Friday, February 24, 2012

BV Benefit #1 - Exit or Succession Planning

The first benefit of having a professional business valuation is its use in exit or succession planning.

Privately held companies are considered pre-liquid assets because they will eventually be sold or liquidated in some manner.[1]  All privately held business owners will one day exit their business.   The exit will occur voluntarily (at a time of the business owner’s choosing) or it will be involuntary (due to burnout, illness, disability, marital problems or death).   An exit plan is needed to ensure a voluntary exit.   A contingency plan is needed to be prepared for an involuntary exit.   Either way - a plan is needed.

It is estimated that somewhere between 60% and 75% of business owners will exit their businesses within the coming decade.[2]   The largest transfer of private wealth in history will occur over this time frame.   Some estimates have this transfer at approximately $10 trillion in the U.S. and $1.3 trillion in Canada.[3]

Faced with this reality, the importance of having an exit plan, including a business valuation, becomes quite clear.

A professional business valuation is one of the cornerstones of the exit planning process. Without a business valuation, a business owner cannot effectively plan for retirement, conduct comprehensive tax planning, formulate an effective estate plan, measure the impact of value enhancement initiatives or understand the full extent of the exit options. A business valuation impacts virtually every component of the exit planning process.[4]

An exit plan identifies: (a) the business owner’s current situation (including the current value of the business); (b) where the business owner wants to be in the future (i.e. 3 or 5 years); and (c) precisely how the business owner will get there (i.e. what strategies will be employed to overcome the obstacles that could prevent the owner from accomplishing his/her goals).

With this in mind, the main components of an exit plan include:
  1. Goals assessment
  2. Financial needs assessment
  3. Business valuation
  4. Exit option analysis
  5. Net proceeds analysis
  6. Action plan 
Preparing the business owner and the business for a smooth transition takes time.   There are no quick fixes. The planning process must begin at least three to five years before the intended exit.

The increasing supply of businesses for sale over the coming decade will create a buyer’s market and buyers will only pay top dollar for the most attractive businesses.   Without a proper exit plan, including a business valuation, business owners may find themselves selling their businesses at a significant discount to those that come to market prepared.

Having a business valuation prepared by a professional valuator provides an independent perspective of the value of one's business from the perspective of a potential purchaser.  Use in exit or succession planning is one of the many benefits of a business valuation.  Stay tuned for further discussions on the many other uses of a business valuation.

1.   Source:  The One Percent Solution, Z. Christopher Mercer, 2007.
2.   Source:  Surveys by the CFIB and the CICA/RBC Business Monitor.
3.   Source:  The $10 Trillion Opportunity, Richard Jackim & Perry Phillips, 2007.
4.   Source:  The $10 Trillion Opportunity.

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