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Step 1. Determining the Business’s Market-Based Value

With any private business transition, the value of the business in question can be perceived very differently by the various parties involved – even when the parties are members of the same family.  That’s why the most logical starting point, even for a family business transition, is determining the market-based value of the business.  Once this benchmark is established and known to all parties, it creates a point of reference to work from.

Acuity will do an in-depth assessment of the most likely fair-market value of your business.  Fair-market value is defined as the price at which the business would change hands between a willing buyer and a willing seller, with neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.  In most cases, three to five years of previous financial results are considered to arrive at a market-based valuation.

Step 2. Review with Both Generations/Develop Common Understanding

This is the most critical step in the process.  Without a common understanding and agreement about the credibility of the business’s valuation, there is a low probability for a successful transition.  Acuity’s role at this point is to provide full transparency to both parties. We will show the methodology used to arrive at the valuation, demonstrate its credibility, and of course answer any questions that might arise.  

Market-based valuations almost always utilize historical data, which is a good thing since there is little to dispute.  However, when making a pricing decision, Buyers are really assessing future results. Historical data is used based on the assumption that it’s the most objective data available about predicting the future. 

The younger generation of a family, especially if they are working in the family business, may be aware of issues that cause them to question this assumption.  Our job at Acuity is to facilitate a productive discussion that ultimately provides an informed view of the likely future results of the family business.   

Step 3. Reach Agreement on an Appropriate Price and Deal Structure

The above discussion may well lead all parties to agree that future results will indeed differ from what’s occurred in the past. If so, an adjustment in the market-based price may be warranted.  Also, it’s typically at this point in the process when the “family discount” discussion is held.  Of course, this can also have a significant impact on pricing, depending on the seller’s needs and the buyer’s ability to pay and when.

It’s important to note that the final price is not the end of this transition equation. How and when the money is paid is a vital component as well.  For example, if a seller secures financing for a significant part of the purchase price over ten years instead of five, it can have a major impact on the business’s annual cash flow. Concessions in terms of payment amounts and timeframes are typical in family business transitions, but they still need to be thoughtfully discussed and agreed upon. 

Acuity brings an in-depth understanding of all of the large, small and unique details that often accompany family business transitions. Throughout the process, our role is to meet the specific needs of both parties so that a productive and gratifying deal can be achieved.  

Step 4. Turn These Agreements Into a Completed Deal

At this stage, we will work to turn all of the talking points listed above into a completed deal with all of the required legal agreements, bank loans, etc., in place.  If specialists were or are needed, they will be brought in at the appropriate time. When this process concludes, a harmonious family business transition should be complete, with all parties looking forward to a bright and successful future for both the business and themselves.