Starting a business and growing it to a well-known brand takes years of hard work and dedication. While a company or industry can continue for generations, but the business owner simply cannot.
Is your small business at the point where the transfer of ownership is necessary, due to retirement, death or change of interests?
Know that the process of transferring business ownership is not merely passing on the official paperwork and store keys to someone else, family or not.
Keep in mind that you are want to ensure that your business remains a legacy for your children and grandchildren and that they get the opportunity to grow and be a significant competitor in the market.
There are some options to consider when looking at a change of business ownership. Also, you will have to think about the possibility of retaining the business within the family or including non-family members.
Reasons for Change of Business Ownership
- The exit or retirement of one of the key members thus the need to replace the individual
- The death of a business owner or spouse
- Business owner becomes disabled and therefore cannot provide the necessary services
- To sell your business entirely
Despite the above differing reasons, the most critical factor to consider is the primary business or company agreement that members agreed upon right from the very start. However, there are fundamental underlying factors that every change of business ownership abide by and must come into play. When starting a limited liability company (LLC), the drafting and signing of an LLC operating agreement are essential. It is crucial because it provides a guideline of the company’s operations as well as includes a guide on how to transfer ownership.
Selling a Limited Liability Company
Entirely selling your business will require that you find a non-related third party who has an interest in your business as well as one who will be able to pay as per your agreement. When selling a business, whatever the new owner decides to do with the business or company after that is entirely up to them. When selling, the market will be evaluated to identify its worth. The evaluation will include looking into the business books as no one wants to invest in a business that has lost its value.
Once the valuation is complete and both parties are still interested, it is recommended that you hire a lawyer who has the experience in such fields. Hiring a lawyer will not only ease the process, but it also ensures that all financial, as well as legal implications, are complete.
The lawyer will draft the contract, and after both parties are satisfied with the terms and conditions provided, you and the buyer will sign the deal with the help of your lawyers. At this point the sale is complete, and you cannot claim ownership of the business or company.
Addition of a Major Shareholder / Partner
The company’s operating agreement will determine the process of adding a new shareholder. The deal will not only provide the terms, requirements, and capabilities of the new partner but it also indicates the required financial strength of an individual. Quote how much it needs for a new member to obtain ownership interests.
Family Member Transfer
There are instances where individuals grow a business and rather than sell it or add a new member, the founder will choose to retain the company within the family. In this, another family member will need to run the business. Many a time, if you decide to maintain the company as a family operated concern it is best that you train the family member you intend to transfer it to, early. The individual can accompany you to work on various occasions. Over time, you can then train him or her by allowing them to work in the company or business. They will then grow into the market as they familiarize themselves with the business expectations. Groom your family member over a period as opposed to just handing it over to him or her.
On the other hand, you can decide to hand it down to your children. Depending on the level of interest they have shown, they can get different shares. For example, the child, or children who have an interest and have demonstrated outstanding cooperation can obtain leadership roles whereas the others can only be shareholders without the need to participate in the company operations actively. You can, therefore, reward all members thus preventing unnecessary conflict especially during your time to depart or upon your death.
Despite the different ways in which you can transfer ownership, consider hiring professional assistance. Retaining one is essential even if you are a lawyer by profession. A third party ensures that there is no favoritism or desperate move that may legally bind you to any actions or financials after the transfer of ownership. The necessary and legal documents will also be prepared and presented professionally.
Always remember to obtain legal documents. The documentation will differ depending on the type of business as well as on the complexity of the operations underway. For example, a large and complex company will require more documentation due to the hierarchy of command as opposed to a business that only needs two parties to consider.
Whether you choose to sell, add another shareholder, or transfer it to a family member, remember that ownership will remain with the trusted owners only. You cannot come back later and claim to make decisions or advise the management unless they consult with you. In the case where you are selling the business entirely, your signature on the change of ownership business reaps you off every responsibility that refers to the company.
When transferring it to a family member, you can advise and monitor the company operations. About adding a shareholder, your role remains the same, and you will continue to be part of the activities until you choose to leave the business. The above ways will help you to understand better the change of business ownership and how best to go about it. Also, you will know what you stand to gain or lose by choosing either way of ownership transfer.
Leaving your business to your kids without setting them up for failure.
Transfer Ownership Process
If a business has not performed well and the owner is involved in other concerns they may opt to sell the full concern. By selling the firm, the full ownership is transferred immediately upon payment as agreed in the sales documents.
This is a scenario where a business is sold but the prior business owner gets continuing payments from the new owners. It could be in the form of royalty payments or as installment payments over time which were part of the purchase agreement.
Some business owners who are unable to manage their business for a long period of time transfer their company via a lease contract to an individual who is given the rights to manage that firm and make payments to the original owner.
SBA tips on business transfer ownership