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Running a closely-held business can be a rewarding experience as well as a lucrative adventure, however, a lifetime of hard work can be undermined without proper planning. One common mistake of many small business owners is failing to plan for the possibility of incapacity or the inevitability of death. If you intend for your business to survive into the next generation, it is crucial to establish a business succession plan.
The first consideration in designing a business succession plan is selecting a successor, whether that individual will be a family member, another partner or business owner.
Regardless of who takes the reins, it is crucial for a successor to have the necessary skills, experience, as well the desire to lead the business. At times, a family member may be positioned to take over, however, often times other business partners or key people are better equipped to do so. In any event, the succession plan must clarify the rights and responsibilities of the successor, specify guidelines for operating the business, and establish a method for resolving disputes. Of course, a critical component of any business succession plan is determining the value of the business.
Generally, there are three methods for determining business valuations -- the asset approach, the income approach, and the market approach:
Asset approach -- A basic evaluation of a company’s value by subtracting its liabilities from its stated assets; such an analysis does not consider factors such as market conditions and good will, however.
Income approach -- An analysis of past earnings combined with a projection of future earnings which requires evaluating future cash flows and capitalization, with the goal being to determine both the present and future value of the business.
Market approach -- A more comprehensive analysis that looks to the recent sale of similar businesses in the same industry that weighs factors such as differences in the size, duration and market risk.
Depending on the exigencies of the business, a transfer can be memorialized in a cross purchase agreement or a entity purchase agreement.
In the end, it is important to remember that a closely held business is an estate asset. This is why it is crucial to your business estate taxes and creditors’ claims and ensure its continuity when you are no longer at the helm. By working with an experienced estate planning attorney, you will have peace of mind knowing that your legacy will be secure.
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Disclaimer: The information on this website is for general information purposes only. Nothing on this site should be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or viewing does not constitute an attorney-client relationship.
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