Keeping Your Succession Plan Aligned with Your Business Value

By Jamie Batt

Many business owners think of their company’s value as something they only need to know when they are ready to transfer ownership. In reality, many parts of a succession plan depend on what the business is worth, and a plan built on an inaccurate number may not work as you intended. Keeping your valuation current, and making sure it matches your succession documents, is essential for a smooth transition.

Why Valuation Matters

A valuation affects several parts of a succession plan, whether or not a sale is planned.

If you plan to transition the business to family members, partners, or key employees, the value helps set the price and how the purchase is financed. If ownership will be gifted or passed through your estate, the value is used to calculate gift and estate taxes. If you have a buy-sell agreement, it often sets the purchase price determination mechanism for an unexpected event, such as an owner’s death, disability, or departure.

A valuation also ties into your own planning. Many owners rely on the business to help fund their retirement, and knowing what it is worth can inform when and how you step away. An early valuation may also show you how to increase the value of your business before a transition is imminent.

Why It Needs to Stay Current

A business’s value changes as revenue grows or declines, owners and/or key employees come and go, and the market shifts. Meanwhile, succession documents can stay unchanged for years.

When the two drift apart, a buy-sell price may no longer reflect what the business is worth or hold the correct formula for determining that worth, which can leave a departing owner or the remaining owners with a result no one intended. Gifts or estate plans built on an old figure may need to be revisited, and an outdated number can give you an inaccurate picture of what the business will provide in retirement.

When to Review

Certain events are a good reason to update your valuation and compare it to your succession plan. These include bringing on a new owner or investor, a significant change in revenue or profitability, buying or selling part of the business, a change in your intended successor or his, her or its role, or a change in your plans for the transition.

Even without one of those events, regularly reviewing your succession documents and updating your business valuation helps keep your plan in line with where your business is today.

Keeping Your Plan Current

A succession plan works best when it reflects the business as it is today. If it has been some time since your documents were compared with the current value of your business, our Business Law attorneys can help you evaluate where things stand and develop a strategy tailored to your business.