Succession Planning

A good succession plan starts with a business appraisal.  

This is why: a succession plan says how ownership in a business transfers on the day the owner retires, becomes disabled or dies. Or to put it another way, it says who will end up owning a valuable asset after the owner steps down. Clearly a succession plan is incredibly important both to the owner and to the family members or employees who will be taking over.  

But what is the business worth? If you asked each person what he or she thinks the business is worth, you would hear wildly different answers. One might say the business is worth $X. Others might say no, it is worth $2X, or $5X or even $10X! Until everyone is "reading from the same sheet of music", until everyone agrees about what the business is actually worth, no succession plan is possible. That is why sucession planning Job One is to have the business properly valued by an independent expert.

The appraisal firm you select should do two things. First, it should produce a valuation complying with appraisal standards set forth in IRS Revenue Ruling 59-60 (used by the IRS to value businesses for estate and gift tax purposes). Second, because the interested parties typically never participated before in the valuation process, the appraiser should be committed to explaining the results . It is not good enough just to get a number; the appraiser must explain where that number came from, how it was derived, the assumptions upon which it was based, the relevant court cases, etc.

A succession plan resting on a sound business valuation is much more likely to be implemented. Better still, it is more likely to leave everybody satisfied with the results.