Get the Value That Reflects Your Legacy
September 9, 2022 | Iowa Manufacturing
Typically, one of the biggest assets in a person’s gross estate is their closely held business — often exceeding 50% of the owner’s total net worth. Owners may spend decades building up their business yet neglect to develop a long-term plan to monetize the value of the business for retirement purposes. The absence of a succession plan can lead to regrettable results, both financially and personally.
Succession planning involves tax planning, valuation services, possible brokerage services, and more. To help promote a successful transition and avoid potential landmines, work with a professional advisor who can help you navigate the complexity and begin your succession plan early.
The value of a business is essentially the present value of the business’ future cash flows. Cash flows are the most important factor in valuing the business. When you boil down business valuation theory, value can be enhanced in two main ways: 1) increased cash flow growth; and 2) decreased risk associated with those cash flows.
DEVELOP AN APPROACH FOR INCREASING CASH FLOWS
In most cases, the higher the expected growth rate of the future cash flows, the higher the multiple applied to the cash flows to arrive at value. Part of a complete succession plan includes a full analysis of the business’s financial operations and creating a strategy to enhance profit margins and lower expenses.
Starting your plan years before the exit event can allow you to make necessary changes to help create a growth trend year over year, thus providing support for a higher value multiple. During this time, a qualified professional can help you identify market opportunities, employ tactics to help increase operational efficiencies, and align strategic thinking with the core ideals of your business.
REDUCE RISK TO INCREASE THE VALUATION MULTIPLE
Mitigating known and unknown risks go hand-in-hand with increasing the value of a business. Some obvious risks include the economy, industry factors, and competition. However, proactive planning can reveal risks owners may overlook, such as:
- customer concentration
- supplier concentration
- key person issues (even the owners themselves)
- legislation that could impact the business
- cybersecurity threats
- depth of management
With a complete understanding of the value of your business and a well-thought-out exit strategy, you increase your chance of getting the value you deserve for the decades of work and sacrifice that you have put into the business.
For more information on succession planning in Iowa, contact Sahan Totagamuwa at sahan.totagamuwa@CLAconnect.com or Timothy Muehler at timothy.muehler@CLAconnect.com.
The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, investment, or tax advice or opinion provided by CliftonLarsonAllen LLP (CliftonLarsonAllen) to the reader. For more information, visit CLAconnect.com.
CLA exists to create opportunities for our clients, our people, and our communities through our industry-focused wealth advisory, outsourcing, audit, tax, and consulting services. Investment advisory services are offered through CliftonLarsonAllen Wealth Advisors, LLC, an SEC-registered investment advisor