There are, according to Oxford Economics, some 4.8 million family-owned businesses in the UK employing 14 million people and contributing £575bn to the UK economy. They make up 85% of all privately-owned businesses. Their contribution to family wealth and the local and national economy is vital.
Yet, the very nature of their ownership can make valuing a family-owned and run business challenging. Here is what family business owners need to consider.
Why value a family business?
It is not unusual for a family business to simply pass from one generation to another begging the question why a valuation is needed at all. Yet there are trigger moments where a valuation is vital.
Typically, these will include:
• Succession planning. Here, a valuation is important to ensure succession is managed in a fair and equitable way, particularly where multiple family members have a stake.
• Tax planning. Succession or a sale can trigger an Inheritance Tax or Capital Gains Tax event, meaning an accurate valuation is essential.
• Growth and strategic planning. Valuations will be needed should a business look to grow through acquisition or external investment and maybe needed for funding purposes.
• Understanding performance. A valuation can be a starting point for families who want to monitor business wealth.
• Restructuring. The uncertain economic conditions of the past four years have made it challenging for businesses. Where restructuring or refocusing is needed, so too may a valuation.
• Family dynamics. Family businesses can be vulnerable to family disputes and divorce, triggering a requirement for an independent valuation.
• Sale or exit. Sometimes the next generation doesn’t want to take on the business, and so the family may wish to sell. Any sale process will start with a valuation of that business
The challenges of valuing a family business
The reason a business is being valued will often impact the result of the valuation itself, but the approach and factors considered will remain. There is the need to not only understand the business but the family dynamics too.
Here, your accountant will consider the industry and market position the business holds in terms of market share. The business model, costs and revenue structure need also to be considered.
So far, so straightforward.
However, the family dynamic may have a considerable impact on the valuation. The value of the business will need to take into account ownership, the roles family members hold and the decision-making process.
It is not uncommon for family members to take an income or enjoy perks from the business yet play a limited role in its day-to-day operation or conversely to take lower than commercial salary levels, and these too can impact values.
Legacy matters also need consideration. There is, of course, the emotional connection that can lead to family members believing a business is worth more than its market value, but other things to consider that may affect the value of the business include:
• An over-dependence on one family member.
• Informal management or governance structures.
• Family disputes, particularly where there is resistance to change.
• Strong connections to a local community and long-serving members of staff.
These are all concerns that can be mitigated with planning, and once resolved will have a positive impact on the final valuation.
Our specialist Business Valuations team has considerable experience in valuing family-owned businesses across a wide range of scenarios. For more information, please contact Tom Wacher, Partner:
Call: +44 (0)33 0124 1399
Email: enquiries@krestonreeves.com
Visit: www.krestonreeves.com
