Online Exclusives
Entering the Exit Planning Process
Knowing the Value of Your Business is Key When it’s Time to Step Away from It
By Robert Snyder
Growing your business might require a lifelong effort, so when the time comes to pass that business on, you should do so in such a way that maximizes its value for you and your heirs, says Scott D. Ford, president of Cornerstone Wealth Management Group in Hagerstown. “A business owner has put his or her sweat and blood into their business and built real value over the years,” Ford says. “It is critical that they provide for their family and the continuity of the business when they plan to step away. When you have spent a lifetime building a business, it's a shame to not invest in the transferring of that wealth it has created to your family.”
The first step in stepping away is clarifying your exit strategy objectives, which depend on factors including when you want to leave the business and who you want to assume responsibility for it, says James Hyatt, a Montgomery County attorney who specializes in estate planning. The company should be valued differently if it is to be passed on to family members or co-owners rather than to an outside party. Seller compensation options when transferring the company to a family member or close associate include deferring payments over several years, incorporating non-compete covenants, and implementing deferred compensation agreements, says Randy Rachor, a CPA with Albright Crumbacker Moul & Itell accounting firm in Hagerstown. “Whether the payments are taxed at capital gains rates versus ordinary income rates will have a dramatic effect on the net taxes the business owner must pay.”
And while minimizing the value of the business as part of an equity gifting arrangement can help reduce the tax burden, you must still consider the estate tax ramifications along with gifting exclusions, Rachor emphasizes. Different tax effects can be achieved depending on whether you sell your company stock or its assets and good will, which is a soft combination of the company’s reputation and the extent to which it possesses a name brand.
An outside expert should complete a thorough business valuation if you aim to sell the company to a third party. Planning to step away from your business is no time to be “penny wise and pound foolish,” says Ford. “You need to get experienced professional advisors to work with you on the decisions and structure to accomplish this important goal,” Hyatt agrees. In addition to the critical services of an attorney, accountant and financial advisor, a business valuation expert can assess whether your opinion regarding the value of your company is realistic.
Value is determined by assessing the worth of its hard assets and income-producing capability and through the extent of its good will, says Hyatt. Consideration of the customer base and employees is also essential in assigning worth. “The value of the company will often be heavily dependent on the ability to retain key employees,” Hyatt says. “A well-trained, efficient employee base, properly incentivized to keep the business running in the face of the owner’s disability or death and the likelihood of their continuing employment if the company is sold, is a very good value driver that will really improve any exit plan.”
An exit plan can take between three and six months to complete and should be reviewed annually. “An exit plan is not a one-shot deal,” Hyatt says. “It should be continuously monitored, amended and supplemented as needed, on an annual basis.” And more frequently than that if circumstances change, Ford says. “When you run your business you don’t just plan for its success every few years. It’s an ongoing process to ensure success. The very asset that has built a family’s wealth should be treated no differently.” With that in mind, no exit strategy should be without a disaster plan that will protect against a sudden disability or the death of the owner. “Without this element, the owner’s family will not be protected, the employees will be out in the cold, and the business may simply fail.”
Exit Planning Seminar
Cornerstone Wealth Management Group will host an exit planning seminar for Smart Company Magazine readers, featuring speakers Scott Ford, James Hyatt and Randy Rachor. Get tips for clarifying your exit strategy objectives, valuing your business and more.
Thursday, Jan. 29
8–9 a.m.
Fountain Head Country Club, Hagerstown
Free
Register online at www.smartcompanymag.com, via e-mail to exitseminar@perceptiononline.com or by calling 301-739-8505.
