24
Mar 2022
Business Valuation: An Essential Process In Succession Planning
The assessment of a firm, its profitability, retention of company culture and how it stands in future years to come can be based on many factors, but usually for a small organization or a CPA firm owner, those factors for survival has been carved out primarily on the backdrop of a consistent and systematic diet of blood, sweat, and tears to build and leave behind a legacy. How do you measure that type of investment? This is why it’s no doubt that owners and heads of smaller organizations and firms are set on not just leaving behind a legacy of all that they have accomplished but leaving it in the hands of someone that will continue to add to and increase value and profitability to their legacy for many years to come. As many of these owners and heads of these firms and organizations head into their business twilight years and the world and industry is facing the most extravagant and imminent exodus of the “baby boomer” generation from the marketplace, these firms and organizations are now in a position to be released into the hands of new successors. And the question again begs to be asked, “how do we place value on what took someone a lifetime to build or operate for the better half of their lives?”.
Baby boomers, (75 Million strong in the US, according to recent Census data), are the generation of people born during the post–World War II baby boom – 1946 and 1964, and are now between 52 and 70 years old. In 2011, the first Boomers turned 65 and began retiring, and despite numerous studies that indicate many Boomers will continue to work after 65, they will continue to retire at an astounding rate of approximately 10,000 per day over the next 20 years. Baby Boomers are leading the exodus, as 3.2 million more of them retired in the third quarter of 2020 than did in the same quarter of 2019.
Companies that choose to address this issue head on and develop a plan for transitioning a company or its workforce upon the retirement of their key staff, will undoubtedly be a step ahead of their competitors. So what should be done? Have a transition plan! One of the best transition plans to implement is implementing a succession plan that is thorough and effective.
There are several factors to consider for a succession plan to be thorough and effective. Examples include dividing business interests, tax planning, staff interaction, and leadership development. Different studies show how important all of these factors play in executing a successful succession plan, and one of the factors that can be even more thoroughly utilized by leaders and executives is Business valuation.
This article will explore in more detail why business valuation is important to succession planning and why it is necessary as firms transition and embark on a new future.
Benefits of Business Valuation
A firm’s transition may be the most significant financial event for a business owner or an executive, whether it’s accomplished by selling the firm, establishing partner ownership percentages, or transitioning it to family members. The valuation of a firm is integral to its transition, we will share some more in the discussion below reasons why it is necessary.
1.Valuation Clarifies the Value of the Firm
Many executives and owners focus primarily on the growth of their businesses, often times the realization and assessment of the current worth of their organization may not be fully known. There may be broad estimates of their firm’s worth, based on simple statistics like stock market value, total asset value, and business bank account balances. However, business valuation has much more to give than just those basic facts, especially as executives dive into succession planning.
Without business valuation, the firm’s value to a third party or a potential successor is undetermined, which could significantly affect future transactions and hinder the firm’s transition.
Without business valuation organizations and firms face the drastic risk of underestimating or overestimating their value, which could lead to losses for outgoing owners or the potential successors.
A valuation can not only show how much the firm is worth today, but it can also tell where that value stems from. This could be a great opportunity to level up the firm’s succession plan to a more strategic approach, resulting in increased value in the future.