Family Business Valuation and Succession Planning: Understanding Key Triggers and Timing
Family businesses are not just about the present; they are about securing a legacy for the future. To achieve this, family business owners must navigate the intricate process of succession planning while also assessing the strategic growth and overall value of their businesses. In this article, we will explore the critical aspects of family business succession planning and valuation, including key triggers for valuations and the importance of timing.
Key Triggers for Valuations:
Valuations are not a one-time affair; they are often prompted by specific events or circumstances within a family business. Recognizing these triggers is essential for proactive planning and ensuring the business’s long-term success.
Estate Planning and Wealth Transfer:
One of the most common triggers for valuations in family businesses is estate planning and wealth transfer. When considering passing on assets or ownership to the next generation, a valuation helps set the value and protect the integrity of these transactions.
Principal Shareholder’s Passing:
Unfortunately, the death of a principal shareholder can also trigger the need for a valuation. This is often done in conjunction with tax filings to comply with Form 706 requirements.
Seller Agreements and Governance Documents:
Compliance and governance documents, such as seller agreements, play a crucial role in outlining how the business will be conducted between owners or parties within the dealership. When conflicts or triggering events arise, these documents may necessitate valuations.
Strategic planning valuations are instrumental in assessing the current value of the dealership and determining the path for future growth. They help dealers understand where their business stands today and where they want to go in the future.
With the automotive industry seeing a surge in potential sales, dealers contemplating selling their businesses often seek valuations to gauge the value of their assets accurately.
Unfortunately, litigation is a reality in the business world. Valuations become necessary in cases of family law disputes, commercial litigation between vendors and manufacturers, and disputes arising from buy-sell agreements.
Timing Matters in Succession Planning:
Timing of valuations is crucial in family business succession planning, and there are two primary categories to consider:
These are situations where it’s evident that a valuation is needed, such as the death, disability, or divorce of a partner or family member. In such cases, prompt valuation is crucial.
This involves assessing where the business stands, developing benchmarks, and building equity for key managers and potential partners. It’s also essential when considering the transition of wealth within and outside the business, as well as determining the value of the business in various succession scenarios.
In conclusion, family business owners must recognize that valuations are not isolated events but integral to the overall succession planning process. Understanding the triggers that prompt valuations and the timing associated with different aspects of strategic planning is essential for ensuring the long-term success and sustainability of the family business. It’s not just about knowing what your business is worth; it’s about preparing for the future and securing your family’s legacy.
For more insights, check out the video below from Scott Womack of Mercer Capital, and Dan Iosue from The Rawls Group.
Mercer Capital: Mercer Capital is an employee-owned business valuation and financial advisory firm founded in 1982, serving a diverse and international client base. For more information on Mercer Capital’s valuation services, contact Scott Womack.
Succession Readiness Survey: A 7-minute investment in time will put you in an informed position of opportunities many business owners overlook, impacting business value, growth, and lifestyle and ultimately achieving your vision.
Contact a Succession Planner: The Rawls Group can help you with insights and other resources and see if it makes sense to work together. At the very least, in 30 minutes, you may get some ideas to apply to your business immediately.
The Succession Planning Matrix
Many people put off succession planning because they think it means retirement, exit, and the end. However; succession planning is just the beginning. It gives the owner options in terms of what “their next” looks like, whether that be growth, philanthropy, or a new business venture. Our process focuses are addressing 10 key areas of what we call the Succession Matrix.