The Ship Is Set to Sail - Are You On It?
by Mark Gould
This is where the rubber meets the road or when the ship pulls out of port.
Most business owners rely on a number of different advisors to chart the course to their ultimate destination, a prosperous retirement. Although steering clear of dangerous storms may not always be smooth sailing, there is help. One key tool for an accurate strategic route is to have a true indication of your business value.
Problem: As the business valuation process is an art and not a science, the pre-set formulas used can often be off by a factor of three to five in some cases. The result is similar when the value is assessed by the business owner, which may be off by as much as 20 percent to 50 percent, as many entrepreneurs are sometimes optimistic.
Because ownership interests in privately held companies often represent a significant portion of one's estate and/or portfolio - the value or worth of an interest in a privately held company, as opposed to stock in a public company, is usually unknown because there is no active market to sell or trade that interest from which to ascertain or approximate value.
Common Consequences:
1. Disappointed business owner, when he thinks he can retire based on his retirement plan but finds out he needs to work five more years to get the results he had hoped for.
2. Disappointed business owner, who could have changed the outcome if he had made some small changes years earlier.
3. An inaccurate value determination, regardless of whether it is high or low, generally leads to undesirable consequences for a seller.
Solution: A professional business valuation provides an objective, real world assessment, gives investment advisors and business owners peace of mind, and provides a solid base value on which to build your future.
Additionally, it often results in the business owner’s largest asset being enhanced, giving the business owner a higher probability of the desired outcome as well as a potentially increased portfolio.
Other sharks in the sea: Another factor that can affect the outcome of the retirement plans is improper tax assessments. Improper tax assessments in the planning stages could result in a 10% to 30% decrease in net proceeds, thus dramatically affecting the desired life style of the business owner. The best time to plan for the sale of a business is when retirement or the need to sell is not looming. The type of legal structure the business is currently operating as could result in up to 60 percent in tax consequences as we have witnessed, for example in C corporations without proper pre-sale planning.
These sharks are usually easily identified early on in the planning stages and when dealt with properly may not necessarily increase your business value, but will enhance the net outcome and increase the probability of your retirement plans.
Other Uses for a Business Valuation
Value determinations are most commonly needed to calculate estate tax upon death, split up family assets in a divorce, and negotiate value in a purchase, sale or merger of a business enterprise. Other common reasons why a holder of an interest in a privately held company might require a business valuation include:
- Adequacy of Life Insurance
- Buy/Sell Agreement
- Bankruptcy and Foreclosures
- Charitable Contributions
- Disruption of a Business
- Dissenting Shareholder Actions
- Eminent Domain
- Employee Stock Ownership Plans (ESOPs)
- Franchise Valuation or Evaluation
- Gifting Programs
- Gift Taxes
- Incentive Stock Option Programs
- Initial Public Offerings (IPOs)
- Liquidation or Reorganization
- Obtaining Financing
- Partner Disputes
- Split-ups/Spin-offs
- Succession Planning
A periodic business valuation also serves as a measurement tool to help owners assess overall success and management effectiveness. It is usually recommended that a valuation of a business enterprise be performed every two years for management purposes, if for no other reason.
Remember it is better to be on the conservative side of the business valuation equation when it come to projecting future valuation expectations, as inputting the wrong data could cost you years off your retirement.
Mark Gould is a VERCOR principal and co-founder, Certified Business Intermediary (CBI), Mergers & Acquisitions Master Intermediary (M&AMI), and Certified Business Opportunity Appraiser (CBOA). Mark is also a co-author of “The Business Sale … An Owner's Most Perilous Expedition.” He can be reached at mgould@vercoradvisor.com.
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