Case Study - Business Succession Planning
We have a client, let’s call them ABC Manufacturing, a closely held family-owned business in Upstate NY, has been operating for 22 years. With 18 employees and steady annual revenue of $4.5 million, the business had grown significantly, but the owner, Mark, had never formally assessed the company’s true market value.
Mark is now in his early 50s and has begun to think more seriously about long-term planning for both his family and his business. He wasn’t ready to sell-but he wanted to understand his strategic options.
The Challenge
Like many small and medium-sized business owners, Mark reinvested most of the company’s profits back into the business. While this fueled growth, it also meant that:
- He had no clear understanding of the company’s current value
- His personal wealth was concentrated heavily in the business
- Key-person dependency created risk: the company’s success was tied to him and two high-level managers
- He lacked a roadmap for eventual succession or a future sale
- There was no updated valuation for buy-sell agreement funding
- He did not have adequate key-person insurance in place
- What happens post sale, income needs, tax implications, and the process.
This lack of clarity meant that if an unexpected event occurred, or if a buyer suddenly approached, Mark would be making high-stakes decisions without accurate information.
The Process
During Mark’s annual review, we discussed his business and some of the issues on his mind. We informed Mark that we had a partnership with Principal Financial Group to provide informal business valuations to our clients. This process is ideal for small to mid-sized businesses that are preparing for succession, reviewing their buy-sell agreement, or simply wanting to understand their financial position.
The valuation provides 5 different valuation methods:
- Excess of earnings method
- Capitalization of earnings method
- Adjusted Book Value method
- Multiple of discretionary earnings method
- Discounted future cash-flow method
This informal valuation did not require the cost or complexity of a full certified valuation, making it a practical starting point for long-term planning.
Key Findings
The valuation revealed that ABC Manufacturing was worth significantly more than Mark expected - a gap of nearly $1.2 million compared to his assumptions.
It also uncovered critical planning opportunities:
1. Key Person Insurance Needs
Two individuals-Mark and his operations manager-were responsible for more than 70% of client relationships and operational decision-making. The valuation helped determine:
- Appropriate levels of key person insurance
- How a disruption would affect the business
- The amount needed to protect cash flow if a key person were lost
2. Succession Planning
The valuation clarified what it would take to:
- Transition ownership to Mark’s children
- Prepare for a management-buyout
- Improve systems and reduce owner dependency
- Set a realistic future target valuation
3. Eventual Sale Preparation
Even though Mark wasn’t ready to sell, the report identified:
- What strategic buyers in his industry typically look for
- Operational improvements that could increase sale value
- How far he was from his target retirement number
- The potential timeline and path to becoming “sale ready”
4. Estate and Retirement Planning
With a more accurate business valuation, Mark could:
- Better calculate his net worth
- Align personal financial planning with business value
- Ensure adequate estate liquidity
- Revisit his buy-sell agreement and funding strategies
The Outcome
With clarity around the company’s value and risk profile, Mark took several important steps:
- Implemented key-person insurance for himself and his operations manager
- Updated his buy-sell agreement using the valuation as the basis for funding
- Began a multi-year succession plan designed to maximize future value
- Increased retirement savings contributions and diversified outside the business
- Set measurable goals to improve operational efficiency and long-term value
Most importantly, he gained confidence knowing he had a clearer picture of his business-his largest asset and how it fit into his family’s long-term financial plan.
Why Business Owners Should Know Their Company’s Worth:
Whether you’re years away from selling or not even thinking about transition yet, knowing your business value provides significant benefits:
Key Person Insurance Planning:
Determine how much coverage is needed to protect cash flow and ensure continuity.
Buy-Sell Agreement Funding:
Keep agreements updated and properly funded with accurate valuation data.
Succession Planning:
Understand what your business is worth before transferring ownership to family or employees.
Preparing for a Future Sale:
Become “buyer ready,” even if you’re not actively looking to sell.
Strategic Growth Planning:
Know which areas drive value so you can strengthen them.
Estate & Tax Planning:
Improve overall financial planning with accurate net-worth calculations.
Retirement Readiness:
Understand how the business contributes to your long-term financial independence.
How We Help:
At The Pitti Group Wealth Management, we offer complimentary informal business valuation services for small and medium-sized businesses through our partnership with Principal Financial Group. This service is ideal for business owners who want practical, actionable insights without the cost of a full certified valuation. Whether you’re planning ahead for succession, evaluating key-person insurance, or simply want a clearer view of your financial picture, our team can help you make informed, strategic decisions about the future of your business.
Disclosures:
This case study is provided for illustrative purposes only to provide an example of the firm’s process and methodology. The results portrayed in this case study are not representative of all client situations or experiences. An individual’s experience may vary based on his or her individual circumstances and there can be no assurance that the firm will be able to achieve similar results in comparable situations. No portion of this case study is to be interpreted as a testimonial or endorsement of the firm’s investment advisory services. The information contained herein should not be construed as personalized investment advice.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
This information is general in nature and should not be considered tax advice. Investors should consult with a qualified tax consultant as to their particular situation.
The Pitti Group Wealth Management, LLC (“The Pitti Group”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where The Pitti Group and its representatives are properly licensed or exempt from licensure.