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Why is Determining Value Important as Part of a Succession Plan?

Every business owner questions how much his or her company is worth. As you approach retirement, this is a critical question so you can determine if you will have enough to live the life you would like to in retirement. For public companies where a market exists, the question is easy. It is not quite so easy for private companies. Obviously, this question is critically important, for instance, when determining how much an owner might need to spend to fund a purchase of a co-owner’s shares.

Experienced professional exist who do this for a living. Those persons will tell you that while there is a great deal of science involved, there is also a real art to the profession. Some of that “art” can be reduced by thinking through the valuation provision in a buy-sell agreement well before any partner is seeking to sell. A buy-sell agreement needs to clearly describe the owners’ valuation agreement and clearly set forth items such as:

  1. The valuation standard to be used, such as fair market value,

  2. The valuation date, such as the last day of the month or quarter when a triggering event such as a partner’s death occurs, and

  3. The level of value, such as whether discounts will be included in a valuation for non-marketability of the stock, or a lack of a controlling interest.

  4. The valuation approach, such as whether an appraisal will be obtained, whether a formula is used (such as EBITDA or revenue) or use of an agreed upon value.

You can call Henry G. Grendell at 440-462-6503 for a free initial consultation to discuss your business succession plans.

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