Banking & Finance, Human Resources, and Small Business & Startups

Evaluating the true value of your family business

September 28, 2017
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As a business owner, it’s essential to get an early start on understanding the true value of your business. This is especially true when it comes to family businesses, which often are the life and livelihood of many family members.

Eighty-eight percent of family business owners believe the business will continue within family control in the next five years, but statistics show that only 30 percent of family businesses survive into the second generation, and only 12 percent are viable into the third generation.

Succession planning is complex and involves a team, including family members, key leaders and professional advisors. It is never too early to prepare and strategically position your business, employees and family for these future changes.

To properly evaluate a business, there are many components to consider, including the timing, the buy-sell and operating agreements, leadership skillsets and many other important aspects. Owner participation with a team of advisors and experts creates a comprehensive evaluation of the business to develop plans for implementation and metrics to evaluate the process.

Determining the current value of your business is often the first step in succession planning and is dependent on several factors, including: the strength and experience of your management team, existing legal structure and protections, efficient facilities and modern equipment, the industry segment, the history of financial performance, customer connections and the ease of access to new markets.

Establishing value in succession planning also avoids the five Ds that affect half of all business transitions: disagreement, death, divorce, disability and distress.

One of the common issues is disagreement. Disputes between buyer and seller or family members can stop a transition in its tracks. In a family transition with multiple siblings or other relatives, those who plan to buy or to inherit the business often have varying opinions or ideas on value and how to determine the long-term cash flow or future strategy.

A professional and objective valuation provides an outside context and perspective, as well as independent documentation and explanation of market or discounted value. This helps to bring all family members to an agreement.

Transition planning specialists are experienced in working with many kinds of dynamics and collaborate with existing advisors and specialists with transition experience. An early and strong plan ensures desired outcomes when the time arrives to transition your business.

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