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How M&A, Succession Planning, and Estate Planning Affect Value

How M&A, Succession Planning, and Estate Planning Affect Value

Jacob Katz, director in the business valuation services practice, led an informative session that included an economic update followed by an explanation of how the value of a business can vary, depending on if the value is being sought for estate planning, succession planning, or M&A purposes.

Economic update

Majority of businesses and financial professionals believe that we will enter a mild recession by the fourth quarter of 2022 or early in 2023, with some believing that we may already be in one. The Fed is expected to remain hawkish and continue raising interest rates in an effort to control inflation, signaling that they are willing to do so even in the face of economic retraction. Equity values will remain stagnant. Barring unexpected geopolitical events, such as a large disaster or expanded conflict, market pull backs are expected to be temporary.

Value as it pertains to estate planning, succession planning, and M&A

Value comes into play in all three of these sectors, but in very different ways.

When we talk about estate planning, we are talking about passing assets on to a member of your family. In this case we are often trying to minimize value; that is, we want to be able to pass on the most assets for the lowest value that can be justified by regulations. The goal for succession planning – defined here as transferring your business to employee(s) – is a fair deal for all parties, one that compensates the owner while not unnecessarily burdening the buyers. Finally, when selling your company, typically an owner is seeking maximum value for the company.

In each case, you should start with value. But while value is the same word with the same definition in each case, there are different applications depending on the lens through which you are looking.

Passing your business onto family members

When planning to pass assets onto your family members, the best time to start is today. With a dynamic political environment, the tools available to your family now to minimize tax liability may not be available tomorrow. In addition to starting as soon as possible there are a few other estate planning strategies to consider. Utilizing discounts like lack of control and lack of marketability gives you the ability to lower the value associated with those assets. Share classing is another strategy that will allow you to maintain a great deal of control while discounting a greater portion of your company at one time.

Passing your business onto your employees

Transferring your business to your employees generally happens when legacy is important to a business owner. Succession plans are usually based upon trust in your employees who will be buying you out and their familiarity with your business, your clients, and yourself. Succession planning can present you with the easiest way to find a buyer for your company, making it more attractive than the alternative.

When discussing succession planning, strategies would differ slightly for smaller businesses and larger businesses.

Selling your business

If estate planning and succession planning are not viable options, you may look into selling your business. Here, the place to start is by ensuring your financial information is ready for review by a third-party purchaser. Any parties interested in buying your business will be running analyses, forecasts, and projections, and you will want to make sure your financial information is accurate and organized in a manner that purchasers are used to seeing.

Katz went into some more detail on each of these scenarios and how value relates, providing some high level examples and a preview into the process for each of the three strategies for passing on your business.



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