Succession and deceased estate valuations for industrial businesses

When should a succession valuation be done?

Three to five years before the handover, not the month before. In many family industrial businesses the founder is still the chief estimator, the person the two biggest customers ring, and the only one who knows how to set up the old machines for the awkward jobs. A first valuation shows how much of the value depends on that, in dollars rather than in general terms. The plan that follows moves the dependency: a second-tier manager given real authority, quoting moved into a system, customer relationships handed over in person, processes written down. A second valuation a couple of years later measures whether the plan worked.

Done this way, a valuation is a management tool as much as a number. It also gives the incoming generation or management team a clear view of what they are taking on, including the plant that will need replacing on their watch.

How do you treat family members fairly when one takes over the business?

The usual tension is between the child who works in the business and the children who do not. If one child takes the shares, the others are often equalised with property, cash, superannuation or a loan back from the business. That only works if the business is valued on the same basis as everything else, at the same date.

Two industrial details cause most of the arguments. The first is rent. If the factory sits in a family trust and the business pays well below market rent, the business looks more valuable than it is, while the sibling who inherits the property will later expect a market rent the business has never paid. We value the business on a market rent so the two values fit together. The second is growth since the working child joined. If the business has doubled under their management, the family may decide some of that value is theirs already. That is a family decision; the valuation can show the value at the date they joined and today, so the conversation has numbers in it.

What changes when managers buy the business?

Managers rarely have the capital to buy outright, so management buyouts of industrial businesses are usually staged and funded from the business's own cash flow: a bank loan, vendor finance and deferred payments, repaid out of future profits. That makes sustaining capital spending central. If the plant needs replacing in the first years after the buyout, the same cash cannot also service the purchase debt, and a price that ignored the capital spending will strain the business that is meant to pay for it.

Staged sales need a pricing mechanism for each later tranche: a revaluation, a formula, or a fixed schedule. Each has trade-offs, and each additional valuation date is $495 + GST. If employees are being offered shares or options rather than buying a controlling stake, see employee equity on our services page.

What does an executor need from a business valuation?

When an owner dies, the business does not stop. Wages, supplier accounts, equipment finance repayments and customer orders all continue, often under a manager who has never had to run the whole operation. The executor needs to know what the estate actually holds: shares or units in the operating entity, often loan accounts owed by the company to the deceased, which in family industrial companies can be large, and sometimes the plant or the factory in a separate entity.

Two dates commonly matter. A value at the date of death may be needed for the estate's records and tax, and a current value if the estate is selling the business or distributing shares to beneficiaries. A valuation at the date of death also has to deal honestly with the owner's absence. Where the deceased was the chief estimator or held the main customer relationships, we say how that loss was treated, because it is often the largest single judgement in the report.

How does CGT treat inherited business assets?

Under the ATO's rules, the executor disregards a capital gain or loss when an asset the deceased owned passes to a beneficiary. The beneficiary's cost base then depends on when the deceased acquired the asset. For an asset acquired before 20 September 1985, the first element of the beneficiary's cost base is its market value on the day the deceased died. For an asset acquired on or after that date, it is generally the deceased's own cost base.

That first rule matters for industrial families. Many manufacturing and engineering companies were founded before 1985, and the founder's original shares may be pre-CGT assets. A market value at the date of death sets the starting point for any later sale by the beneficiary; without one, that sale has no documented cost base. Whether the rule applies to particular shares, and how, is a question for the estate's accountant.

What if the distribution is challenged?

If a family member disputes the will or the distribution and the matter goes to court, the valuation may need to be prepared as expert evidence. A report prepared for estate administration is not a court expert report; court or tribunal work is a separate engagement with its own scope and fee, quoted individually. See dispute valuations.

What does a succession or estate valuation cost?

The fee follows the business's turnover; the bands and delivery times are in the fee table below and on our pricing page. What is specific to estates and succession is the extras. An estate often needs the date of death and a current date, and a handover plan may need a value now and again before the final tranche: each additional date is $495 + GST. Where the factory or the plant sits in a family trust, each additional entity is $795 + GST. We confirm the fee in writing before we start. No hourly billing. The method is on how we value industrial businesses.