Business Valuation Is a Critical Step in the Transition Process

Crystal Faulkner & Tom Cooney, Partners with MCM CPAs & Advisors
April 2017

The value of your company is something that should always be on your radar, but it should be even more front of mind as you approach retirement or an exit. Building value can come in many different forms, with the most obvious being building value with the goal of becoming more profitable.  Some build value with an eye on growth, while still others want to use systems that build value to become more organized. These are all great motivators, but in exit planning, you often want to take a longer view that will prepare business owners to exit their companies when they choose and for the amount they need or desire to enjoy the next phase of their lives comfortably.

Building value is one of the most important parts of any exit planning strategy. When we discuss building value in the context of exit planning, we usually encourage business owners and stakeholders to do the following:

Evaluate current value

In exit planning, because the company’s current value is so critical to the work that follows, guesses and assumptions are grossly inadequate. Business valuation experts must be consulted to establish some sort of benchmark for the company’s current worth in order to move forward with the process.

Establish future goals and objectives

Exit plans are designed to quantify the amount an owner will need to support their preferred, post-exit lifestyle, and then establish the milestones needed to reach that goal. Usually, the owner will work with a financial planning or accounting professional to establish working assumptions, like life expectancy, future value of other assets and rates of return on active investments. Owners also must ask and answer hard questions about what they want their post-exit life to look like from a spending standpoint. A workable plan must start with an accurate and realistic idea of where it is meant to lead.

Determine the tactics

Once the gap between current and desired business value is established, owners and their consultants can decide what needs to be achieved to reach the end goal, and what needs to be accomplished and when with an exit date in mind. A time frame is a must—it will keep owners accountable to intermediate milestones and keep the plan on track.

By using gap analysis as the foundation for exit planning, owners can identify and implement specific tactics. There are many options, and an exit planning professional can walk you through many of them, but the most important are those that will prepare the business to operate in the absence of the owner. These include the installation or training of a highly skilled management team that is just as passionate for the company as its owner(s), the use of current financial information to track and alter company performance, and the implementation of sustainable, forward-thinking systems and processes that will keep your company ahead of the curve.

Consider transfer options

Any good exit planning strategy is going to consider tax implications. Owners want to use every legal tactic they can to minimize taxes while they earn money, grow value and transfer that value. Owners should use knowledgeable advisors long before the eventual transfer of their companies in a way that limits the tax burden (as far as it is possible) for both the seller and the buyer.

If you’d like more information about increasing the value of your business in the context of planning your exit, please consult with a tax or exit planning professional.