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What can a valuation expert do for your succession plan? I 415 Group

Written by Dominic G. Reolfi | Feb 23, 2017 5:00:00 AM

As the baby boomer generation nears retirement, many business owners are facing a difficult task: succession planning. Should they sell their business to a third-party or pass it on to a family member? With many options to consider, 415 Group Manager Dominic Reolfi, CPA/ABV, MT, explains how a valuation professional can lend support:

As a business owner, working with a valuation expert will help to ensure that you’re not leaving money on the table; or conversely, that you’re not holding out for an unrealistic price. A business advisor can also help you navigate the various tax implications that you may face. For example, if you plan to sell your stock to your children, there could be a tax benefit to sell the business over multiple years compared to all at once.

Often we see business owners wait too long to begin exit planning. I’d say that a good rule of thumb is to start the process at least five years prior to your retirement.

At 415 Group, we have three certified business valuation experts on staff who performed more than 100 valuations within the past year. We also have access to resources to help us determine the value using the factors that this article explores. We look at comparable sales of other similar companies and projected cash flow. Our goal is to provide our clients with all the information they need to make the best decision.

 Most business owners spend a lifetime building their business. And when it comes to succession, they face the difficult decision of whether to sell, dissolve or transfer the business to family members (or a nonfamily successor).

Many complicated issues are involved, including how to divvy up business interests, allocate value and tackle complex tax issues. Thus, as you put together your succession plan, include not only your financial and legal advisors, but also a qualified valuation professional.

Various value factors

When drafting a succession plan, a valuation expert can help you put a number on various factors that will affect your company’s value. Just a few examples include:

Projected cash flows. According to both the market and income valuation approaches, future earnings determine value. To the extent that a business experiences decreasing, or increasing, demand and rising (or falling) prices, expected cash flows will be affected. Historical financial statements may require adjustments to reflect changes in future expectations.

Perceived risk. Greater risk results in higher discount rates (under the income approach) and lower pricing multiples (under the market approach), which translates into lower values (and vice versa). When selecting comparables, the transaction date is an important selection criterion a valuator considers.

Expected growth. Greater expected revenue growth contributes to value. In addition, there’s a high correlation between revenue growth and earnings (and thus, cash flow) growth.

Other determinants of discounts

In many cases, valuation discounts are applied to a company’s value. For example, decreased liquidity translates into higher marketability discounts, while increased liquidity reduces marketability discounts. Other factors that affect the magnitude of valuation discounts include:

  • Type of assets held,
  • Financial performance of the underlying assets,
  • Portfolio diversification,
  • Leverage,
  • Owner rights and restrictions,
  • Distribution history, and
  • Personal characteristics of the general partners or managing members.

Discounts vary significantly, but can reach (or exceed) 40% of the entity’s net asset value, depending on the specifics of the situation.

For best results

An accurate and timely value estimate can facilitate the succession process and prevent costly and time-consuming conflicts. Please contact our firm for more information.

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