BUSINESS SUCCESSION AND VALUATION CONSIDERATIONS FOR PRIVATE COMPANIES

(Note: This article, authored by Greg, was originally published in Toowoomba Director of Australian Institute of Company Directors, Aug-Oct 2011 issue and is reposted here in pursuit or more enlightenment on business succession for private companies.) The global financial crisis has significantly affected the value of investments and without adequate business succession planning, the sale of your business may not be a straightforward undertaking.

Succession planning involves putting in place a strategic plan for your business which allows you to outline your business goals and objectives for the future. This year, the first baby boomer turned 66 which imply that this is a potential issue for many business owners in the next five to ten years. Everyday issues often preoccupy business owners and demand much of their attention. In the long run this can result in a considerable decrease in the business value due to a heavy reliance of the business on its owner or an unplanned sale, for example, for health reasons.

 

Business owners need to ensure they take the maximum value from their business when they sell, to provide for either their retirement or the necessary funds to move on to other enterprises. For this reason, a better understanding of business valuation is required. This involves several considerations including how the company might be valued, what is required to put it into saleable condition and how it can be restructured to defer or lessen the costs arising from the sale of the business, for example, tax considerations. A professional valuation helps the buyer and the seller establish a selling price to be used as a basis for purchase negotiations, thereby increasing the chances of a successful outcome for both parties. There are several factors that need to be considered to help increase business value:

HOW ATTRACTIVE IS THE BUSINESS TO BUYERS/INVESTORS?

Look at what buyers want. The attractiveness of the business – how appealing is it to investors and buyers? Sustainable earnings, good management team, accurate and up to date financial records and appropriate legal documentation are essential to ensure a smooth, hassle-free transition during the sale process.

ENHANCE THE BUSINESS’ GROWTH POTENTIAL.

The likelihood that a buyer or investor will purchase a business is strongly influenced by its growth potential. Not only do they look into the businesses past earnings, but they will also be interested in the future earnings of the business. For this reason, business stability is an integral component of the business valuation.

REDUCING RISKS.

The lower the risk in purchasing the business, the higher the business valuation. A business that is totally reliant on the owner or has high long-term liabilities may result in a lower valuation.

INCREASE VALUE BY CAPITAL MANAGEMENT.

Better working capital management results in an increase in value for shareholders. Accounting for the business receivables, inventory, and other surplus assets helps in minimizing the interest bearing debt level, resulting in an increased share value.

While the process is complicated and the outcome is not always certain, it is always advisable to have a current business valuation and succession plan in order to optimize your business worth. Even though you may not be planning to sell in the short term, it is a good exercise to go through if you are considering selling your business in the future.

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