For most small business owners, there comes a day when you decide to transfer your business. This may be because you wish to retire, seek a partner to assume ownership, or are ready to move onto something new. No matter the reason, transferring ownership has many legal and financial implications to consider. Every ownership transaction is unique to the business and the parties involved. As such, here is a list that should be considered prior to transferring ownership.
6 Steps for Transferring Business Ownership
1. Assemble a Team of Advisors
The first step to transferring ownership is hiring the right team of advisors. An attorney, an accountant, and a financial advisor can help you determine the best approach for your circumstance. The paperwork and details associated with transferring ownership can be complex. As such working with a quality team will help ensure you do not miss any important steps in the process.
2. Get a Business Valuation
The next step is getting an accurate valuation of the worth of the company. If you have not already received one recently, it is a good idea to have an independent third-party value your company. If you are selling any part of your business, a reliable valuation can help you gauge the business’s true value and set a realistic selling price. Knowing the value of your business can also help you plan for tax considerations and retirement income from your business.
3. Revisit Governing Documents
Depending on how your business is set up, governing documents dictate how to transfer ownership. If your business is a sole proprietorship or partnership, the business only exists if you and any partners are actively engaged. In contrast, corporations or LLCs are a separate legal entity with perpetual duration.
Corporations typically have an easier transfer process than LLCs. A corporation’s shareholder agreement provides a guideline for transferring ownership shares. Whereas, LLCs have an operating agreement, that outlines the various aspects of ownership. Before determining your exit strategy, revisit your governing documents to make sure they have the flexibility to execute your plan.
4. Structure the Transfer
There are many ways to transfer your business and structure the transaction. Each has its own advantages, so be sure to weigh your options. These options may include:
Your timeframe and business entity structure often play a large role in determining the best approach. If you are looking to sell within a year the structure may look a lot different than planning for eventual retirement. Additionally, transferring ownership in an LLC is quite different from transferring ownership in a corporation. Potential tax implications can also impact your decision.
If your end goal is selling your business, one of the most important considerations is whether to structure the business purchase as an asset or a stock purchase. Refer to our article on structuring a business purchase for more information.
No matter how you structure the transfer, be sure to consult with an attorney and CPA first.
5. Notify Vendors, Suppliers, and Customers
If you are completely exiting the business and transferring ownership to a new party, be sure to notify vendors and suppliers. This step takes place after the transaction is complete. Most contracts will either need to transfer or be renewed. It is also a good practice to notify customers. Thank them for their business and make them aware of the new leadership.
6. Change Legal and Financial Documentation
Lastly, there are several legal and minute details to take care of when transferring the business. Many of these involve changing legal and financial documentation. Some of this documentation may include:
- Final tax payments
- Current payment obligations
- Notify stakeholders, relevant organizations, and government entities
- Transfer lease agreements, permits, and licenses to new business owner
- Transfer records and key assets such as website domains, intellectual property and business records like customer, employee, legal, and financial records
- Apply for a new Employer Identification Number (EIN) if creating a new entity
- Update business documents with state
- Transfer or set up a business bank account
- Amend operating agreements or other governing documents to reflect changes in management
Transferring business ownership is a process, not just a mere transaction. Through preparation, you can create a transition plan that can help you avoid seller’s remorse and maximize your return. Considering the business entity and structure of the transaction will help determine your specific steps. With the right team of advisors and a detailed succession plan, your business transfer can execute smoothly and efficiently.
Peak Business Valuation, a business appraiser in Utah, is here to help you transfer business ownership. Through a business valuation, Peak can help you understand your company’s worth and provide ideas for structuring the transfer. Schedule your free consultation by clicking the link below.