Pandemic Triggers Chances for Valuers in Exit Planning


One of the key takeaways from the recent ENGAGE 2020 conference sponsored by the AICPA was one of particular interest to business valuers. “The pandemic has created some temporary financial planning opportunities,” says Steve Siegel, JD, LLM, president of The Siegel Group. “If you have a client who plans to pass their business along to a child one day—while business values are low, this is a useful time to get a new business appraisal. If you wait, values may recover, and federal tax laws may be less generous to business owners seeking to transfer their interests to family members.”

Many advantages. 

Succession planning is a practice area with many benefits for appraisers. First of all, it can be very rewarding work for valuation generalists who don’t want to spend all of their time doing niche valuations. Also, it’s less price-driven than traditional commodity work, such as estate and gift valuations or ESOP appraisals. It’s also a great consulting opportunity for valuation experts to get involved as financial advisors or “facilitators,” a role that often feels like a financial psychologist. Exit planning typically involves dealing with older family business owners and the tough issues of estate planning, asset transfers, and passing on substantial management responsibility to the next generation (who may not be ready to take on such a heavy burden—even if they do want the wealth).

To be a good succession planning consultant, you need to force some tough issues, first by getting the parent/owners to put together a plan and then by bringing their adult children to the table. Experienced consultants advise that you get the fights resolved upfront, while the parents are still alive—and not afterward, when the siblings (who may not like each other) stop talking to each other and start filing lawsuits. By tackling the sensitive issues, succession planners can bring the entire process to fruition and help the family avoid personal and financial disasters.

Leverage your experience. 

The specific components of exit planning should be familiar to many credentialed business appraisers. The process focuses on: (1) traditional M&A planning; (2) “key” employee transfers; (3) next-generation (family) transfers; and (4) buy-sell agreements/appraisals.

Exit planning strategies begin with the broad question: What is the business worth? What if the business has no significant value? Amid today’s pandemic environment, this is more of a possibility. The owner may be very disappointed, but a strengths, weaknesses, opportunities, threats (SWOT) analysis can help identify any value-creating areas and places for improvement. Indeed, some businesses have reinvented themselves in response to the impacts of the coronavirus.

The value discussion branches out into three typical tracks, each with its own specific issues:

  1. Asset or stock sale? Or does an installment sale make sense, to spread the tax consequences over time? For an operating business, would an ESOP work? What about recapitalizing the business by issuing more stock and then redeeming the founding shareholders’ equity?
  2. Internal transfer? If owners want to pass the business onto key employees, consider how they might structure a buy-in that will “incentivize” new partners while providing sufficient retirement for the owner/older partners, and how they might maximize retiring partners’ return without burying the remainder in debt.
  3. Family transfer? How can the owner pass the business to the next generation at the lowest possible transfer/tax costs? How do specific gifting plans and estate options work? What about installment sales of minority shares? How do minority/marketability discounts come into play?

No matter which track is followed, it will end with a carefully crafted buy-sell agreement.

Buy-sell agreement is key. 

Creating an effective buy-sell agreement is another topic in and of itself.  Essentially, a buy-sell needs to balance a number of interests, including the continued viability of the business, the needs of the affected (departing) principals and their families, and the needs of the remaining principals. On balance, most practitioners believe the paramount concern must be the continued economic viability and health of the enterprise. That approach will ultimately work to the advantage of all the parties, both the principals who are leaving and the ones who will stay with the business.

Buy-sell agreements must also cover the “trigger” events, such as death, disability, and divorce. They should deal with voluntary and involuntary events (sale or withdrawal, termination or expulsion) and also bankruptcy, insolvency, and receivership. Having determined what triggers a buyout, the agreement must also address how to value the purchase and how that purchase price is to be paid.

In the context of business succession planning, they can also provide a recurring source of value to BV consultants, who ideally should review buy-sells regularly, amending and updating to ensure their provisions still promote the interests of the entities and their principals.

Secret to success. 

The secret to succeeding in the business succession/exit planning process is to ease the owner’s pain all the way through the process. This means permitting the owners to:

  • Leave the company on their own terms and timetable and not as the result of external, unexpected pressures or sudden deadlines;
  • Realize the full value of the business and all their hard-earned wealth, minimizing the impact of transfer and estate/gift taxes;
  • Retain control of the situation by entertaining a variety of exit options;
  • Suffer the minimum of psychological stress and family conflict;
  • Watch a lifetime of work come to a fulfilling, profitable finish; and
  • Guarantee the continuity of the business.

You’ll find some potential problems along the way. For one thing, a business owner doesn’t want to talk about the death of his or her company. Also, exit planning can be time-consuming—and most owners are buried in day-to-day operations and management. The planning process can be complex and can look costly. Most owners don’t understand the tremendous return on investment that solid exit plans can provide.

As a result, many clients can stay buried in the work and do nothing. The advisor who can get them to face the difficult issues and make the necessary changes as smoothly and painlessly as possible becomes invaluable.

Marketing a consulting practice. 

As with the development of any other focused business valuation (BV) practice, it’s critical to build your own brand in business succession planning. Marketing is not something you do in your spare time—you have to do it all the time and sometimes when you’re the busiest. It’s also much harder to sell BV services during flat or falling times. Therefore, get a marketing plan and schedule set up now and stick to it. Become known in this practice area and promote your expertise—write articles and speak on webinars or at conferences and at smaller professional gatherings (such as local bar association meetings).

Attorneys will be your best referral sources for business succession planning. A second source of referrals consists of other BV analysts and accountants. You’ll get referrals when they are conflicted out of a consulting job or don’t have the requisite expertise. You’re not taking work from them—you’re helping your colleagues to do better work for their existing clients by acting as teammates. The more of these professional connections you have, the more quickly your practice will grow.

For more advice.

Want to listen to some timeless advice on opportunities in exit planning from Shannon Pratt, Gary Trugman, Chris Mercer, Ron Seigneur, and other thought leaders? Check out some of these past webinars from BVR, available for free to Training Passport holders.


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