All business owners, to an extent, want to ensure that the business they built continues to thrive long after they step down. However, many are not sure about where to begin. Succession planning is the strategic process of identifying and developing future leaders to take your place when you retire, sell or leave your business. It involves preparing for the day when you’ll transfer your company’s ownership and management to someone else.
An accurate business valuation plays a key role in this process. You need to know your company’s true worth to make informed decisions and navigate the succession process more effectively.
It establishes your business’ fair market value
Fair market value is the price your business would sell for on the open market, assuming you and the buyer are knowledgeable and acting in their best interests. Determining the fair market value is crucial for your succession plan because it is the basis for the sale price or transfer value of your business.
Without a fair market value, you may face several challenges. You might:
- Overvalue your business, making it difficult to sell or transfer
- Undervalue your business, potentially shortchanging yourself or your heirs
- Cause disputes among family members or potential buyers over the business’s worth, complicating the succession process
An accurate fair market value helps prevent these issues and ensures a smoother ownership transition. Moreover, it is crucial in your tax planning strategies. Estate and gift taxes apply when you transfer money, property or business interests to others. It’s important to understand your business’s true value in order to minimize tax liabilities and make the most of current tax laws.
It can legally support buy-sell agreements
A buy-sell agreement sets clear rules for transferring ownership when you or other owners leave, pass away or become incapacitated. It typically includes a method to value your business. This valuation directly affects how much you’ll pay or receive for an owner’s share.
Michigan courts usually respect the valuation methods in these agreements when owners disagree. This makes it particularly important to have a well-crafted agreement with a fair and accurate valuation method. Without one, you risk lengthy and costly litigation in Michigan courts. This can disrupt your business and derail your succession plans.
Today is the best time to plan for tomorrow
Don’t leave your business’s future to chance. Professional legal counsel is key to creating a comprehensive succession plan.