Written on November 7, 2012 – 7:00 am | by Steven Frye
Recently, I wrote about the need for a succession plan if you wish to preserve the value of your business to you and your estate. What if your succession plan contemplates a sale to your key employees: How does valuation play a role?
A professional valuator will tell you what the business is worth, with a range of values: will it be sufficient for your retirement and/or for your estate? Could you retire for a lesser amount so a sale to key employees who will preserve the business will be better accommodated financially? Good questions to ask yourself and your professionals, I believe, before you embark on a plan.
Let’s face it, many business owners do not want to retire so your plan could include a “creeping takeover” as I read it described a while ago. Start selling a 10% ownership, have them pay for it out of their share of earnings, then once that is paid, have them buy another 10% etc until they eventually have control. The problem you will encounter is now they own 10% of the business, what happens when the value of the company goes up due to new business efforts by you; do you make them pay more when the growth and additional value in the business is purely attributed to you? This is a key issue which you need to negotiate. Do you value the business today at a set value and use that as the valuation for the entire creeping takeover? What happens if you lose a large customer and the business is not worth the same anymore? The value could go up or down; there is considerable risk for both parties to lock into a purchase price to be paid over a long period of time however you still need to factor in growth that you bring into the business.
These are just some of the valuation issues that need to be considered in a succession plan. More on this in my next blog.
Thanks for reading!