How Is The Worth Of A Business Determined?
The simplest way that the business’s worth is determined is to have a business appraisal by a qualified business appraiser determine what that value is. Sometimes in the underwriting process or the investment banking process, if the business is put on the market, rather than have a formal appraiser of the business done, an investment banker will try to get competing bidders to make competing bids in order to drive up the price of the business and ultimately what the business’s worth is what somebody will write a check for.
Estate Tax Considerations That Are Addressed In Business Succession Planning
There are certain estate tax considerations that need to be addressed. First of all, if a business is successful, it is going to have a value that is going to drive the value of that business to such an extent that it is going to cause estate tax to be incurred when the business owner dies. When estate tax occurs, then the family has to struggle with where the money is going to come from to pay the estate tax and how to minimize its affects.
In the business succession planning process, there are a number of techniques that are used in order to make the business for estate tax purposes worth less than it really is. Economically if the business were to be sold, in doing business succession planning, often what we are trying to do is segment the business into several different parts and when the business is segmented into several different parts, some of the parts rarely equals the whole and in that way, we can produce valuation discounts for estate tax purposes in order to minimize any estate tax consequences that will be there.
Income Tax Considerations That Are Adjusted In Business Succession Planning
Just like estate tax, there are income tax considerations that need to be addressed. First of all, there is going to be income tax consequences in almost any business succession or exit plan that occurs other than one in which just a gift of the business is made. If the senior generation sells the business, the senior generation is going to incur capital gains taxes. Sometimes the business is sold in a manner so that even though the senior generation has sold the business to the next generation, the senior generation continues to pay the income taxes on the business.
That is done for the purpose of reducing the value of the business owner by having to continue to pay the business income taxes. But the bottom line is that in just every instance, there are going to be income tax consequences and a good part of the planning in business succession and business exit planning is to determine how to mold the transaction so that the most favorable income tax treatment is received.
The Role Of Life Insurance In Business Succession Planning
Life insurance has a big role in business succession planning. The first role that it has is if the business owner has a plan to transfer succession of the business to the next generation, what happens if the business owner does not cooperate and the business owner dies before that business succession plan can be put in place.
Life insurance on the business owner is a way to bring new dollars into the business so that the right new people can be hired and the employees who are there can be rewarded for staying with the business and continuing to keep its value until the business can be sold. Often life insurance is then purchased on the next generation of business owners in order to provide a source of liquidity to pay for the business, the purchased interest of a deceased or disabled business owner.
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