Step into action Featured

8:00pm EDT April 25, 2009

The current economic conditions and unstable market may have you feeling like your financial value is dropping. Because of this, you may be sitting on the sidelines and not planning for your future.

“Since you’re feeling less wealthy, you’re not doing some of the family transfers like gifting or worrying about getting shares out of your estate,” says Brian Bornino, CPA/ABV, CFA, CBA, director of valuation services with GBQ Consulting LLC. “Now is a good time to do that, given the low values in the market. It’s a great time to transfer shares, and a lot of people are not doing that.”

Bornino recommends working with a financial planner or trusted adviser, because you need to diversify your wealth and start to think about succession planning. There are a lot of ways to transfer business ownership, so you need to have a plan. Also, a business valuation will help you estimate the economic value of your interest in your business.

Smart Business spoke with Bornino about how to begin planning for the future, how business valuation plays a role in planning and what unique succession planning tools you can use in the process.

How can a business valuation be a helpful planning tool?

A business valuation comes into play from a compliance standpoint, in terms of documenting the fair market value of the transferred shares for gift tax purposes. It’s also a good starting point for planning. A lot of times, the wealth transfer plan starts with a business valuation and knowing what’s there, how much the business is worth, what other assets the family has, and what the value of the company will be in the estate.

You have to think about wealth equalization plans and how to take care of active and nonactive family members. You probably want to transfer an equal amount of value to them, but maybe not in company stock, maybe in other assets you have. Or you might do a recapitalization with voting and nonvoting shares and make sure the voting shares end up with the active family members and the nonvoting shares go to the inactive members.

At the end of the day, a business valuation is the cornerstone of the transfer, because you have to know the amount of money you’re dealing with to adequately plan.

What are some unique succession planning tools to use in the process?

There are a lot of great tools, but probably the most underutilized tool is the employee stock ownership plan (ESOP). It allows selling shareholders to sell the company to their employees. If the business doesn’t have active family members and is not going to remain a family business, an ESOP is a way to sell to your employees and still get fair market value for the shares.

It starts with talking to an ESOP consultant to make sure the ESOP meets your business objectives. For example, there has to be a strong management team or else the ESOP, which has similar characteristics to a management buyout, wouldn’t work.

The next step is an analysis to see if an ESOP is financially feasible. The consultant could determine the value of the company, what the ESOP would be willing to pay for those shares and decide if the price makes sense from the seller’s standpoint. They can also make sure the ESOP is properly structured to take advantage of the financial and business benefits that ESOPs offer.

You then assemble a team of advisers and complete the transaction. Usually the employees don’t find out until right before the transaction is about to happen, because you don’t want to disappoint them if it doesn’t go through.

What types of companies would be best for ESOPs?

Companies that have good cultures and open-book management styles are usually a good fit for employee ownership. Hopefully, companies that form ESOPs already have some of those characteristics, and hopefully, their employees are already taking active roles in the business.

Many owners are concerned about employees running their company, but from a corporate governance standpoint, the ESOP doesn’t necessarily change the management structure. The ESOP is the shareholder, but there’s still a board of directors that appoints management, and management still runs the company.

Why is it important to plan ahead?

Knowing the value of your business can help you decide if you want to sell to a third party or your employees or transfer to your children. It’s hard to plan if you don’t know the value. If succession planning isn’t done, the business might not transfer to the next generation or employees. If the business deteriorates, it’s not worth anything to your family, employees or a selling shareholder.

ESOPs are an opportunity to keep the business an independent entity, rather than selling to a competitor, where employees could potentially lose their jobs if the business relocates to another state or country. It’s a way to reward the employees who helped build the business, as well as a way to take advantage of many tax, financial and business advantages.

Brian Bornino, CPA/ABV, CFA, CBA, is director of valuation services at GBQ Consulting LLC. Reach him at (614) 947-5212 or