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How Can A Valuation Expert Help During Succession Planning?

Many business owners' goal is to create a successful business, build up the company's value and eventually sell when they feel the time is right for them. When it comes to being prepared for succession, many are unsure which option to choose: sell the business or transfer to a family member or key employee(s).

If you're a business owner and don't have a succession plan in-place, take a look at these eGuides for valuable information to help with your planning process:

Exit Paths for Business Owners

Successful Transfer of Family Business

Transferring Your Company to Key Employees

Advantages and Challenges of a Third-Party Sale 

 

The succession of a business has many moving parts. Business interests will be allocated, the company's value determined, and many complex tax issues to be solved. As you are putting together your succession plan, it is vital to include your financial and legal advisors and a qualified valuation professional.

EGUIDE: Company Valuations - Understanding Valuation Methods

Value Factors to Consider During Succession Planning

A valuation expert can help provide numbers for different factors that affect your company's value as you're drafting a succession plan.

EGUIDE: Using Value Drivers to Increase Business Value

Just a few examples include:

Cash Flow Projections

The value will be determined by future earnings when using both the market and income valuation approaches. A business's expected cash flow will be affected by increasing and decreasing demand and price fluctuation. Adjustments may need to be made to historical financial statements to accommodate future expectations.

Factoring in Risk

With the income approach, higher discount rates can result in greater risk, which also translates to lower pricing multiples when using the market approach. These scenarios will result in lower (or higher) values. The transaction date is an essential factor for valuators when selecting comparables.

EGUIDE: Reducing Risk: Business Acquisition Advisory

Future Revenue Growth

If you expect to have an increase in revenue growth, this will contribute to your company's value. The relationship is high between revenue and earnings (and cash flow) growth.

Factors Used to Determine Valuation Discounts

Valuation discounts will be applied to a company's value in many cases. For example, higher marketability discounts can result from decreased liquidity, while an increase in liquidity can reduce discounts.

Here are more factors that can affect the significance of valuation discounts:

  • Different types of assets held by the company
  • Financial performance of underlying assets
  • Diversification of the portfolio
  • Leverage
  • Rights and restrictions of owners
  • Distribution history
  • Personalities and characteristics of general partners and managing members

There can be a varying degree of significance regarding valuation discounts. They can amount to 40% (or more) of the entity's net asset value, with the discount amount varying based on the succession's specific situations.

How to Ensure a Successful Exit from Your Business

To ensure a timely and seamless process and results that will be beneficial to all parties during your business succession, utilize a valuation expert from SVA or contact us for more information.

© 2021 SVA Certified Public Accountants

BIZ TIP TOPIC EXPERT: DANIEL GLOMSKI, CPA, ABV, CVA, MST

DANIEL GLOMSKI, CPA, ABV, CVA, MST

Dan is a Principal with SVA Certified Public Accountants, S.C. and a member of the Business Advisory Services group. Dan helps clients understand financial information to improve their company’s profitability and protect their interests. He does this by taking the time to understand the client, external influences and personal objectives of the owners. He works closely and proactively with the clients, emphasizing customer service and being available for his clients. This approach results in supporting clients with timely information and strategies to move them and their businesses forward to help them reach continued success.

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