Use Business Evaluations to Grow And Maximize Estate Planning When Times Are Tough

In times of great uncertainty or disruption, some Midland business owners will panic and bury their heads in the sand. Some will sit tight and wait for things to settle down. But others will try to create opportunity and future growth and maximize their estate plans by using a Midland business evaluation. Which will you be? We’re here to help you be the latter. 

Tightening the Belt

In difficult times, Midland companies make difficult decisions about where to cut expenses or streamline operations. Sometimes it takes a big event to help business owners see their business models in a new light. Many Midland business owners think it’s a novel idea to pay for a business evaluation in a time of uncertainty. You’ve no doubt already made some changes, and your future business value may benefit from making more of these tough decisions now, such as:

• Combining roles and responsibilities to more efficiently deliver your products or services;
• Canceling or delaying planned expansions or equipment purchases; and
• Eliminating Midland customers or lines of services that require a high level of human capital or a high degree of customization, which can eat into profits.

Be cautious to not let these decisions affect the short-term or long-term profitability of your Midland based company. Too often, companies look at expenses that have an immaterial impact on cashflows. Cost cutting and cost management should be focused on supplier costs, which are buried inside cost of goods sold. An evaluation of revenues should also be assessed to make sure you are charging a competitive price and are not undercharging. These are just some of the things that a Midland business evaluation can do for you to help manage costs in a time of uncertainty. 

Consider Growing Rather Than Shrinking

Now may be the time to acquire smaller, less adaptable Midland companies who are struggling to continue. You may have strategic business plans that are more achievable with the help of another company’s assets. Keep in mind that you may not need to acquire an entire business if that approach does not work for you. Consider these options:

• Purchase the customer list of a competitor who is not going to continue their business. A customer list can be valued using a Midland business evaluation; 
• Look at acquiring inventory, equipment, or staff from smaller competitors; these may be options for growing your business that weren’t available just a few months ago. These too can be accomplished with a business evaluation; and 
• Suggest seller financing and more flexible payment terms; sellers are willing to consider alternate sale structures when bank financing and cash are less likely to be available. A Midland business evaluation firm can work on seller financing strategies that work for all parties involved, which can be more flexible. 

Take Advantage of Estate Planning 

Investors value the shares of public companies on a (nearly) continuous basis. It should not be too surprising that these “real-time” evaluations are subject to a good bit of volatility.

Is the value of your family business that volatile? Probably not. Unlike public companies, privately owned Midland family businesses are not subject to continuous public evaluation. Reliable evaluation data points for family businesses exist only when a competent Midland business evaluation is prepared or when there is an arm’s-length transaction with a third party. As a result, whatever day-to-day volatility exists in the value of your family business is not visible. However, just because you can’t see it doesn’t mean it’s not there. Instead, what is often assumed to be limited volatility in the value of a family business is more likely a function of the limited frequency with which value is observed. Unless you are an essential Midland business in a time of economic crisis, the value of your family business is likely lower today than it was prior to the crisis. This can only be tested with a business evaluation.

The Silver Lining

At this point, you may be thinking that, even if the value of your family business is currently depressed, you have no intention of selling today. But even for families that have no intention of selling in the current environment, the fact that the value of your family business has declined should not be ignored. One of the cornerstones of estate planning is the concept of fair market value (“FMV”). Fair market value is the price at which shares in family businesses can be gifted or otherwise transferred when executing estate planning. In general, the lower FMV is, the more efficiently shares can be transferred in pursuit of estate planning goals. RS regulations (Revenue Ruling 59-60) define fair market value as:

“The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. Court decisions frequently state in addition that the hypothetical buyer and seller are assumed to be able, as well as willing, to trade and to be well informed about the property and concerning the market for such property.”

Family business directors are currently facing many pressing issues. Amid all of the chaos, however, directors should know that the estate planning opportunities triggered by lower business evaluations may not last. Midland business owners should be schedule meetings with their estate planning advisors to see if there are steps available to help reduce the burden of future estate taxes on their Midland family business.

Personal Planning Considerations

Be sure to evaluate your personal planning in light of any recent changes in your business evaluation, investments outside of your business, or other areas of personal financial stability. Think through issues such as:

• Business Continuity – how will your business continue if something happens to you?
• Exit Timeline – how has your personal plan to continue working or owning your business changed recently, and what adjustments are necessary to get you back on track or support your new timeline?
• Family Support – Do you have family members who need additional support, financial or otherwise? If so, are there creative ways you can help them?

We strive to help Midland business owners identify and prioritize their objectives with respect to their business, their employees, and their family. If you are ready to talk about your goals for the future and get insights into how you might achieve those goals, we’d be happy to sit down and talk with you. We love providing business evaluation solutions for Midland business owners.