Last time, we wrote about the operational side of succession planning.  In case you missed it, you can read it here.

Continuing with our series, we’re moving on to the financial side of succession.  There are a few key ingredients:  who will become the new owners of the deceased shares, and what are the financial arrangements for that transfer.  

Both issues depend largely on the valuation assigned to the business.  This valuation process is not something to be left until something bad happens; that can breed animosity amongst heirs and future owners. Businesses with the least amount of animosity and grief in a transfer of ownership are those who have had regular valuations by an outside professional and where owners and future owners are well versed in the process and the value. While all owners probably have a general sense of the value of their businesses, having an independent outside appraisal at regular intervals is better when the IRS or anyone else wants to challenge your opinion of value. Do not shop for this work with a low bidder mentality.  Your criteria for selecting a valuator is their experience in your specific industry and their rate of success in defending their valuation when challenged by the IRS or any other interested parties. 

The extent to which the business has any bank loans are something that may need planning.  If the owner had any personal guarantees on business loans, the issue needs to be resolved with lenders before there is a problem.  The worst possible scenario shortly after the majority owner/operator passes away is that all loans get called.  It may be just as bad if new owners find out after the fact that they need to step up and personally guarantee these loans themselves.  That could be a significant hardship for a business trying to succeed with a pre-arranged financial succession plan. 

Real estate can also cause problems.  Will the real estate remain with the heirs or will the new owners also buy the real estate.  If the real estate is large and extremely valuable, will the new ownership team have the capital to purchase the real estate now that they’ve just made a substantial financial commitment to become the new owners of the company? This may be dependent on the interest rate environment, the new owner’s ability to borrow and any other issues common to large real estate transactions such as hazardous waste testing. 

As with the business itself, I strongly recommend a formal valuation of the real estate.  This should be kept current with valuation updates occurring at regular intervals. Let me explain a bit further what I mean by regular intervals.  Annually is certainly an acceptable interval but may be overkill.  Start with one now, and then each year in your minutes at your privately held annual meeting, have a discussion with your leadership team about last year’s value, and if everyone agrees that it is still valid.  If not, the group can agree on a new number that has strong validity if ever challenged. Updating the formal valuation should happen when there is a material change of facts or circumstances, and probably no less than every 5 years. The business itself, however, may require more frequent formal valuations if it is growing rapidly, making acquisitions or developing new products, markets or technology. 

One last point about real estate.  Make sure there is a lease between the actual owner of the real estate and the business.  Hopefully your team of advisors was at least aware enough to segregate the real estate into a separate entity when it was acquired. The lease between the two entities should be based on fair market value.  If the real estate is valuable with substantial maintenance requirements, rent and expenses, a formal appraisal of fair market rental rates would be advised. 

Next time, we’ll finish up the financial piece of business succession by discussing the financing of the transfer of ownership.  In the meantime, we’d love to hear from you. 

Napier Financial is an independent full-service wealth manager and a fiduciary.  We act as a financial “head coach”, overseeing and managemanaging all facets of our clients’ financial lives, including succession planning and business owner retirement planning.  Interested in learning more?  Reach out to Alex Weiss at or 781.884-2356. 

John P. Napolitano CFP®, CPA, PFS, MST is Founder and Chairman of Napier Financial in Braintree, MA.  Visit for more information. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investment and financial planning advice offered through US Financial Advisors and Great Valley Advisor Group,  Registered Investment Advisors. 

By John P. Napolitano CFP®, CPA, PFS, MST Founder & Chairman Read More