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Last updated on 2024年5月31日

What are the challenges in assessing the value of a family business with multiple stakeholders?

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Assessing the value of a family business with multiple stakeholders can often be complex and emotionally charged. Unlike corporations with clear-cut ownership and valuation methods, family businesses intertwine personal relationships and individual contributions with the financial aspects of the company. When you're faced with evaluating such a business, the challenge lies in balancing the objective financial indicators with the subjective elements that define the business's unique character. This assessment becomes even more complicated when considering the diverse interests and visions of various family members involved.

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Rory James-Duff

Orwell Independent - Independent client reviews, employee engagement analysis, and advisory.

1 Emotional Factors

Emotions run high in family businesses, where personal relationships and business decisions are deeply interconnected. You might find that family dynamics can cloud objective judgment, leading to over or undervaluation. Sentimental value attached to the business often inflates its perceived worth, while conflicts among stakeholders might lead to undervaluation as a means to expedite a sale or buyout. Navigating these emotional waters requires a delicate balance between acknowledging personal attachments and maintaining a focus on the business's tangible and intangible assets.

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Rory James-Duff

Orwell Independent - Independent client reviews, employee engagement analysis, and advisory.
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Family dynamics frequently cloud judgement or stop new ideas getting the air time they deserve. Dominant family members might (consciously or sub-consciously) demonstrate behaviours at work that are rooted at home. A child, used to doing what they are told in their teens, may find it difficult to stand up to their mother/father/uncle in the board room in their 20s or 30s. Change can be hard to facilitate when family dynamics are mirrored in the work place.

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2 Ownership Structure

The ownership structure in a family business is typically more complex than in other types of companies. You'll encounter various classes of stock, non-voting shares, and trusts that can obscure the true distribution of ownership and control. This complexity makes it difficult to determine who has a say in business decisions, potentially leading to disagreements during the valuation process. Understanding the full scope of who owns what and how it impacts the business's value is crucial for an accurate assessment.

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Rory James-Duff

Orwell Independent - Independent client reviews, employee engagement analysis, and advisory.
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Informal ownership structures are a can or worms and should be transformed and simplified where possible. If you are considering putting the business up for sale, or are seeking inward investment it is advisable to clean up the family shareholder structure before any process. From a practical point of view I have witnessed how voting shares in the hands of persons NOT actively involved in the day-to-day running of the business can disrupt decision making, and prove a significant turn-off to new investors.

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3 Succession Planning

Succession planning, or the lack thereof, is a significant challenge when valuing a family business. The question of who will take over can greatly influence the company's future prospects and, by extension, its current value. If there's no clear successor, or if potential successors lack the skills or interest to run the business effectively, this uncertainty can diminish the business's value. On the other hand, a well-prepared next generation can enhance value by ensuring continuity and stability.

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4 Non-Financial Contributions

In family businesses, stakeholders often contribute in non-financial ways that are hard to quantify but essential to operations. These contributions could be in the form of time, expertise, or even the family name, which may carry significant brand value. Assessing these non-financial contributions requires you to look beyond the balance sheet and consider factors that don't have a direct monetary equivalent but still add substantial value to the business.

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Rory James-Duff

Orwell Independent - Independent client reviews, employee engagement analysis, and advisory.
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Buyers of family businesses will often have to unpick historical salary and dividend details to arrive at a more realistic 'new day one' starting point. Family businesses will have worked hard to optimise their tax bill, including having family on payroll and tax deductibles related to properties.

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5 Market Comparables

Finding appropriate market comparables for a family business can be daunting. The unique nature of each family business means that it may not fit neatly into standard industry categories or benchmarks. You must carefully select comparables that account for not only the financial performance but also the size, market position, and special characteristics of the family business. This comparison often involves a deeper market analysis than what is typically required for more standardized businesses.

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6 Legal Considerations

Legal considerations play a crucial role in assessing a family business's value. Issues such as estate taxes, shareholder agreements, and potential litigation can all affect valuation. You need to be aware of any legal constraints or obligations that may not be immediately apparent but could have significant financial implications. A thorough review of all legal documents and potential liabilities is necessary to ensure that the valuation reflects the true worth of the business.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Shannon Shaw ABV ASA MAFF CVA CBA BVAL ABAR

Shaw Business Valuation & Litigation Support Leader of Business Valuation & Litigation Support Group
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In my experience every business should be valued by the same standardized methodology as any other business regardless of family issues. Those issues are very important but, they are not valuation issues.

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What are the challenges in assessing the value of a family business with multiple stakeholders?

1

2

3

4

5

6

7

1 Emotional Factors

2 Ownership Structure

3 Succession Planning

4 Non-Financial Contributions

5 Market Comparables

6 Legal Considerations

7 Here’s what else to consider

Business Management

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What are the challenges in assessing the value of a family business with multiple stakeholders?

1

2

3

4

5

6

7

1 Emotional Factors

2 Ownership Structure

3 Succession Planning

4 Non-Financial Contributions

5 Market Comparables

6 Legal Considerations

7 Here’s what else to consider

Business Management

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