Efforts today will pay off tomorrow.
Business owners regardless of their age have a responsibility to put in writing their wishes for business succession in the event they are unavailable to manage or wish to transfer their ownership of the business.
A starting point is to prepare a well-thought-out job description. What are your duties and are they transferrable to your chosen successor? Examples of these duties for many successful business owners are:
* Creating a “Brand” that sends a message to customers, suppliers, employers and the business community that says “We are the preferred business.”
* Creating a clear organization chart that clarifies duties and responsibilities for all employees including a career path for everyone in the organization.
* Creating a business plan that allows the organization to have a “vision” of tomorrow, including product development, marketing, finance and matching hiring practices with tomorrow's needs.
* Creating a current, futuristic, and cyber secure information technology system.
In most cases a business is valued based on its ability to make profits and the related cash flow. A few of the factors influencing the value are:
* Brand: Is it strong? Does your logo create a promise?
* Future: Are your products/services what consumers will need in the future?
* Organizational strengths and weaknesses: Strong organizational strength equals added value.
* Personal/business goodwill: Is your business organization a company brand or really just you?
Obviously you want your business to be more than just you. If you want greater value, visit with a professional business evaluator to get guidance. In discussing how to value a closely held successful business, I asked Jill Jones, CPA, CVA (Certified Valuation Analyst, partner, McMahon & Associates CPAs PC) to provide her thoughts on how to utilize a cash flow method. Jones says there are many reasons why a business value may need to be determined, including:
* Estate valuation in the case of the death of an owner
* Gifting of ownership in a business
* Valuation in the case of divorce
* Proactively establishing value for a Buy/Sell Agreement in a business venture
* Buying or selling a business in the open market
Business value can and often will differ depending on the purpose for the valuation. Business value is more than what appears on a balance sheet. A business is typically worth the fair market value of its hard assets (cash, receivables, real estate, and equipment less liabilities) plus a value for goodwill (if any). Goodwill measures the intangible value of the business as a profit making entity. It is meant to capture the value of the work force in place, reputation of the business, customer list, etc.
Buy/Sell Agreements are crucial to proactive planning in a business venture. Simplistic definitions of values such as “book value” will likely not capture fair value. Selecting an appropriate valuation formula that can be easily updated will lead to less confusion when it comes time to exercise the agreement.
Finally, think about what you want to do by answering some key questions:
* Business succession can be very personal, i.e., you worked hard to create the “Brand”–will your successor carry on?
* Can you let others run the show?
* Can an inside buyer (family, top employees) afford the price? What terms will you provide?
* What are the tax consequences of a sale/gift?
A business owner has a responsibility to have a succession plan covering death, disability, or just time to sell. By providing this futuristic business plan, it will enable the business owner to be a better business person today as well as create a path for tomorrow.
Terry W. McMahon, CPA, is president and CEO of McMahon & Associates CPAs PC in Munster. He founded the firm in 1972 and has 25 team members.
