For many business owners, the business can be the largest asset they own. When it’s time to pass the business on, you might transfer it to a family member, business partner or management team, or leave it in a will. Almost every decision depends on one crucial number: the business’s value.

Get that number wrong and the effects can last for years. A child who takes over the business may be stretched to pay out siblings at an inflated price. A partner's family may receive less than a fair share. A tax position may be built on a figure that doesn't hold up if the ATO looks at it. This article explains how a business valuation is part of succession and estate planning. It also covers what makes a valuation trustworthy for planning purposes.

Why does succession planning need a business valuation?

Because every succession option involves transferring value, and the parties need a figure they can rely on. Common scenarios include:

• passing the business to one or more family members

• selling to a business partner or co-shareholder

• a management or employee buy-out

• a staged handover, where ownership transfers over several years

• setting up a buy-sell agreement between shareholders, to take effect on death, disability or retirement

In each case the business valuation sets the price, or the basis for working out the price. It also shows the owner what the business is realistically worth before committing to a plan. This matters if the proceeds will fund their retirement.

How does a business valuation help keep things fair between family members?

When one family member takes over the business and others don't, the usual aim is to balance things out. This is often done with other assets, such as property, investments, or a cash payment. That only works if everyone accepts the value placed on the business.

An independent, documented business valuation gives the family a common starting point. The child taking over sees that the price accurately reflects how the business really operates. Meanwhile, the siblings recognise that their share is based on solid evidence, rather than just their parent's estimate. Arrangements based on an assumed value usually last until someone questions them. By that time, the person who could explain the decision might not be around.

What is a buy-sell agreement, and why does it need a business valuation?

A buy-sell agreement is a contract between business owners. It sets out what happens to an owner's interest if they die, become disabled, or leave the business. This agreement helps ensure a smooth transition and protects the interests of all parties involved. It's commonly funded by insurance held over each owner's life.

The business valuation does two jobs here. It sets the price at which the outgoing owner's interest will change hands. It also guides how much insurance cover is needed to fund that specific price. If the agreement relies on a value set years ago, both can be out of date by the time the agreement is triggered. Many agreements therefore require the value to be reviewed regularly, or set out a method for working it out at the time.

The agreement should be clear on:

• who prepares the valuation

• the valuation date

• the basis of value, such as market value

• whether a minority discount applies to a part interest

• how often the value is updated

A vague business valuation clause can turn a planned transfer into a dispute between the remaining owners and the estate. Our article on minority discounts covers one of the points these clauses often need to address.

How does a business valuation fit into estate planning?

When a business interest goes through an estate, the executor must understand its value. This helps manage the estate, treat beneficiaries fairly, and meet tax obligations. Where the business sits in a company or trust, the structure affects what the estate actually holds, and that's a question for the estate lawyer.

Valuations also come up when a will is challenged. If a family member makes a claim on the estate, the value of the business can affect both the size of the estate and how it's divided. Our article on probate and business valuation covers this in more detail.

What are the tax implications of transferring a business to family?

Transfers between family members are generally treated as not at arm's length, so the ATO usually expects them to happen at market value for capital gains tax purposes, whatever price is actually paid. A gift or a discounted sale to a child can still create a capital gain calculated on market value.

Different rules can apply when an asset passes on death, and the small business CGT concessions may be available in some cases. The capital gains tax changes taking effect from 1 July 2027 also make the value of a business at that date relevant for many owners. Our article on ATO business valuation requirements explains why.

The tax outcome depends on your circumstances, so work through it with your accountant or tax adviser. The business valuation gives them a supportable market value to work from.

Does the business lose value when the owner steps away?

It can. Many small businesses rely on the owner for client relationships, technical skills, and day to day decision-making. A business valuation has to consider how much of the value belongs to the business and how much goes with the owner.

This matters most in succession, because the owner is the person leaving. A business that depends on one person is less valuable to a successor. In contrast, a business with a skilled team, clear systems, and clients who interact with multiple team members holds more value. Working on that before the handover can lift the value, and it makes the transition more likely to succeed. Our article on owner remuneration covers a related adjustment that often affects family businesses.

When should you get a business valuation for succession planning?

Earlier than most owners expect. Two to three years before a planned handover gives time to:

• understand what the business is worth now

• see what's holding the value back

• address owner dependence, reporting or other weak points

• agree a fair arrangement with family or partners before emotions are involved

For buy-sell agreements and estate plans, update the business valuation regularly. Aim for every year or two, or sooner if there are major changes. A value set five years ago may bear little resemblance to the business today.

What makes a business valuation reliable for succession and estate planning?

The same things that make any business valuation defensible:

• Independence. A business valuer with no interest in which family member or partner benefits.

• Clear reasoning. Assumptions stated, evidence attached, and reasoning someone else can follow.

• The right basis of value. Usually market value, applied consistently with any agreement or tax requirement.

• Proper adjustments. Normalised earnings, owner remuneration and shareholder loans treated correctly.

A succession plan often involves your accountant, lawyer and financial planner. An independent business valuation gives all of them, and the family, the same figure to work from.

Talk it through

If you're planning a succession, setting up a buy-sell agreement, or working through an estate that includes a business, get in touch to discuss the business valuation.

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