By Bruce Juhola / Rimrock Partners
A universal ownership objective is to secure an income stream that you (the owner) and your family will need to support your future lifestyle.
Knowing the value of the business is critical if you are to undertake the planning necessary to successfully exit the business. Why?
-- The business is usually the owner’s most valuable asset. Frequently, the business comprises between 65 and 90 percent of an owner’s assets. Financial security depends on converting that asset to cash.
-- An owner and his/her advisors need to know the current value of the business to determine if the owner’s financial objective can be met at present through a conversion of value to cash; or, as is more likely, how much the business value must grow in order to reach the owner’s retirement objectives
Who can help?
The need for an accurate and thorough valuation is evident. To accomplish this, you should retain (if you haven’t already) a valuation specialist to give you and your advisors a good idea of what your company is worth. Any Exit Planning Process should be owner-based, meaning that its foundation should be structured to meet your goals – one of which is how much money you want when you leave your business.
Preliminary valuations are also important in designing incentive plans for key employees. Stock Purchase, Stock Bonus and Non-Qualified Deferred Compensation Plans (such as Phantom Stock Plans and Stock Appreciation Rights Plans) are all designed to motivate employees to increase the value of your company. All are based on a valuation of your company. Once you determine current value, these plans can motivate employees to increase that value to the level you require for a successful exit.
If you are considering a transfer to insiders (key employees, co-owners or family members), your advisors will likely recommend that you begin transferring ownership in advance of the transfer of your controlling interest. So that you receive more money (and the IRS less), these initial sales are usually made at a discounted value. Of course, the IRS will carefully review the reasons you reduced its take, thus highlighting, once again, the need for a certified valuation specialist.
An independent valuation is the foundation for future planning.. Of course, an independent valuation costs money - typically between $4,000 to $10,000. In Exit Planning, valuation occurs in two phases: the preliminary valuation and the complete valuation. The preliminary valuation:
· Consumes about 60 percent of the total valuation fee;
· Is the basis for the complete valuation but
· Lacks the supporting information contained in a written opinion of value.
You should also consider the dangers of failing to get an accurate valuation of your business. Imagine that, after spending many months and thousands of dollars on planning your exit, then discovering that your company’s value does not support your exit - either on your timetable or for the amount of cash you wanted. Alternatively, you could find that all the months, even years, of working toward your departure were simply unnecessary in light of the lately-discovered value of your company.
Would you put your home on the market without knowing its value? Your business is likely far more valuable and the conversion of that value into cash is far more important to your financial future. For all these reasons, determining a reliable value is essential before planning your exit can truly begin.
This column appears regularly in Cascade Business News.
To reach Bruce Juhola, please contact us.
