It’s essential to have a clear idea of the value of your company. Otherwise, it can interfere with everything from exit planning to strategic growth. That’s why so many business owners opt for professional business valuation services.
Unfortunately, those with family businesses tend to be even less likely to know the true value of their business. However, since these kinds of businesses often include family shareholders, it is critical to get a handle on this information and apply it in a manner that is fair and equitable to shareholders.
Why Owners Conduct Frequent Valuations
Many small business owners have the same professional come back time and time again to conduct periodic valuations. Further, a consistent single appraiser is able to conduct valuations in the future so that they are consistent with past reports. Future appraisals will also be less money and quicker to perform. The appraiser will also continue to learn more about the industry as time goes on, which will allow for even more accurate valuations.
If you are prepared in this regard, if a transaction triggering event were to occur, you’d be completely prepared in regards to what to expect. Even if you’re not expecting an event to arise in the near future that is a transaction triggering event, it could happen out of the blue. For example, what if a shareholder or employee were to retire, quit or be fired? Worse yet, what if a shareholder were to die or get a divorce, or your company went bankrupt? Often a transaction is also triggered when a shareholder merely wishes to sell stock. All of these kinds of events can change your future.
What about Discounts?
When handling their wealth planning, often, businesses gift stock to family members. The term “discounts” refers to when there are those with a minority interest in the business. As a result, buyers will apply minority discounts. Those are often known as DLOC or “discounts for lack of control.” In some cases, they are also referred to as discounts for lack of marketability (DLOM).
These kinds of discounts can factor into certain tax strategies. The DLOC is deducted to take into account the absence of some of the power in the business. As a result, the person buying the business does not receive full control. Often the DLOC means that the buyer is not going to be able to choose management, control distributions, and make key decisions about the business assets.
When it comes to dealing with investors, discounts are essential to understand. After all, investors receive returns through distributions. Investors will think about potential obstacles that could occur if and when they sell their interests in the business. It’s important to note that discounts are a tool that can help when you sell a business, and it’s essential to discount minority interests in an accurate way.
Family Succession Issues
When it comes to family succession, one thing to avoid is dealing with stress around dividing shares for future generations, regardless of whether they are active or passive in the business. Many businesses include a valuation in their more significant decisions about handling succession planning. Through this means, you can handle not only your transition matters but also leadership, family governance, and development.
The bottom line is that you will lose leverage over the results if you seek to get a valuation at the last minute when one is immediately needed. In contrast, if you are proactive and prepared, you will gain critical information and properly strategize and increase the value of your business.
Most small business owners have likely spent many years invested in the growth of their business. Frequent valuations can help you best plan for future changes, whether for new strategies or an eventual sale.
Michael J Schwantes is President & CEO of Creative Business Services/CBS-Global.
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