 |
|
Three types of company-valuation methods can be used to help a remodeler value the company, aiding in passing ownership to a new generation, says Bart Basi of the Center for Financial & Tax Planning Inc. in Marion, Ill.
|
By Craig A. Shutt
What happens when Dad decides to retire from his remodeling business? Will Junior take over, and what does Sis get out of the deal? Many family-based remodeling businesses have a line of succession figured out, but often there is no formal plan to ensure that ultimately, things will work out as the owner planned. Preparing for succession—and who will be the boss—requires hard decisions. By involving everyone in the process and making plans early, everyone benefits.
A succession plan for a privately held, family-owned company should include a stock-redemption agreement, but it often doesn't, says Bart Basi, president of the Center for Financial & Tax Planning Inc. in Marion, Ill. Too few business owners understand its value and advantages. "As a result, they needlessly face larger tax bills and succession headaches," Bart says.
Technically a variation on a corporate buy-sell agreement, stock-redemption agreements offer the biggest bang for the buck to small businesses. A stock-redemption agreement makes it easy to tell who the boss is: the one with the most stock.
Those with less stock benefit as that stock rises in value and can join with others to add to their voting strength on key ownership issues, but their position in the pecking order is clearly defined.
In a typical stock-redemption agreement, all stockholders agree that if any of the stockholders dies or leaves the company, his or her stock returns to the company and reduces the number of outstanding shares.
There are four key advantages to this approach, Bart says:
- The agreement isn't difficult to create,
- It saves money over other options,
- it requires only one basic agreement that everyone signs, and
- it diminishes the amount of legal and insurance expertise required.
But making such an agreement work requires a clear valuation of the company to determine the stock's value. An owner can give stock to family members each year as a tax-free gift, Bart points out, but only to an $11,000 maximum—and owners can't know if the stock meets that requirement unless the company has been valued.
Valuations can be done relatively easily, he says, but they require as much art as science and won't result in one precise figure. As a result, several approaches must be used to value a company for tax purposes, and they are blended to determine the final value. Bart recommends any of three approaches, each of which has its own nuances. All should be discussed with an attorney and financial planner. The three are:
1. Asset-based valuation, a.k.a. adjusted book value, uses the company's hard assets (office equipment, trucks, accounts receivables) and adds good will.
2. Profitability or earnings is based on five years of tax returns. Since tax laws encourage private companies to keep their profitability low, reported profits can't be used for valuation — and most companies wouldn't want to use them, anyway.
3. Cash flow/leveraged debt, a variation on #2, calculates the company's value based on how much money could be borrowed if the owner wanted to buy the company and use its income to pay the interest on the borrowed money. This usually represents the maximum amount an outsider would pay to buy the company.
Each valuation is weighted for its significance, with the final total determining the amount that stock is worth. Once stock can be issued, it becomes an easier matter to pass the torch to a new generation and ensure their claim on the company.
| 
)
