Deriving Full Value

Business Transition Consulting LLC (BTC) enables the business owner to derive the highest possible value from the business by facilitating the development of a written strategic plan. This plan includes succession provisions describing the concept and structure for an owners' agreement containing buy-sell terms and describing the process of managing the business for sale.

There are three phases to the business cycle. Businesses often do not complete the cycle, and many never leave the first phase. In the beginning of  the business, there is creation of value at the start up.  During the second phase the business achieves profitability and has the opportunity to install middle management. At the transfer of the business, the owner has the opportunity to receive value for the business interest. The more important the owner is to the business, the less the business is worth without the owner. Managing a business for transfer for highest business value requires the owner to instill capabilities in the business which are not provided by the owner. For highest value, at the very least, the owner cannot be a manager of the business.

A succession plan consists of a contingency plan (plan for a crisis brought on by the sudden absence of an owner or critical executive of the business) and a transition plan (long-term plan for the change that will occur in the ownership and management of the business). It is a mistake for a business owner wishing to have maximum value from a business to be without a succession plan. Here are foreseeable situations that could occur at any time:

  • The owner of the business dies. Who controls the business? What does the owner know that no one else knows? If there has been no preparation to prepare the business for sale and no one involved with the business is in a position to purchase the business, should the business be liquidated? How can the survivors obtain value from the business?
  • A critical executive of the business dies or becomes disabled. What does the executive know that no one else knows? Does the executive have sole authority to do certain things that must be done? How long will it take to find an effective replacement?
  • The founder and owner-manager of the business suddenly cannot participate in the business. Who steps in to fill the void and at what cost to their existing duties? Where the owner is a manager, all the concerns of 1 and 2 apply. Is there someone else trained and available to manage in the void? Who controls the business?

Obviously there are many other situations that could also be detrimental even with planning, but will certainly be worse without it. There are not plug-ins available. A succession plan is not drafted and implemented quickly or easily.

Maximum value will not be received from a business that does not have planning in place for foreseeable future events.

Valuation is initiated on the value of the entire business. “Fair market value” is defined by the American Society of Appraisers as “the amount at which property would change hands between a willing seller and a willing buyer when neither is acting under compulsion and when both have reasonable knowledge of the relevant facts.” "Fair value” is used as a statutory term in statutes involving entity transactions between owners, such as dissolutions, shareholder dissent, and oppression of minority owners’ rights. Generally, fair value refers to the value of an owner’s interest in an entity with respect to the other owners. While a third party buyer (someone not currently involved in the business) might pay for certain intangibles valued in the fair market value of a business, it is unlikely that owners buying entity interests from one another would be willing to pay for the intangible values such as goodwill and know-how that they already possess. To compensate a minority shareholder whose interest is involuntarily liquidated it may be appropriate to view fair value to include the value of certain intangible items valued as a part of the fair market value of the entity (requiring a third party purchaser). It can reasonably be argued that in a buy-sell agreement between owners, fair value might not be based on an entity value that includes certain intangibles possessed by all of the owners. Not only will the value vary upon the trigger event for these reasons, the payment terms will vary as well.

A well-drafted strategic plan for a business will anticipate the foreseeable contingencies of ownership and management change by providing transition guidance. The succession terms will form the concept and structure for the buy-sell agreement which will be executed between owners to enforce the succession plan.