ClarityBV Blog

A friend just passed on a good article about succession planning in the current issue of MyBusiness magazine.

A sidebar in the print edition notes five key questions to consider long before you’re ready to retire.

1. Are you trying to raise as much money as you can for your own retirement?
2. Can you imagine life without thinking about the business?
3. Are your heirs interested?
4. Do you want to maximize the wealth you leave for your family?
5. Is the value of your business increasing or decreasing?

A business owner’s answers to these questions are critical to finding the right succession or exit strategy for them.

Most owners underestimate the time required to carry out a viable exit plan. Sure, some “win the lottery” through a quick strategic sale for top dollar, but those cases are rare. The article notes that crafting a viable exit plan can take as long as seven or eight years.

I’m reminded of the poll conducted last year by George S. May International. The poll found that 58% of business owners have not recently valued their business and do not plan to do so in the future, while 42% of the respondents plan to sell their business within 10 years.

Peter Drucker said, “What gets measured gets managed.” If that’s true, 58% of business owners aren’t managing what is presumably their largest asset. That has significant implications not just for their net worth, but also for their heirs and their communities.

So much for that sun-setting estate tax law being patched well before 2010. Recent commentary suggests that Congress is now likely to patch things retroactively. In the meantime, following are links to a couple of interesting studies on the relationship between taxes and death rates.

• Did the Death of Australian Inheritance Taxes Affect Deaths? (pdf)
• Dying to Save Taxes: Evidence from Estate-Tax Returns on the Death Elasticity (pdf)

Don’t be surprised if death rates (or “reported” deaths) are lower the next two weeks and higher the first two weeks in 2010!

The AICPA just released “A Guide to Financial Decisions: Implementing an End-of-Life Plan.” The free guide (pdf) was inspired by Hospice of Michigan and the Michigan Association of Certified Public Accountants. It is a timely topic for me, having just been in Michigan for both a funeral and a wedding.

As we all know, life can change quickly and unpredictably. Don’t leave your loved ones a financial mess to untangle! Pages 36 and 37 contain a timeline and checklist of tasks for survivors, including things the bereaved should avoid doing right after a death.

Just returned from a luncheon where a U.S. Congressman spoke about the prospects for estate tax reform. One of his key remarks was, “if you can figure this Congress out, let me know…”

There are so many other major issues on the legislative table, it sounds as though estate tax matters may be tacked onto other bills or could sit unresolved until next year.

In a funny aside, he mentioned how growing up, he dreamed he would sit on a local school board, then thought he might sit on the board of the local bank, and eventually thought he could aspire to sit on the board of a company like General Motors. In the meantime, his brother became a physician. As a Congressman now, he observed that he has become all of these!

It’s amazing how many valuation questions can be answered by IRS Revenue Ruling 59-60, which is available as a free download in PDF format from BVResources.com. At only six pages long, it is required reading for preparers of valuations and users of valuations for gift and estate tax reporting.

Recently, I’ve had several people ask questions along the lines of…

1. When valuing a business, do you apply as many methods as possible and average the results?
2. Is there a standard multiple of average earnings to value my business?

Revenue Ruling 59-60 succinctly addresses these questions.

1. Because valuations cannot be made on the basis of a prescribed formula, there is no means whereby the various applicable factors in a particular case can be assigned mathematical weights in deriving the fair market value. For this reason, no useful purpose is served by taking an average of several factors (for example, book value, capitalized earnings and capitalized dividends) and basing the valuation on the result. Such a process excludes active consideration of other pertinent factors, and the end result cannot be supported by a realistic application of the significant facts in the case except by mere chance. [Section 7] [Emphasis Added]
2. Prior earnings records usually are the most reliable guide as to the future expectancy, but resort to arbitrary five-or-ten-year averages without regard to current trends or future prospects will not produce a realistic valuation. [Section 4.02(d)] [Emphasis Added]

To paraphrase — appraisers should not substitute arithmetic for professional judgment!