Valuation of Family Businesses
Families own or control 90 percent of businesses in the United States. But according to the Family Business Forum at the University of North Carolina in Asheville, 30 percent make it into the second generation (Success), 12 percent, into the 3rd generation (Headline) and only 3 percent into the 4th generation (Dynasty). Due to poor planning, preparation and communication between siblings, brothers and sisters of a family, ugly valuation fights arise sometimes that affect the value of the family business.
Specific Characteristics of Family Companies
80 percent of family businesses have between 20 and 499 workers, with sales ranging from $5 millions to $30 Millions.
Family-owned businesses with 20 or less workers employed 20.2 million Americans whereas those with 21 to 499 workers employed over 55 millions Americans.
Family owned businesses generate 64 percent of the nation’s gross domestic product, however only 30 percent have succession plans and less than 40 percent have a successor lined-up.
Family finances are too tied to business success.
Two-third of family businesses don’t require family members to have the qualifications or related experience to be successful when entering the business.
Nearly half of America family businesses are operating without a written strategic plan.
75 percent of family owned companies have a board of directors, an advisory board, or both, that guide them when making strategic decisions.
Family Businesses Face Big Issues
It is estimated that 40.3 percent of family business owners expect to retire, creating a significant transition of ownership in the US. Less than half of those expecting to retire in five years have selected a successor.
Nearly half of family business owners (43 percent) have no succession plan in place.
Even though nearly 70% of family businesses would like to pass their business on to the next generation, only 30% will actually be successful at transitioning to the next generation.
A majority of family businesses (60 percent) believe that their ethical standards are more stringent than those of competing firms. They also report ethical standards being discussed often or always at meetings with employees, in discussions with customers and during board meetings.
How Families Hurt the Value of Their Businesses
The failure to plan for succession in a family business is more often than not the root cause of many issues that threaten the value and future of their businesses. Some of those issues include:
No succession planning
Strong owners can be weak at leadership development
No strict rules govern family members coming into the business or back into the business
The next generation is not trained to play nicely
Families can be resistant to change, and so can their companies
No formal compensation structure exists
Family conflicts inside and outside the company
All these issues affect the valuation of their businesses; therefore the value of these companies may not be as high as the owners think. The simple reasons are that they do not follow best practices for their industry, and their finances and business strategies are not in the best of shape.
Achille Ekeu, MBA, CVA
The Washington Valuation Group (WVG)
Achille Ekeu is a Certified Valuation Analyst (CVA) member of the National Association of Certified Valuators and Analysts (NACVA) in the DC-MD Chapter. He provides valuation services for Estate and Gift Tax, Purchase, Sale of business, Debt Financing, Buy-Sell Agreements, and Litigation Support in Divorce/Shareholders disputes cases. He can be contacted by phone at 240-274-9570 or by email at firstname.lastname@example.org.