Changing ownership in a business can happen in several ways depending on whether you are selling the business, adding or deducting a partner or shareholder, or transferring your business to a family member. Below we will discuss how to structure each of these business transfers.
The business owner will need to determine what their specific goals are and the goals of the company. As each way requires a different set of paperwork and processes.
Transferring to a Family Member
Many business owners choose to transfer or gift the business to a family member. Creating a comprehensive succession plan can help you avoid many of the potential pitfalls with this type of transition. Planning can also help limit your tax liability and ensure a smooth transfer.
Transferring your business via gift has several benefits and stipulations. Gifts of certain sizes are not subject to gift tax. To learn more about estate taxes and current gift exemption limits, consult with your legal advisor.
Rather than gift ownership shares to heirs, the owner may decide to sell shares of ownership to their successors. You can do this either through a lump sum payment or over time. Selling your business to an heir can create more buy-in and provide the owner with cash during retirement.
There are additional methods to transfer your business to an heir. For more information see Transferring your Family Business.
Selling the Business
When selling a private business, there are a few options for structuring the transfer. These financing options include:
- Cash: the buyer pays for the company upfront using cash from personal resources.
- Financing: the buyer pays for the company upfront via a loan. SBA loans are commonly used for this purpose. The benefit of this type of financing is the lender carries the risk of default.
- Seller-financing: the buyer purchases the company over time in the form of pre-agreed upon installments. The terms are set by the seller. During this financing period, the seller may offer to mentor the buyer until the business is paid in full. The seller takes on the risk of buyer default and forfeiting the business back to the seller. For sellers, this is often a preferred method as it provides a steady stream of income form the principal and interest of the loan for the time period.
Many business owners who sell their company, often stay involved for a period of time. This may be through serving on the board of directors, consulting, or maintaining and transitioning key clients or contracts.
Whatever method you agree upon, it is wise for both parties to obtain a business valuation to assess the worth of the assets and the company. A business valuation is also important in drafting a buy/sell agreement.
For more information, refer to our article on Structuring a Business Purchase.
Adding a New Business Partner
Another method of transferring business ownership is by bringing on new partners. In this case, each partner buys into the business in exchange for an ownership interest.
The operating agreement of the business describes how new partners can join. It also details how much the new partners will pay to have an ownership interest. This type of transaction is usually via cash, but other arrangements are possible.
To determine how much the new partner(s) will pay, a business valuation is often ordered per the operating agreement. A business valuation helps determine how much the company is worth currently. Shares of ownership can then be priced and redistributed accordingly.
In some situations, the new partner(s) will learn enough about the company to take over the entity. The current owner then becomes a lesser partner and can eventually transfer the full ownership of the business to the new partner. This type of buyout is a gradual process. However, it helps the new partner learn all the elements of the business, build relationships with key partners, and help to ensure revenue remains steady.
Partial Sale or Lease-Purchase
In this type of transfer, the business owner leases the business for a set period. This is beneficial to the buyer as it reduces the risk of a bad fit. This option gives the lessee the ability to simply walk away and give control back to the owner if things go downhill. And for the lessor, it provides steady income and allows them to retain a portion of the business assets.
There are many ways to structure a business ownership transfer. Whether you plan on selling or transferring ownership in a business to another party, you will need a business lawyer, valuation expert, and financial advisor. The above individuals can help you in the process to draft contracts and review buy/sell agreements. Most transfers of ownership require a business valuation and a written agreement. The details of the transactions should always be clear between both parties.
Structuring a business transfer in the right way can help smooth the transition and be beneficial to both parties. Peak Business Valuation, a business appraiser in Utah, provides business valuations to assist in the ownership transfer process. With an experienced and trusted team, we are here to answer any questions you have. Schedule your free consultation today.