How to Transfer Business Ownership
No matter the impetus, transferring ownership has many legal and financial implications that should be considered before the transaction. In fact, every type of business ownership transfer is unique to the parties involved. To help you start this process, we’ve compiled a guide to developing your succession plan.
5 Steps for Transferring Business Ownership:
1. Assemble a Team of Advisors
If you’re considering ownership transfer, the first step is to hire the right team of advisors. At a minimum, you’ll want to hire an attorney and financial advisor to help you determine the best approach. Because the paperwork can be complex, working with the right legal and financial team will help you navigate the process.
Once you assemble your team, they’ll provide council on assessing your business debt. They can also provide insights on the pros and cons of transferring ownership and ensuring your assets are protected.
2. Get a Business Valuation
Before transferring ownership, it’s a good idea to have your business valued by an independent third-party. If you’re selling your business, a reliable valuation will ensure that you receive a fair price in return.
Whether or not the transaction ultimately takes place, knowing your business’s value is beneficial in numerous situations. This includes applying for a business loan, seeking investor funding, or merging operations with another business.
3. Revisit Shareholder/Member Agreements
If your business isn’t incorporated, that means you operate as a sole proprietorship or general partnership. Therefore, your business structure only exists if you and any partners you may have are actively engaged. Once you incorporate, your business becomes a separate legal entity with perpetual duration.
When it comes to transferring ownership, corporations typically make the process easier than LLCs do. The corporation’s shareholder agreement provides explicit guidelines for transferring shares to new owners. On the other hand, LLCs are usually governed by an operating agreement, which outlines the various aspects of ownership. Before moving forward with your succession plans, ensure that your governing documents provide enough flexibility for you to execute.
4. Determine the Structure of the Transfer
You have several options when it comes to transferring ownership to another party. Your timeline often plays a significant role, as closing a sale within the year differs from planning for your eventual retirement.
In addition, the potential tax implications may also impact your decision. This is because selling your small business’s shares will have different considerations than transferring them.
No matter how you decide to structure the transfer, you should ensure that you understand everything in your documented agreement. If anything seems amiss, it’s better to handle it as soon as possible.
5. Notify Vendors, Suppliers, and Customers
If you’re transferring ownership to a new party, you should notify your vendors and suppliers once the transaction is complete. You should do this because contracts will likely need to be amended or renewed. In addition, these vendors will likely want to know who their new contact will be at the business.
It’s also good practice to notify your customers of the changes in ownership. In addition to thanking them for their business, you should also prepare them for new leadership. If you’re pursuing new ventures, you may want to share this information with them as well.
Every ownership transfer has its own unique requirements and considerations. The type of business entity you’ve created and the transfer structure ultimately determines the steps you should take. With the right team of advisors and a clear succession plan, you can ensure the process is executed smoothly.
Do you have experience successfully transferring business ownership? Or do you have more questions about how to start the transfer process? Share your experience with us, or as your questions, in the comment section below!
Editor’s Note: This post was updated for accuracy and comprehensiveness in November 2020
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.