Tuesday, March 12, 2013

Enhance Value, Manage Wealth, Avoid Costly Legal Disputes

This past week I presented to a group of business owners on the importance of having a professional business valuation.  In addition to many situations where an independent business valuation is required (e.g. estate freeze, shareholder or matrimonial dispute litigation, purchase or sale of business, etc.), a business valuation can also be a very powerful planning tool.
Speaking as a professional business valuator, obviously I am biased.  However, you will find that others agree, as evidenced by the following:  

"It is important to get a professional business valuation, since owners may grossly overestimate or underestimate the value of their business." [1]
"At present, being able to measure the value of the business is a critical aspect of the business succession plan." [2]
"In preparation for the annual update of this blueprint I will arrange for an updated valuation of this business." [3]

All business owners will one day sell or exit their business.  If you want to build a business for a successful transition, you need to start thinking like a potential purchaser.  Getting your business professionally valued can help you think like a potential purchaser.  The top 5 reasons to have your business professionally valued include:
Benefit of Having a Business Valuation

Enhance business value

  • A valuation provides a benchmark from which to measure value enhancement
  • The valuation process helps to identify key value drivers
  • Documenting the increase in value over time increases a business’ attractiveness, which will help maximize price

Manage shareholder / family wealth

  • Privately held business value often represents a significant portion of a family’s wealth
  • Cannot manage and protect family wealth without first knowing the value of the family assets (including the business)
  • A valuation prepares the family in the event of receiving an unsolicited offer

Prevent costly legal disputes

  • Shareholder, matrimonial and tax disputes can be costly, time consuming and emotionally draining
  • Business value is often a major issue in these disputes
  • A professional valuation enables the parties to discuss and agree upon value before potential disagreements arise

Tax and estate planning

  • A business valuation is required for estate freezes, share reorganizations, deemed dispositions on death, related party transactions, etc.
  • A valuation provides support for the value and acts as insurance for potential disputes with the CRA
  • Price adjustment clauses may be disregarded by CRA if it determines that a reasonable attempt at value was not conducted at the time of transfer

Shareholder life insurance

  • Shareholders obtain life insurance for income replacement, key person, fund buy/sell clause, fund income taxes on death, etc.
  • A valuation provides third party evidence for ensuring adequate coverage
  • This is turn provides the shareholders with peace of mind and comfort that their families and/or businesses are sufficiently protected

You may not have an immediate need for an independent business valuation, but if you are interested in enhancing business value, managing wealth and avoiding costly legal disputes, an independent valuation is a necessity.  Contact us at www.vspltd.ca to obtain an independent business valuation or to learn more about the valuation process in general.
1.   RBC Business Succession Planning: Your Essential Road Map.
2.   Canadian Federation of Independent Business (CFIB) Research – Survey results on small business succession planning. November 2012.
3.   Question #7 of The Family Blueprint – Every Family’s Business, Tom Deans, PhD. March 2009.

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