Review for Accountants & Financial Planners
November, 2015

Business Succession Planning & the business valuation

Two minute scenarios...

When clients decide to develop a business succession plan, one of the most common questions asked is 'How do you value the business?'.

Scenario One... Nick, Zoe and Liam

Scenario: Nick, Zoe and Liam have a successful engineering practice. They have decided they need to protect their investment in the business in case one of them either wants to, or needs to, leave the partnership.

What's the issue? How do they value the business? And do they value it at today's value or the value they expect in the future?

Solutions: It depends for what purpose the valuation is being used. Normally in a contract, whether it's a Buy Sell Agreement or an Exit Agreement, the business value can be agreed by all interested parties on the day it is triggered, or failing agreement, by the business' accountant. If that is also not accepted then an independent valuer can be nominated.

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Scenario Two... But what if insurance is funding it?

Scenario: Nick, Zoe and Liam are happy with paying out a partner for a voluntary exit from cashflow over time, but have chosen insurance as the cheaper funding option for their Buy Sell Agreement.

What's the issue? How much Life and TPD do they take out? Today's value, a planned (hopeful) future value?

Solutions: The insurance is taken out to cover today's value. Ideally, the accountant will provide a current valuation to help with this, which will probably need to be submitted to underwriting. We suggest you also contact the underwriters upfront to see what they will cover given turnover, profit levels etc.

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Scenario Three... But what if the value increases?

Scenario: Nick, Zoe and Liam were happy with the insurance cover when they took it out two years ago.

What's the issue? The business has grown exponentially and is now worth 25% more. Unfortunately Nick has discovered he has a blood disorder and can't increase his cover.

Solutions: In the best case scenario, the Adviser has put forward-underwriting in place so this is no problem. Worst case, the Buy Sell Agreement can be drafted so that if the insurance does not cover the value when someone exits, the remaining partners can pay the difference over time.

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More information for clients

Please feel free to forward this insight on Buy Sell Agreements to your clients. Or if they would like to discuss how we can help them please call 03 8621 9000 or email with their details and we will contact them, obligation free.

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