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The importance of valuation in family business succession

Business succession, especially when it's a family business handed down from generation to generation, is a complex process that requires careful preparation.

One of the key elements in this transition is the valuation of the business. In this article, we will explore the usefulness of a valuation as part of a business succession, focusing on family businesses, and highlight the tax issues they face. We will also examine the importance of obtaining a valuation document to justify the value retained when transferring the business.

I. What is company valuation?

Valuing a company involves determining its financial worth. It's a complex process that takes into account various factors such as assets, liabilities, cash flow, profitability, market competition and so on.

Valuation provides an objective estimate of a company's market value, which is essential when transferring or selling a business.

When it comes to determining the value of a company, it's important to distinguish between price and value. Price refers to the amount actually paid in a transaction, while value represents the objective estimate of what the company is actually worth on the market.

The valuation of a company involves assessing its intrinsic value, taking into account various factors such as assets, liabilities, cash flow, profitability, market competition, and so on. It aims to estimate what the company would be worth under normal conditions and without selling pressure.

On the other hand, the price of a company is often influenced by factors such as market demand, competition between potential buyers, negotiating conditions, expected synergies, etc. It may be higher or lower than the company's actual value, depending on these factors. It may be higher or lower than the company's actual value, depending on these factors.

The difference between price and value can be particularly relevant in a family business succession. When family members are considering taking over the business, it is essential to determine the true value of the business, independent of any family or emotional relationships. An objective valuation ensures that the value of the business is correctly established, which can contribute to fair discussions and a smooth transition.

It should also be noted that valuation can be carried out using a number of different methods, such as the net asset approach, the discounted cash flow approach, the comparative approach and so on. Each method offers a unique perspective on business value, and can be used depending on the nature of the business, the industry and the specific circumstances of the estate.

In short, the valuation of a company aims to estimate its intrinsic value, while the price represents the amount actually paid in a transaction. Understanding this difference is essential when considering the succession of a family business, as an objective valuation helps to establish a solid basis for discussions and negotiations, thus guaranteeing a successful and equitable transition.

II. Tax issues for family businesses in succession

When a business is passed on from one generation to the next within a family, the tax implications can be considerable. The FISC (French tax authorities) take a keen interest in the value of the business, as this determines the capital gains tax payable on the transfer. If the declared value is deemed to be undervalued, the FISC may question this assessment and proceed with a tax reassessment.

It is therefore essential to take into account the recommendations of the tax authorities to avoid potential disputes or tax reassessments. Here are some of these recommendations:

  1. Professional and independent valuation: The tax authorities strongly encourage family businesses in succession to have a professional and independent valuation of their business carried out. It is preferable to call in business valuation experts with in-depth knowledge of valuation methods and applicable tax regulations. This guarantees an objective and credible valuation, reducing the risk of the value being contested.
  2. Documented justification of valuation: The tax authorities require documented justification of the valuation used at the time of succession. It is therefore essential to retain all relevant documents, such as valuation reports, calculations, financial data and comparables used to establish the value of the business. These documents will serve as evidence and support in the event of a request for information or an audit by the tax authorities.
  3. Compliance with applicable tax rules : The tax authorities lay down specific rules concerning the valuation and transfer of a family business. It is essential to comply with these rules, and to respect the deadlines and procedures for declaring the transfer. Family businesses need to keep abreast of legislative and regulatory developments, so as to adopt the best practices for business transfers.
  4. Transparency and communication: The tax authorities encourage transparency and communication between the parties involved in the succession. It is advisable to consult a lawyer specializing in tax law to ensure that all legal and tax obligations are met. Transparency in dealings with the tax authorities can help establish a climate of trust and reduce the risk of litigation.

In short, to avoid potential disputes or tax reassessments in the event of succession to a family business, it is advisable to have a professional and independent valuation of the business carried out. Documented justification of the valuation chosen, compliance with applicable tax rules, and transparency and communication with the tax authorities are key elements in ensuring a smooth and healthy tax transition.

To request a valuation by one of our consultants XVAL :

    Simply complete this form and an expert will contact you within 24 hours to evaluate your business or answer your questions:









    III. The importance of a valuation to justify the chosen value

    Obtaining a solid valuation document is essential to justify the value retained when inheriting a family business. Here are some key reasons why this is of crucial importance:

    a) Avoid family disputes : An independent, professional valuation of the company provides an objective basis for determining value. This can help avoid family disputes that may arise if there is disagreement over the value of the business.

    b) Comply with legal requirements: By obtaining a valuation document, you demonstrate your willingness to comply with legal requirements. This reinforces the transparency and credibility of the transaction.

    c) Protect against tax reassessments: By presenting a solid, well-documented valuation document, you minimize the risk of tax reassessments. This helps avoid disputes with the FISC, and ensures that the value adopted is in line with the company's economic reality.

    d) Facilitate negotiations with heirs : A clear and precise valuation facilitates negotiations with heirs. Discussions can be more objective and balanced, making it easier to reach a consensus on the company's value.

    Valuation plays an essential role in the succession of a family business. It provides an objective estimate of the company's market value, which is crucial for avoiding family disputes, complying with legal requirements and minimizing the risk of tax reassessments. Obtaining a solid, well-documented valuation document enhances the transparency and credibility of the transaction, facilitating negotiations with heirs.

    In the context of a family business succession, it is advisable to call in business valuation experts to obtain a professional, independent valuation. This will ensure that the value chosen is justified and reflects the economic reality of the business.

    In conclusion, an accurate and well-documented valuation is an invaluable tool for ensuring the smooth and successful transition of a family business from one generation to the next. By recognizing the importance of valuation in succession planning, family businesses can better prepare for their transfer, avoid tax obstacles and protect the value of their business assets.

    To request a valuation by one of our consultants XVAL :

      Simply complete this form and an expert will contact you within 24 hours to evaluate your business or answer your questions:









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