How business valuation and succession planning go hand in hand

June 1, 2021

One man took over his father’s business and one didn’t—but both today are focused on effective succession planning for family business.

Michael Cohen, owner of DBL Center in New York, has spent 17 years in the niche insurance business where he succeeded his father, who died in 2017.

Lance Hennesay, advanced solutions director for Principal^®, decades ago pursued his dream of earning a law degree instead of taking over his father’s propane company in central California. But today he helps business owners of all types protect their business value and navigate successions and sales.

The challenge: How do you monitor and protect your business value while building a succession plan that balances price with personal goals?

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He was driving to dental school and got into a car accident with an insurance salesman—true story!

Hennesay grew up in the propane business with his father before he sat down over breakfast to tell his dad that his dream was to become a lawyer.

Determine an accurate and up-to-date net worth for your business.

Monitor it at least on an annual basis.

Buyers may treat a year like 2020 as an anomaly and still pay fair market value for the business. If you’re looking to sell at your ultimate peak, this may not be the ideal time. Although if you can show a steady revenue stream in the pre-pandemic years, you still should end up with a good business valuation.

According to our latest Business Owner Insights survey, only 31% of owners are confident about selling their business compared to the 72% who are confident about their ability to adjust to shifting demands.

“As I get older it’s a simple way to say don’t be a jack of all trades,” Cohen says. Focus on your core competency in your line of business.

After his father’s death in 2017, Cohen developed a proprietary broker digital dashboard and app to track revenue.

Beyond sales and profit margins:

• accounts receivable or payable,
• assets and liabilities on the balance sheet,
• key employee plans,
• a cohesive management team, and
• an overall clean business operation.

While 60% of business owners have a succession plan, 32% of those haven’t been reviewed in more than two years (according to Business Owner Insights). The last year probably has exacerbated that tendency and accelerated some owners’ desire to sell and retire, Hennesay says.

A large company with an owner who wants to step back but remain involved might use an employee stock ownership plan (ESOP). A key employee equity compensation plan or a nonqualified deferred compensation plan could help create a down payment along with a buyout plan. Family businesses need to sync their succession and estate plans. Or a seller looking for an outside buyer can focus on those key employees and management team to retain the businesses’ value.

Any SMART business goal must be specific, measurable, achievable, realistic, and timely.

With an informal valuation. Principal conducts hundreds of them annually. Many business owners plan to sell their business to help fund a comfortable retirement.