Succession Planning: Discussion Dollars With The Next Generation

Business Succession Tips

Today I really want to just share some information about one of the most sensitive parts of succession planning, and that is talking about the dollars with the next generation. And this means really understanding what the value of your business is and helping the next generation understand that they need to actually buy-in and pay for the business, and not expect it to be handed to them.

Sometimes the younger generation have a bit of an entitlement mentality. They may feel that they’ve helped contribute to the success of the business and that they should just be given the business. I just want to firstly highlight the fact that that’s not what should happen. You should really understand there is value in the business and that they should pay for it.

Because firstly, it’s not fair on you if you don’t get something for your business. And it’s probably not fair on other family members who aren’t involved in the business. Because, obviously, it’s an asset just like your house or anything else. And so giving it to someone else really robs your family, your estate of that asset.

So, that’s the first point. And I can understand that it can take some time for the next generation to understand the value, understand why they should pay for it, understand how it’s going to help them financially longer term. And that’s why sometimes it can be worthwhile bringing someone else in from outside who can help build a relationship with them and help explain these sorts of concepts, because it’s commercial reality that businesses have value and that they should pay for it. Now, how they can afford to pay for it, that’s a different discussion. And there are definitely ways that I’ve worked with my clients over the years to help set up systems, help set up some sort of payment plan, or other arrangements where they can use the profits of the business to pay for the business. OK?

Now I want to talk to you very quickly also about how a business is valued generally. And you may or may not be across this, but generally speaking a small business is valued on a multiple of profits. And it’s generally somewhere between one and a half to three times the profit of the business. And that can depend on how well the business is set up with systems and so on and staffing. And that profit that we look at is a profit that excludes tax, it excludes depreciation, and it also excludes how much you’re taking out of the business.

So, there are some adjustments that we make to the profit and then we multiply that by a multiple. And then on top of that we add stock to that value. Now, we don’t add in things like the cost of the equipment that you’ve purchased that’s being used in the business because that equipment should be helping you generate profits, and that’s where that value lies. So, just probably understand that as well and it may be something that you’re not used to thinking about. But, once again, these are things that we help our clients through.

So, definitely don’t undervalue your business. And really start thinking about educating your next generation of managers, or your kids, about the need to buy into the business. And that can take years. It can take some time to put all the systems in place.

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