our Palm Beach Gardens or Miami office today to get started on your succession plan with a business valuation.