If you own a small business, you may eventually want to transfer ownership to someone else. Maybe you want to retire and transfer ownership to a family member or perhaps you want to recruit a partner that can take over ownership of a portion of the company. Then again, there are some businesses that are so successful, others approach them with offers to buy the business.
Regardless of the situation, there are legal and financial implications involved in transferring ownership of a business. Of course, every transfer of ownership is unique- but there are some basic steps that you should follow.
5 Steps to Transfer Ownership of Your Business
Here are the 5 steps to transfer ownership of your business:
Gather a team of advisors
If you are thinking about transferring ownership of your business, you first need to gather a team of advisors. At the very least, you want to have an attorney and financial advisor. After all, the paperwork can get complicated, and having the right legal and financial team in place will help you get through the process.
Once you have a team in place, they will be able to explain to you how to assess the debt your business has. They can also explain the advantages and disadvantages of transferring ownership of your business and help you protect your assets.
Get a valuation of your business
Before you transfer ownership of your business, you should have a valuation done by an independent third party. This will help you make sure that you are receiving a fair price.
Knowing how much your business is worth can be helpful in a variety of situations, whether the transaction goes through or not. It’s critical to know what your business in valued at in these situations:
- Merging with another company
- Applying for a business loan
- Seeking funding from investors
Evaluate your agreements with shareholders/members
If you have not incorporated your business, you are operating as a general partnership or sole proprietorship. Once you have incorporated, the business is a separate legal entity that has a perpetual duration.
When transferring ownership, the process is usually much easier with a corporation than with an LLC. Typically, there are specific guidelines for transferring shares to new owners in a corporation’s shareholder agreement. An LLC is typically governed by the operating agreement, outlining the aspects of ownership. Before you move forward with your plans for succession, it’s important to make sure the governing documents provide the flexibility to do so.
Define how the transfer will be structured
When it comes to transferring ownership of your business, there are several options. The timeline is involved because closing the sale within 1 year is different than planning your ultimate retirement.
The tax implications may play a role because there are different considerations that come with selling your shares versus transferring them. Regardless of how you structure your transfer, it’s important that you understand your agreement. As mentioned, your advisors should review the documents and offer legal or financial advice as needed. If anything is off, it needs to be rectified as soon as possible.
Let your vendors, suppliers, and customers know
Once the transfer is complete, it’s important to let your vendors and suppliers know because the contracts will likely need to be renewed or amended. Plus, they will probably be interested to know who they will be dealing with in the business.
It’s also a good idea to let your customers know what is going on. Take the time to thank them for their loyalty and prepare them for the new owners. If you plan to pursue a new venture, you may want to let them know this as well.
If you decide to transfer ownership of your business, you should keep in mind that every transaction is unique. Keeping these 5 tips in mind can help the process go smoothly. If you need more assistance in your transfer of ownership, contact Crimson Stone Capital Solutions.