Small business owners generally work many long hours at growing their businesses, but often they don’t spend the time needed to think about what will happen to the business when they pass away.
A succession plan is a key consideration for any small business owner. In some instances, it’s easiest just to sell the business entirely, but other times there are partners who may want the business to continue operating after the founder is no longer involved.
If it is determined that the business has the potential for long-term viability, an owner should have a succession plan that includes selecting a successor and getting the business appraised.
Selecting a Successor
Sometimes a small business owner will select a family member to assume the leadership role. However, you may not know if that person has the skills or experience to make a go of it and ensure that the business will continue to grow. Your children may not want to continue the family business, or there may be other business partners or key employees who are better suited to take over.
Business Valuation
There are three ways to determine the value of a business: Asset, Income, & Market Approaches.
Asset Approach – the value of a business is determined by examining the stated assets and deducting the liabilities. However, this look focuses mainly on the balance sheet and doesn’t consider important elements such as market conditions or good will.
Income Approach – analyzes business income, requiring a review of past earnings, projecting future earnings and factoring future cash flow and capitalization to arrive at the present or future value of the business.
Market Approach – which is basically a comprehensive analysis of comparable companies that have been sold in the same industry, accounts for differences in the size, duration, and market risk of the business. An objective evaluation of present or future value of a business requires the services of a business valuation expert such as a CPA with business valuation credentials.
Creating and implementing a well-thought-out succession plan helps business owners in several ways. If the value of the business is determined, there should be no need for valuation upon the owners death, and the price for a partner’s share can be agreed upon. A succession plan, along with a comprehensive estate plan, can expedite the settlement of an estate if the owner dies.
A well-designed business succession plan provides the opportunity for a fair and equitable business transition. In order to do this, your team of advisors should include a CPA, a tax advisor, and an experienced estate planning attorney.
For more information on Estate Planning for Small Business Owners please contact Matthew Karr at mkarr@maheritagelawcenter.com or 617.299.6976.
