Lost in Transition

Valuation, Finances and Planning

4. Get a Valuation
Many owners only have a vague idea of their company's worth. Of Monitor survey respondents who answered a question about valuation, a shocking 61 percent were uncertain how companies in their industry were valued.

To get the best price and to satisfy the IRS, owners need a professional opinion. Gerald Barney, president and principal shareholder of valuation firm American ValueMetrics Corp. in Ojai, California, says he scrutinizes a business's balance sheet and earnings track record, then consults national databases to find comparable business sales. Barney says he applies various formulas, depending on the business' size, to help determine the asking price. For smaller businesses, cash flow is a key metric.

Entrepreneurs often think their company will be worth nothing if they're gone, but companies have other assets--such as their customer list and brand equity in their market--that Barney says buyers often pay good money for.

5. Work Out the Finances
When imagining the financial side of their exit, Kautt says many owners live "in an absolute fantasy." In the Monitor study, more than 36 percent thought they would retain full ownership while not having to run the business.

In fact, most business owners will need to transfer some or all of the value of the company to someone else when they depart. Deciding how and when to do that is the most complex part of the transition plan.

Armed with a solid valuation, the owner could sell the business outright. A buyer might pay cash or want to pay out the price over time, a scheme that could offer a steady retirement income for the owner.

Owners seeking to shift company ownership to family members can incorporate the business and create transferable shares, says Tom Cronin, managing director in the national tax practice for RSM McGladrey in Minneapolis. Shares can then be gradually given to children--up to $11,000 per owner per year tax-free. If employees or partners are buying out the owner, they could purchase the shares. The gradual switch may also help the owner preserve a retirement income stream.

If you're planning to stay with your business until you die, it's important to think ahead. A prenegotiated contract known as a buy-sell agreement, paired with life insurance to fund the ownership transfer, is often used in these instances, says Getman, who is vice president of advanced marketing at Prudential Financial. For instance, if an owner wants to sell to their child, a price--or a formula for determining the value later--would be agreed upon. A life insurance policy taken out on the owner for the sale amount, naming the child as beneficiary, would fund the purchase after the owner's death. Similar buy-sell agreements can be made with partners or key managers, compelling partners to buy out heirs' stakes in the business.

Such deals must be structured carefully. Getman says that frequently, a partner ends up with a lump of cash from a life insurance policy and no obligation to pay off the heirs. A poorly crafted policy can also leave heirs paying taxes on what should have been tax-free money.

6. Plan for Change
Whatever your transition plan, remember that it will need regular updating. Market conditions change, as do owners' and heirs' personal goals. Says Paradise, "These things don't have to be carved in stone for 50 years."

Describe your current transition plan




Starting to think about it


In the process


90% Complete


100% Complete

SOURCE: Entrepreneur, BMC Associates and The Monitor Group's Business Transition Planning Survey Report

How do you envision transitioning out of your business?


I will continue to own the business, but I will not run it day-to-day.


I will sell for top dollar to an outside buyer.


I will sell to a family


I will sell out to my partner(s).


I will sell to an employee.


I will take the company public and continue to run it.


I will take the company public and cash out.


I have no vision for transitioning out of my business.

SOURCE: Entrepreneur, BMC Associates and The Monitor Group's Business Transition Planning Survey Report

Carol Tice is Entrepreneur's "Tax Talk" columnist.

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The author is an Entrepreneur contributor. The opinions expressed are those of the writer.

Carol Tice, a freelance writer, is chief executive of TiceWrites Inc. in Bainbridge Island, Wash. She blogs about freelance writing at Make a Living Writing. Email her at carol@caroltice.com.

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This article was originally published in the November 2006 print edition of Entrepreneur with the headline: Lost in Transition.

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