Transferring ownership of the family business requires care and planning to ensure a smooth change of leadership. One frequently overlooked tool that can make transitioning business to family members smoother is a company valuation. Learn how getting the family business appraised first can benefit not only the business itself but all relatives who work for the family company.
Why You Should Take the Valuation of a Company Before Transferring Leadership
Imagine if you transferred the family business without getting a company valuation. Older relatives who held leadership positions might be expecting a large payout. Some may have assumed the payout was certain and planned their retirement lifestyle on it. When the valuation of the company is not fixed when leadership transfers, the grounds might be set for an intergenerational squabble if the new leaders do not feel the company has enough money to support these retirement payouts.
If you instead seek a business appraisal first, a neutral third party would issue a value for the company that could act as a guide for all relatives. While the appraised value might fall short of the perceived value, the process of getting the business appraised can take some of the emotions out of the leadership transfer.
Once you know the valuation of the company, you can then gauge how much you can expect to inherit if you sell to the younger generation. Dividing the fair market value by the number of shareholders will give all owners an idea of the retirement income they can expect, and can help everyone plan for the next steps with accurate and timely information.
The appraisal can also help manage expectations and allow the new leaders to chart a course forward with confidence they have all the facts needed to succeed. Instead of causing strife, the change of leadership can now strengthen family unity.
Getting Family Business Appraisals for Tax Purposes
Not only does it make sense to have the company appraised from a personal perspective, it is necessary to do so for tax purposes. The IRS requires that businesses that are not subject to a special provision be valued at "fair market value" for federal tax purposes when the business is transferring family leadership. Fair market value denotes the price that a buyer, not related to the willing seller, would reasonably pay for the business. Since most company owners cannot objectively determine fair market value, a business appraisal helps immensely.
If the IRS were to ever examine the business transfer or audit company taxes, the appraisal can prove that the company's value was treated as "fair market" for the purposes of transfer.
If you sell the business to your relatives for less than fair market value, the new owners could be penalized with gift or estate taxes. Selling for fair market value is the only way to avoid this and keep all business assets with the company.
Planning Your Business Appraisal
Now that you understand why a business appraisal is needed before transferring family business ownership, take action by finding an appraiser near you who understands your industry. Just like other professionals, appraisers have niches they work in. It is well worth the time spent to find an appraiser who understands your industry and your geographic locations, since these two variables can directly affect the company's appraised value.
Business Valuation Specialists can help you find the right person to perform the company valuation, so you can move ahead with confidence.