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:
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.
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.
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.
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
- 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.
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