How can I maximize the value I receive from my business?

For any given business owner, the value received from the business will be determined by the funds paid to the owner as a result of the owner transferring ownership of the business. An appraisal (no matter how well done) will not provide assurance of any particular value for the business. The process of deriving maximum value from a business is a succession planning process.

If the business has a proven market for its product or service, the business will transition from owner-managed to having professional (non-owner) management, and then (assuming continued existence) the business will be transferred through either an internal (sale to existing managers) or external (sale to third parties not involved in the business) sale. For the owner to get the most value for the business transfer, at the time of the transfer to a third party the business will not depend upon the selling owner’s contribution. A sophisticated buyer will not pay top dollar for a business that must include the seller’s services.

A business may distribute earnings to the greatest extent possible, may build a balance sheet, or do something in between. If the succession plan is a “dues” based plan for succession, ownership may be obtained for a relatively small amount and transferred for a relatively small amount, but while the ownership is held the owner receives the maximum distribution of earnings. In such a case (a strategy for internal succession often used for professional service businesses), the business does not maintain a high net worth but the owners are rewarded with cash distributions. On the other hand, the “value” based plan for succession is to build the value of the business for a third party sale at a high value (only possible if the owners’ participation is not essential to the performance of the business).

A succession plan must identify the correct legal entity with the correct tax attributes to perform according to the requirements of the succession plan. The succession plan should anticipate the difficulty of selling a business, provide for a means of attracting buyers, and provide a plan for selling the business to those who are managing it if a more attractive sale to a third party does not materialize.

There is a process to obtaining the greatest value from your business. Please click to access a PDF taking you step by step through that process.