There are a number of reasons why it's important for a business owner to obtain an independent valuation opinion when formulating a succession plan.
An owner manager’s investment in their business often makes up a significant amount of their total wealth. And yet depending on what survey you read, between 70% and 90% of business owners don’t have an exit strategy or succession plan in place.
A key part of any plan must be to work out the level of compensation the business owner aspires to obtain from their company when exiting and to sanity check that against its current value.
Thus, it makes sense to get an independent view on the value of company. Sadly, the outcome of that often comes as a surprise and a disappointment to business owners who may have over-valued their company.
Getting a decent insight into the valuation of your company is important for several reasons:
When planning retirement or life after business
Whether you’re planning to retire or exit the business to do something else with your life, having an up-to-date insight into its worth can help you to prepare for a sale. Or alternatively to prepare for a succession of ownership through a management buyout (MBO) or sale to an Employee Ownership Trust (EOT).
Whichever route you chose you need to know if the transaction can give you the resources you require after you’ve paid tax and any transaction costs. If the answer is no, then the logical consequence is to revisit your strategy, asking the questions “is my target valuation very likely?” and if so “what do I need to do to the business to make it happen?”.
At this point, a key question to ask is how long it will take to transform the business - especially in the context of a retirement plan.
Improving the business, increasing its value
Not only does a valuation tell you what your business is worth, but a good valuer can shine a light on where the value is coming from and what factors and risks will influence it. This is key to working out your plan to increase business value before you exit.
Good exit planning will consider the M&A market for the type of business under scrutiny, key value drivers and how potential investors or buyers might view it. It’s well worth valuing your business regularly to assess progress.
Keeping it in the family
There are particular considerations when it comes to family businesses. Our research has found that more than half of family business owners aspired to transfer to the next generation, and that about half of those who expected to retire in the next five years didn’t have a nominated successor.
It’s critically important to work out who the successor might be, and whether there are candidates within the family. If not, and you want to preserve the culture and family feel of the business, then an MBO may be the best route. This could also involve family members who may be working in the company but not having the skills or appetite to lead it. A valuation lets you see how much funding and of what type might be needed for an MBO.
And alongside that, the valuation can act as a catalyst for the planning not just of the business but also family wealth and plans to transition it between the generations.
A further reason for valuation in this context is fairness and the avoidance of family conflict. It may be that one family member needs to succeed in the business as they are already a manager in the company or even leading it. And yet wealth might need to be distributed equally amongst siblings.
Putting a value on the company can allow the family to work out what the other siblings are due to achieve parity of value and how that’s to be achieved. If that’s not possible because the business is too big a part of the family wealth, then an adviser can help to structure a shareholding to allow key family management members to have control whilst still leaving a fair slice of value with non-involved family.
Once again, the valuation is a key tool driving the planning process.
Whether a family business or more broadly held, it’s too important an issue to either neglect planning or to try to plan in the dark in the absence of a valuation opinion.
Get in touch with PEM if you would like to discuss your succession plans and valuation requirements.