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Having a succession plan in place is a critical part of ensuring your business will continue after you step down from running it. The first step in the succession planning process should involve determining your business’s fair market value.
Understanding Business Valuation in Succession Planning
Business valuation involves determining a company’s fair market value through various financial analysis methods. In a business valuation, financial experts will review a company’s records and evaluate market or economic conditions to estimate the business’s fair market value under a specific valuation method. Some of the factors that influence valuations include:
- The company’s financial performance
- The value of the company’s assets
- The company’s market position
- The company’s growth potential
By understanding their business’s fair market value, owners can make informed decisions in the succession planning.
Why Do You Need a Business Valuation for Succession Planning?
Obtaining an appraisal of your company’s value can help you with succession planning by:
- Establishing fair market value: Determining the business’s fair market value can create reasonable expectations for stakeholders in succession planning, including owners, heirs, business partners, or prospective buyers.
- Facilitating ownership transfers: Understanding a company’s value can help with the ownership transfer process as part of a succession plan, whether that transfer involves transferring equity in the company to different stakeholders or selling the business to a strategic partner.
- Avoiding disputes among stakeholders: Obtaining business valuations from a neutral expert can help reduce the likelihood of disputes among stakeholders in the succession planning process, including partners, family members, managers, shareholders, and employees, as stakeholders will have objective financial data upon which they can base their decisions.
- Assisting with strategic financial planning: Succession planning goes beyond determining who will take over the business when its owner retires or dies. Owners must undertake other forms of legal planning in conjunction with succession planning, including tax, estate, and financial planning.
Common Business Valuation Methods
There are several standard methods of valuing a business for succession planning purposes, including:
- Asset-based approach: In the asset-based approach, financial experts total the fair market value of a business’s assets, including real estate, equipment, inventory, accounts receivable, intellectual property, and goodwill. Experts then subtract the company’s total liabilities from its assets to determine its value.
- Market-based approach: The market-based approach values a business by the price or value assigned to similar businesses during transactions such as debt or equity financing, mergers and acquisitions, or IPOs. This approach seeks to determine what fair market price a buyer might pay for the business.
- Income-based approach: Under the income-based approach, experts appraise a business’s value by its cash flow and profitability, evaluating factors affecting its future income and then calculating that income under present value.
When Do You Need a Business Valuation?
Business valuation can provide critical information for the succession planning process. Owners should undertake periodic valuations to understand their company’s value at that point in time. Regular valuations can help capture changes in the business’s fortunes or the industry or economy as a whole.
Other situations where business owners might require a valuation include:
- Partnership changes
- Debt or equity financing
- Sale of the business or acquisition of another business through equity consideration
- Divorce
The Role of Professional Assistance
Business valuation requires a team of experienced professionals, including:
- financial experts
- accountants
- business appraisers
- attorneys
Financial professionals can handle the details of gathering and reviewing financial information and developing formulas to calculate the business’s value under appropriate valuation methods. Lawyers can guide businesses through the valuation process by advising them of regulatory compliance issues, handling document requests, and assisting owners with succession planning or other legal needs once the business has an established value.
Contact a New York Succession Planning Lawyer Today
Are you ready to start your business’s succession plan by getting an accurate assessment of its value? If so, contact Merlino & Gonzalez today for a confidential consultation with a succession planning lawyer to discuss how we can guide you through this critical process.