Using a strengths, weaknesses, opportunities and threats (SWOT) analysis to frame an important business decision is a long-standing recommended practice. But don’t overlook other, broader uses that could serve your company well.
A SWOT analysis starts by spotlighting internal strengths and weaknesses that affect business performance. Strengths are competitive advantages or core competencies that generate value (and revenue), such as a strong sales force or exceptional quality.
Conversely, weaknesses are factors that limit a company’s performance. These are often revealed in a comparison with competitors. Examples might include a negative brand image because of a recent controversy or an inferior reputation for customer service.
Generally, the strengths and weaknesses of a business relate directly to customers’ needs and expectations. Each identified characteristic affects cash flow — and, therefore, business success — if customers perceive it as either a strength or weakness. A characteristic doesn’t really affect the company if customers don’t care about it.
The next SWOT step is identifying opportunities and threats. Opportunities are favorable external conditions that could generate a worthwhile return if the business acts on them. Threats are external factors that could inhibit business performance.
When differentiating strengths from opportunities, or weaknesses from threats, the question is whether the issue would exist without the business. If the answer is yes, the issue is external to the company and, therefore, an opportunity or a threat. Examples include changes in demographics or government regulations.
As mentioned, business owners can use SWOT to do more than just make an important decision. Other applications include:
Valuation. A SWOT analysis is a logical way to frame a discussion of business operations in a written valuation report. The analysis can serve as a powerful appendix to the report or a courtroom exhibit, providing tangible support for seemingly ambiguous, subjective assessments regarding risk and return.
In a valuation context, strengths and opportunities generate returns, which translate into increased cash flow projections. Strengths and opportunities can lower risk via higher pricing multiples or reduced cost of capital. Threats and weaknesses have the opposite effect.
Strategic planning. Businesses can repurpose the SWOT analysis section of a valuation report to spearhead strategic planning. They can build value by identifying ways to capitalize on opportunities with strengths or brainstorming ways to convert weaknesses into strengths or threats into opportunities. You can also conduct a SWOT analysis outside of a valuation context to accomplish these objectives.
Legal defense. Should you find yourself embroiled in a legal dispute, an attorney may want to frame trial or deposition questions in terms of a SWOT analysis. Attorneys sometimes use this approach to demonstrate that an expert witness truly understands the business — or, conversely, that the opposing expert doesn’t understand the subject company.
Tried and true
A SWOT analysis remains a useful way to break down and organize the many complexities surrounding a business. At David Mills, CPA, LLC, we can help you with the tax, accounting, and financial aspects of this approach. Contact us today.
It’s been estimated that there are roughly 5 million family-owned businesses in the United States. Annually, these companies make substantial contributions to both employment figures and the gross domestic product. If you own a family business, one important issue to address is how to best weave together your succession plan with your estate plan.
Transferring ownership of a family business is often difficult because of the distinction between ownership and management succession. From an estate planning perspective, transferring assets to the younger generation as early as possible allows you to remove future appreciation from your estate, minimizing any estate taxes. However, you may not be ready to hand over control of your business or you may feel that your children aren’t yet ready to run the company.
There are various ways to address this quandary. You could set up a family limited partnership, transfer nonvoting stock to heirs or establish an employee stock ownership plan.
Another reason to separate ownership and management succession is to deal with family members who aren’t involved in the business. Providing such heirs with nonvoting stock or other equity interests that don’t confer control can be an effective way to share the wealth with them while allowing those who work in the business to take over management.
An additional challenge to family businesses is that older and younger generations may have conflicting financial needs. Fortunately, strategies are available to generate cash flow for the owner while minimizing the burden on the next generation.
For example, consider an installment sale. These transactions provide liquidity for the owner while improving the chances that the younger generation’s purchase can be funded by cash flows from the business. Plus, so long as the price and terms are comparable to arm’s-length transactions between unrelated parties, the sale shouldn’t trigger gift or estate taxes.
Or, you might want to create a trust. By transferring business interests to a grantor retained annuity trust (GRAT), for instance, the owner obtains a variety of gift and estate tax benefits (provided he or she survives the trust term) while enjoying a fixed income stream for a period of years. At the end of the term, the business is transferred to the owner’s children or other beneficiaries. GRATs are typically designed to be gift-tax-free.
There are other options as well, such as an installment sale to an intentionally defective grantor trust (IDGT). Essentially a properly structured IDGT allows an owner to sell the business on a tax-advantaged basis while enjoying an income stream and retaining control during the trust term. Once the installment payments are complete, the business passes to the owner’s beneficiaries free of gift taxes.
Family-owned businesses play an important role in the U.S. economy. We can help you integrate your succession plan with your estate plan to protect both the company itself and your financial legacy. For more information, contact David Mills, CPA, LLC today.