Valuation Often Affects The Process of Succession Planning In Hard-To-See Ways

process of succession planning

Any business owner that is in the process of succession planning should rightfully assume that regular business valuations are a must. When envisioning the valuation process, you’re likely to focus on its end result. The end result is a reasonable, defensible value estimate of your business as of a certain date. But lurking beneath this number is a variety of often hard-to-see issues during succession planning strategy.

Estate Tax Liability

One sometimes blurry issue is the valuation implications of when you intend to transfer the business to the next generation. Will you be completing this during their lifetime, at your death or upon your spouse’s death? Let’s say, for example, you decide to bequeath the company to your spouse. In this scenario, no estate tax will be due upon your death because of the marital deduction. This is also assuming that your spouse is a U.S. citizen. But estate tax may be due on your spouse’s death, depending on the business’s value and estate tax laws at the time.

Speaking of which, President Trump and congressional Republicans have called for an estate tax repeal under the “Unified Framework for Fixing Our Broken Tax Code” issued in late September. But there’s no guarantee such a provision will pass and, even if it does, the repeal might be only temporary.

So an owner may be tempted to minimize the company’s value to reduce the future estate tax liability on the spouse’s death. But be aware that businesses that appear to have been undervalued in an effort to minimize taxes will raise a red flag with the IRS.

Inactive Heirs and Retirement

Bear in mind, too, that your heirs may have different views of the business’s proper value. This is particularly true of “inactive heirs,” which is those who won’t inherit the business and whose share. Therefore, they may need to be “equalized” with other assets, such as insurance proceeds or real estate. Your appraiser will need to clearly understand the valuation’s purpose and your estate plan.

When (or if) you plan to retire is another major issue to be resolved. Are you  wanting your children to take over, while also freeing up cash for retirement? If so, you may be able to sell shares to successors. Several methods (such as using trusts) can provide tax advantages as well as help the children fund a business purchase.

Abundant Complexities

Obtaining a business valuation in relation to your process of succession planning involves much more than establishing a sale price, transitioning ownership (or selling the company), and sauntering off to retirement. The details are many and potential conflicts abundant. Let us help you anticipate and manage these complexities to ensure a smooth succession.