A captain doesn’t decide on a whim that he or she is going to sail around the world tomorrow. The voyage will take proper planning, appropriate resources, and a skilled co-captain. The same can be said for succession planning. Business owners, like captains, must plan and consider many variables before selling or transitioning their business and waiting too long can have devastating effects on the businesses value, its viability, marketability of the ownership interests, and may create significant tax liabilities.

Proper planning for a voyage provides a captain with peace of mind and security, just as a well-constructed succession plan can provide a business owner financial security, as well as, contribute to the viability of the business for future generations. Succession plans can be extremely complex depending on the situation.

Below is a brief list of questions owners should be asking themselves when considering a succession plan:
  • What are your financial goals for retirement? Will a business transition provide an income stream during retirement? What is your approximate retirement date?
  • Is there a next generation to maintain the business in the future? Are there family members in and out of the business who are interested in taking the business over? What is their vision for the future of the business and does it align with your goals for the future?
  • Should the business be sold to provide liquidity for future financial security?
  • What are our benefits to a buy-sell agreement?
  • If a family transition isn’t possible, who will take over running the business and are they financially able, qualified and appropriately trained to do so? If not, can they be and how so?
  • What changes can be made to maximize the value of the company in preparation for a sale or transfer?

Answering the previous questions is the first step in mapping out your goals and identifying potential succession opportunities, but it doesn’t tell you everything you need to know. A Business Valuation can be a vital step in the succession planning process because it’s important to understand the true value of the business from an independent objective perspective. Most business owners tend to overstate the value of their businesses because they remember all the blood, sweat, tears, and long hours they have put in over the years to grow it to its current state. Additionally, they may have unrealistic expectations of revenue growth or are optimistic about the market or a big client that isn’t realistic. They may have calculated the value based on a “rule of thumb,” a multiple of revenue, or some multiple of earnings for the industry they’re in. However, this value is most likely inaccurate because it does not account for specific company risk or for any applicable discounts, such as lack of control (minority interests) or lack of marketability.

Second, knowing the true value of the business is the gateway that can drive other decisions related to Succession and Estate Planning:
  • What is the current owners expected or desired value of the business upon transfer or sale?
  • Should estate tax planning be considered based on current estate value limits?
  • Based on the value, can family or employees afford to buy the business or should other transfer/sale options be considered? How will that effect current employment relationships?

Third, the value of having a business valuation done for succession planning purposes goes far beyond just knowing the value. A good valuation team should also communicate what factors drive that value. Knowing these factors can help the business owner identify the most important factors to maximize value, whether it’s growing revenue, amplifying cost-cutting measures, or focusing on higher profit products or markets.

As a full service CPA firm, the professionals at TDT CPAs and Advisors not only provide Business Valuation services, but also have a full team of tax, audit, and business advisory consultants who can add great value when developing a succession plan for your business.  Contact us at one of our offices in Iowa or Illinois to discuss how we might help!