Succession in family businesses is often accompanied by difficult tasks, many of which place a burden on company management and may not be directly related to strategic issues concerning the company’s growth. The gradual handover of the company also means that management must urgently define the transfer of responsibilities, particularly in the operational area, so that company leadership can fully dedicate itself to the company’s vision.
Many successful Slovak companies are family businesses, some with a multi-generational tradition of entrepreneurship. On the other hand, according to available studies, only 30% of all family businesses survive into the second generation, only 10–15% survive into the third generation, and 3–5% survive into the fourth generation. Despite the many other challenges that come with running a family business, succession in family businesses is one of the most difficult challenges due to the high risk of the company’s demise.
What is your company’s value?
Before the actual succession of a family business, it is very important to know its true value. Money is a sensitive topic in itself, and it can lead to even more difficult confrontations when discussed within the family circle.
There is a common misconception that the value of your company is assessed solely based on revenue and profits. However, the opposite is true, and your company may have a different value. Under the Commercial Code, a business is defined as a set of tangible, as well as personal and intangible, components of business operations. Tangible components include real estate, machinery, technological equipment, office equipment, and the like. Personal components include the structure and qualifications of employees. Intangible components include rights such as the right to a trade name, industrial property rights, as well as the legal entity’s reputation, trade secrets, or know-how. All these components collectively create the value of the business, which can be monetized upon the transfer of the company. When selling, it is essential to take all components of the business into account, as the invisible (intangible) ones can also represent significant value.
Mandatory Expert Appraisal
In light of the above, the correct approach when determining the value of your company is to entrust this task to experts—appraisers. The preparation of an expert appraisal is mandatory if a business entity changes its legal form to a limited liability company or a cooperative, the establishment of which requires partners to make capital contributions to the business entity. In other cases, the expert appraisal is voluntary; however, it provides a starting point for further determining the value of the business.
Methods for Determining Business Value
Generally, within the Slovak business environment, there are four main methods for determining business value: the asset-based approach, the comparative approach, the income-based approach, and the combined approach. In the asset-based approach, the value of the business is determined purely based on its tangible assets, with the company’s liabilities deducted. Although this method is simple and straightforward, it does not take into account the company’s future earnings or its intangible assets. The comparative approach is a method in which a company is compared with other similar companies that were sold at a given time. Again, the advantage of this method is its relative simplicity; however, data on the companies being compared may not always be accurate or fully available. Under the income approach, the value of a company is determined, as the name implies, based on expected future earnings. The advantage is that it takes into account the company’s future growth, but it is not always possible to make a comprehensive calculation of future revenue forecasts. In practice, a combined approach is often used, which involves combining elements of the previous methods. The combined approach is more complex, but it allows for a better understanding of the company’s true value.
This article serves as an introduction to the topic of family businesses and succession. We will publish additional articles related to this topic in the coming weeks.
