Business Succession Planning:
Illustration - Passing The Baton
In a relay race, the winner often is the team which is able to pass the baton with the most speed and efficiency, making sure the pass-off is within the designated range. Passing a family business onto successors is often similar to such a relay race. Facts show that only 30% of family-owned businesses survive to the second generation and only 13% survive to a third generation. Careful planning is important to ensure a successful "pass-off".
Goal
The goal in business succession planning is to produce a workable plan for transferring the family business to the successors. These successors could include family members, key employees or other third parties. Ownership transfer and management transfers will occur at some time. The family business owner will want to influence both transfers.
Team Players
The players involved in business succession planning would include the owner and potential owners, family members, and professionals, such as CPA, attorney, banker, insurance agent, etc.
Challenges
The challenges in completing a successful plan include both financial and non-monetary aspects. Some of the financial issues include income taxes, estate taxes, gift taxes, retirement income, affordability. Non-monetary issues include visions and goals of the owner and the successors' personalities, skills, talents, etc.
Causes For Disqualification
Many times a business succession plan fails due to lack of communication, lack of direction (no vision) or the owner "can't let go" or the successor "can't wait".
Approach
The amount of time and effort in formulating a business succession plan would depend on the level of sophistication needed to meet the needs of the owner and successors. Often the approach involves three phases: Analysis, valuation and action plan.
| Analysis:
In this phase, information is obtain regarding the type of business, the vision of the owner, strengths and weaknesses of the successors, involvement of family members and numerous other related matters. Valuation Of Business:
Often the value of the family-owned business needs to be determined to assist in a sale or gift as part of the succession plan. Business valuations are not an exact science and often family-owned businesses are the most difficult to value. However, procedures are available to determine a reasonable value for such businesses. Action Plan:
Often in a business succession plan, it is important that the plan is documented in written form and all pertinent points are adequately communicated to all major players. It is also important to have the appropriate amount of follow-up to keep all accountable for their part in the plan. |
Result
A well run relay race with a successful passing of the baton often results in a blue ribbon for first place. With proper planning, owners of family owned business can beat the odds and successfully transfer their family-owned business to successors.
Business Valuations:
Right up front, you need to understand that a valuation of a closely held business is not an exact science. However, using appropriate valuation approaches, good business sense, and informed judgment our valuation team will be able to determine a reasonable value for your closely held business. Our valuations may be performed at various levels of sophistication to meet your valuation needs.
Why pursue a business valuation? That is a very good question and can be answered by reviewing the following:
| Gifting or Estate Reasons:
Often a business owner will gift shares or ownership units to other family members, employees, etc. The owner needs a valuation of the stock or units transferred to complete a gift tax return. In other cases, upon the death of the business owner, a valuation may be required to substantiate the value of the business on the estate tax return. Even if a decedent’s estate is under the amount required for an estate tax filing, a valuation may be necessary to substantiate the tax basis of the business for the heirs. Income Tax Reasons:
A valuation may be required to determine the value of stock or business units transferred to an employee as part of a compensation package. If a business owner transferred stock or business units to a charitable organization, a valuation may be required to support the amount of the charitable deduction. Buy Sell Agreements And/Or Insurance Funding:
If a business is owned by more than one person often a buy sell agreement is in place to provide for a smooth transfer of the business upon the death, disability, or voluntary termination of one of the owners. A valuation may be required to establish the value of the business to complete the transfer as directed by the buy sell agreement. In addition, valuations are often necessary to assist in determining the amount of funding required for the buy sell agreement. Financing Arrangements:
A valuation may be a valuable part of financing your business and operating needs. Including a valuation report along with financial, tax, and projections should provide a complete package to greatly improve your chances for a beneficial financing arrangement. Marital Dissolution:
Valuations of closely held businesses are often required in the event of a marital dissolution to determine a fair and equitable division of the marital assets. |
How do you proceed with a valuation? Depending on the level of sophistication needed in the valuation project, our approach to valuing a closely held business will include part or all of the following stages:
| Preliminary Stage: | • Evaluate whether to accept the engagement
• Develop a work plan with estimated fees
• Prepare an engagement letter | |
| Data Gathering and Analysis Stage | • Site visit and interviews
• Obtain company and industry background information
• Obtain financial and economic data related to the company and its industry
• Perform analysis of company data | |
| Valuation Method Stage | • Select several valuation methods most appropriate for the company and ownership interests being valued
• Perform procedures as necessary to apply valuation methods selected and document results
| • Market approach (comparable companies)
• Discounted net cash flow
• Capitalization of net cash flow
• Net asset value method |
• Determine final value after comparing the results of various valuation methods and apply sanity checks and consideration of appropriate discounts | |
| Report Preparation Stage | • Prepare draft of valuation report and review with client
• Prepare and issue final report | |
How much does a valuation cost? We will be happy to meet with you for a one hour conference, at no cost, to discuss your valuation needs and provide a range of expected costs to complete a valuation. The actual cost will depend on the level of sophistication required and the specific attributes of your valuation situation. If necessary or desired, a fixed bid will be available after the initial review.
Business Expansion/Business Purchase or Sale:
Are you contemplating expanding, purchasing or selling a business? We can help maximize the benefits. Involving us early will pay big dividends since we can assist in structuring the deal to your best advantage. Contact us for prompt and competent assistance with any expansion, purchase or selling decision.
Business Expansion/Business Purchase or Sale:
Are you contemplating expanding, purchasing or selling a business? We can help maximize the benefits. Involving us early will pay big dividends since we can assist in structuring the deal to your best advantage. Contact us for prompt and competent assistance with any expansion, purchase or selling decision.
Business Checkups: Often we spend time and money to get a physical from our doctor. Many times these exams are not prompted because we don’t feel well but because we care about our long-term health. This same approach is valid for your business. Pursuing a business checkup may identify inefficiencies, weakness and financial difficulties not readily apparent to you, the business owner. A business checkup will enhance the long-term health of your business. Contact us for a no charge conference to discuss the benefits of a business checkup for your business.
Entity Selection:
One of the first questions for a person buying or starting a business is what type of entity to select. Making the right choice involves consideration of both tax and non-tax issues. We can provide excellent assistance in making the right selection based on our knowledge of tax and business matters coupled with our knowledge of your specific needs.
Some of the issues to consider include:
| • Tax Savings - Selecting the proper entity can reduce income taxes, self-employment taxes, payroll taxes, estate taxes, etc.
• Ownership Changes - The type of entity selected can have a significant effect on the ease of transferring ownership to others by gift, sale, bonuses, etc.
• Liability Protection - If liability protection is an issue, the exposure can be minimized or eliminated through proper entity selection.
• Capital Structure - How the business is to be capitalized and who is to have control may also be significantly effected by the type of entity selected. |
Contact our office to discuss which entity will be the best fit to meet your objectives.
Lease/Buy Decisions:
Are you considering leasing or buying a vehicle, piece of equipment, building, etc.? Let us assist you in determining the appropriate option for you. We can custom fit our analysis to meet your need to know. By using present value analysis techniques and having a good knowledge of your situation will enable us to recommend which option is best for you. Contact us for prompt and competent assistance with any lease/buy decisions.
Personal Estate Planning:
Estate planning can assure your family of financial security after your death. It can cut taxes and administrative costs, and it allows you to dispose of your estate as you see fit. Answer the questions below to see if you need estate planning.
| • Do you have minor children?
• Do you have a child with a special need; i.e., with a handicap, serious illness or other problem?
• Would your family struggle financially if you died?
• Has it been more than five years since you reviewed your will?
• Have you moved from one state to another since your will was drawn?
• Has the total value of your assets changed substantially since your will was drawn?
• Have you and another person put any property in your names jointly, with right of survivorship? |
A YES answer to any of these questions could be a danger signal! There are new wills and family financial planning options which should be considered. Even the best of financial plans is subject to obsolescence and needs periodic revision to accommodate changing circumstances. Remember, all financial planning- including that for estates- is a process, not a single event. Contact our office to discuss your estate plan needs.
Retirement Planning:
Our retirement planning services are structured to help you answer the tough questions related to retirement. These questions often include:
| • When should I retire?
• What benefits can I expect from Social Security or my retirement plans?
• How much do I need to set aside and when should I start?
• What can I expect to pay for living expenses after I retire?
• What type of investments will be best to prepare me for retirement? |
Our approach to retirement planning will include part or all of the following:
| Preliminary Stage
• Define financial goals for retirement
• Determine amount of assets the client already has Analysis Stage
• Determine how much income is needed to maintain the desired standard of living
• Determine what sources of income the client has already
• Determine the effects of inflation
• How much must be acquired to fill the gap between what is needed and what the client already has Action Stage
• Set up specific action steps to assist the client in reaching the retirement goals
• Assist you in determining the types of investments and an appropriate investment advisor to maximize your return on amounts set aside for retirement purposes.
• Action steps to assist you in minimizing the tax impact before and after your retirement Review Stage
• Periodically review the retirement plan and make necessary adjustments to meet the changes in your goals and needs.
• Summarize specific action steps to make the necessary changes in the retirement plan. |
The urgency and priority in a retirement plan will vary depending on your age and the amount of assets needed at retirement. By starting early, you will greatly enhance your success in meeting your retirement goals.