Business Valuation & Succession Planning

Why Plan?

The most traumatic events for a business are the death or disability of one or more of its owners. While the owner is alive, he or she can sell the business interest, give it away or keep it. Without buy-sell or succession planning, at the owner’s death or disability most of the choices are gone. In that case, it is not unusual for a business and a business owner to both die at the same time.

The Planning Objectives:

The key objectives in successful business valuation and succession planning include:

  1. Preservation of the business.
  2. Maximizing of the value of the business.
  3. Minimizing the transfer taxes.
  4. Facilitating the ownership transition.
  5. Facilitating the management transition.
  6. Facilitating harmony among family members and business associates.

The Process

Business Succession Planning has two essential elements:

  1. The structural components.
  2. The financial or tax components.

The Planning Process

This is where we determine the “who”, “how”, “what” and “where” of the plan. Although it’s the most important part of the plan, it is the part business owners often want to procrastinate on because this is where the hard decisions have to be made. The key to this planning is data gathering. The process may include:

  1. Meeting with the client to gather all necessary financial and corporate ownership data.
  2. Clearly identifying the client’s objectives and goals regarding the “people” decisions that must be made. Successor ownership issues, successor management issues and/or the participation of family members.
  3. Assisting the client in quantifying and prioritizing the planning regarding family members who are not going to be active in the business.
  4. Meetings with the client and financial advisors to determine the value of the business and the appropriate valuation technique.
  5. The exercise of diligence, experience, and judgment in recommending an overall business valuation and succession planning strategy.
  6. Assisting the client in implementing and communicating any new agreements in financing plans necessary to properly implement the plan.
  7. The development of an effective follow-up program for periodic review of the plans continuing effectiveness, suitability and any necessary updates to the business’ valuation.
  8. A planned strategy that will provide liquidity when you may need of most is essential. Frequently life insurance and disability buy – out insurance become the most crucial compensation in ensuring that the strategy will succeed.

Succession Strategies

For privately owned companies, there are two basic succession or buy-sell strategies:

Entity Plan: in which the entity (corporation or partnership) buys the interest of the deceased or disabled owner. This type of arrangement is generally used when there are several owners of a business

Cross-Purchase Plan in which the surviving or non-disabled owner(s) buys the interest of a deceased or disabled owner.

Either strategy requires a formal buy-sell agreement between the business owners. The company’s business attorney should be consulted before a decision is made so that all of the various issues related to each plan can be addressed. The agreement establishes the valuation method and payment terms to be used so that decisions need not be made during a crisis.

Advantages of a Buy-Sell Agreement

  • Guarantees a buyer for an asset (share of a business entity) that a business owner’s heirs may have no desire to own.
  • Can establish a value for federal estate tax purposes which is binding on the IRS

  • Spells out the terms of payment and is easily funded with life insurance and disability insurance, if desirable.

  • Provides a smooth transition of complete control and ownership to those who are going to keep the business going.