Business Valuation and Business Succession Planning Lead to Better Business Brokerage Results

Your client (or you, if you are a business owner) should obtain a business valuation as part of a proper succession planning process.  The business valuation combined with succession planning should result in a higher valuation and better business brokerage results.  The business valuation prepared with the purpose of business value improvement should provide keys to improving operating results and reducing transfer risk both of which increase eventual profits from a business sale.

Operating results are the result of quality systems and people working to continuously and forever improve products, service and profitability.   Business buyers want “working models”.  They want to be able to come in and run the business the way you do and then after a period of time begin to change and grow it.  Business buyer’s generally do not pay (or they do not pay much) for future growth.  Therefore if your owner client wants to get paid for potential then they should develop it now.  The business valuation combined with your succession planning will provide a road map for that opportunity.

Want to know more?  Please click here for the downloadable e-book. “7 Things You Must Know Before You Order a Business Valuation” 

Client Results from Succession Planning – Preparing for the sale:

  • More money, higher price and higher values.  A working model with quality products and services, long term customers, and decision makers other than the owner will greatly increase sale-ability and price.  It also ensures a higher likelihood of a successful transition if you want your children to take over.
  • Obtain tax savings.  In many cases business assets and perhaps even corporate or partnership form can be changed to improve after tax results of the transaction.  For larger businesses advanced gifting may also be worthwhile.
  • Deal structures that excite buyers.
    Buyers have tax and liability concerns.  Like tax savings sometimes advance preparation allows you go give sellers what they want increasing your price significantly for a small cost.
  • Resolve family and management issues.
    Growth and opportunity often create better teams.  If you intend to convey to family or management you must deal with and reasonably resolve these matters before the transaction.
  • Create additional buyers.  If a market sale is desired (or even an internal sale) finding out what buyers want and moving towards that if feasible will increase your buyer pool and increase buyer motivation.
  • Realistically timing market.
    Perfect timing is hard but our economy operates in 7 to 11 year cycles.  When we get to the top of one, unless you want to stay involved for 7 to 11 more years do not wait.  Have discipline and sell when the time is right.
  • Create new excitement in your business.
    Taking actions to really build the business will generate enthusiasm.   Enthusiasm is contagious and spurs performance and devotion.  This makes your business more fun to operate now and more valuable in the future.

Connect with Harvest Business Advisors today – email info@harvestbusinessadvisors.com or call 443.334.8000

 


Clients choose Harvest Business Advisors for our accurate business valuations and our consistent ability to deliver a high price as part of a smooth exit transaction.
Harvest Business Advisors provides business brokerage, business valuation, and business succession planning services. We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland, New Jersey and Virginia. Connect with us at info@harvestbusiness.com or 443.334.8000 to discuss selling your business, ordering a business valuation or buying a business.

Fair Market Value, Fair Value, and Discounts for Business Owners when Planning or Selling a Business

In our previous post I talked about Strategic Value as a standard of value when business owners are valuing their business.  Instances where you need to know the value of your business include planning to sell or transition their business through business brokerage or a sale transfer to managers or family.

Want to know more?  Please click here for the downloadable e-book. “7 Things You Must Know Before You Order a Business Valuation” 

Fair Market Value. This value is the value a typical buyer who will not derive strategic efficiencies will pay for your business. Typically these buyers are called Financial Buyers. They are looking for what I call “working models”. Almost like a franchise they want to step into your “business model” and run it. This is the value of the business to a control owner that can make changes as desired. This value typically used for buy-sell agreements and transactions involving closely held and family business interests.  In many jurisdictions a version of this can be called Fair Value which again, is generally fair market value without discounts even when the interest is a minority interest.  This is also the value generally used on SBA loans during SBA business valuations.

Fair Market Value with Discounts.  This is the value of a minority interest in the business. The owner of this interest is either a minority owner (under 50%) or has agreed to restrictions on company control. Therefore this owner has little control over continued employment at the company (if they are an employee), distribution of profits, company policy or planning etc. Namely they are along for the ride. Because of the lack of control these interests are valued below fair market value. This is primarily used in estate and gift tax planning to lower the give or estate value. Many exiled family members from family businesses will also tell you that the lower value is very real when family harmony breaks down.

Finally, business value can be more or less than the price negotiated between parties.  Price is subject to the actual market, how well the company is positioned by its brokers, the players in the market, and other variables that cannot be fully taken into account when determining value.

Conclusion. If a business has a fair market value of $1,000,000 with 100 shares of stock issued the 100 shares to a strategic control buyer might be $1,200,000 or more. The value of 1 share to a non-control buyer (fair market buyer with discounts) might be $700 not the $1,000 fair market value. It is important to know why your business is being valued and to specify the correct level of value be used.

Gregory R. Caruso
Harvest Business Advisors
Business Brokerage, Business Valuation and Appraisal
gcaruso@harvestbusiness.com
609-664-7955