Using A Valuation Specialist
In The Sale
Or Transfer Of Your Business
In order to leave your business successfully, you must not only know what you want (when you want to leave, how much money you will need and who you want to sell to)
you must know how much your business is worth. For example, if you told your
advisors all about your objectives, but you couldn't tell them with any certainty what your
company was worth, how could they help you reach your destination? It would be
similar requesting a map but not knowing if you planned to take a plane, a boat, a car or
walk to the destination.
Knowing the value of your business is critical no matter who you plan to sell or transfer
to. The primary three exit paths are:
- Transfer your company to a family member
- Sell the business to one or more key employees or co-owner(s)
- Sell to an outside third party
Third Party Sale
Let's look first at sales to third parties. If you plan to sell to an outside third party, you
will need an accurate valuation to determine if, after the business is sold and taxes are
paid, you will have enough money to achieve financial independence. A valuation
performed in advance will help you decide whether to begin the time-intensive and
expensive sale process.
You will also need a business valuation based in reality; rather than on rules of thumb,
or what your neighbor sold his business for or any of the other many sources of
misinformation. Without a realistic, objective business valuation, how can you make a
Retaining a certified valuation specialist to perform this valuation gives you an unbiased
valuation. These specialists do not try to sell you a "bill of goods" only to encourage you
to list the business for sale.
If you learn that the business is not valuable enough to achieve your definition of
financial independence, the valuation specialist should be able to point out areas where
the business performance could be improved. Following his or her advice, you can then
work to increase the value of the company.
If you plan to sell the business to an "insider" (a child, employee or co-owner), a
valuation provides all parties with a sense of the true fair market value of the business.
Based on the valuation, your advisors can create a plan to provide you with the full
value while describing the most tax-advantaged method of how the insider and business
can use the cash flow to pay for the business.
Often, to facilitate these sales, minority discounts or marketability discounts are
used to place the largest possible amount of total after-tax cash in the departing
owner's hands. If discounts are used, they must be substantiated by a certified
Transfer to Child
If you plan to give even part of the business to children, be aware that the IRS
wants to know what valuation method was used. It is concerned that the gift may be
undervalued. Therefore, a valuation specialist should substantiate these gifts in
anticipation of an IRS inquiry.
In short, in all but the very simplest and low value scenarios, successful Exit
Planning requires a valuation that can be relied upon by you, your advisors, and
often, the buyers.
Subsequent issues of The Exit Planning Navigator® discuss all aspects of Exit