Are you looking to transfer your business to a loved one?
Studies show that about 90% of businesses in the US are family-owned. With the concept of transfer ownership, these enterprises continue to exist. However, transferring business ownership isn’t simple as giving gifts.
There are some legal hurdles to get over before you can pass your business on to someone. Read on to learn more about transferring family business ownership.
Creating a Succession Plan
Preparing to transfer business ownership is a tough decision. However, to keep the enterprise thriving, you must do it right and plan as soon as possible. Creating a succession plan directs the business and protects it from uncertainty.
1. What Is a Succession Plan?
To ensure a smooth transition, companies use a succession plan as a guide. It’s a document instructing the passing of leadership roles and the best route for the business. With an effective plan, you guarantee the enterprise continues to operate without interruption.
2. How Does a Succession Plan Work?
When you create a succession plan, it must strive to benefit everybody. It must serve the owner, successor, employees, and the business.
It must state when the succession can take place. Included in the plan are your potential successors and why they are candidates. Further, you must present the formalized standard operating procedures, business valuation, and funding.
3. When to Create a Succession Plan?
There is no specific date when to create a succession plan. However, it’s best to make one as soon as possible. It ensures that the operations continue and no one experiences a service disruption.
Albeit you don’t plan on leaving your business yet, some fortuitous events can happen. The closer you get to the retirement age, the more you need to create a plan.
Different Ways to Transfer Ownership
Are you aware of the ways you can transfer your family business ownership? The method to use depends on your plans and needs. Further, the type of business and the market can affect your decision.
Continue reading to determine the method you can use in business transfer ownership.
1. Passing the Business Onto an Heir
When it comes to family-owned businesses, it’s common to pass the enterprise to an heir. Owners believe that succession thrives best with them involved.
However, not all potential successors in the family take an interest in the business. Outsiders can take advantage of the opportunity, putting the enterprise at risk.
If you’re passing the business, choose the candidate with the best interests at heart for your business. In your plan, give clear instructions on who takes over and how to compensate other heirs. Consider a buy-sell agreement to make inactive heirs sell their shares.
2. Reapportion Ownership
Apart from a sole proprietorship, all other business types can change ownership percentages. However, the approach can differ for each entity, and you must follow the guidelines.
In a partnership, it’s essential to review the contract about the transfer of partnership interest. If the agreement permits, transferring voting rights, profit, and responsibilities are okay.
For a limited liability company, an operating agreement governs the business. If the contract doesn’t allow it, you can apply the state’s law to proceed. Further, all members of the LLC must approve the change of ownership.
Corporations have the least complicated procedure for transferring ownership. You only need to follow the steps of selling your shares and filing the required documents.
3. Sell to Your Family
If you cannot afford to give the business to the heir, consider selling it to them. However, the problem is they can lack the capital to buy the enterprise. If this is the case, the best solution you can give is the issuance of a seller-financed installment note.
Instead of a lump sum payment, the heir can pay you through installments for several years. A seller-financed installment agreement lets the buyer borrow from the seller. The concept is close to mortgage contracts.
The Process of Transferring Ownership
As mentioned, there are steps you must follow for smooth transfer ownership. Note that the procedure can differ depending on the type of business. Read on to learn the process of how to transfer your business.
1. Work With a Team of Advisors
In family business transfer ownership, hiring a team of advisors is your best course of action. They can give you legal and financial advice that best suits the situation. with the complex paperwork, the right advisors can help you through the process.
A team of advisors provides counsel on assessing the business performance. Further, they can give insights into the advantages and disadvantages of transfer ownership. Thus, protecting your assets from risks.
2. Valuing Your Business
If you plan to sell your business, it’s essential to value it. Through this, you can determine enterprise worth and ensure you receive a fair price. Thus, get your business valued by a professional broker or accountant.
3. Review the Business Agreement
Before creating a succession plan, review the business agreement first. Unless running a sole proprietorship, check if your governing documents allow transfer ownership. If you fail to consult with the agreement, it can result in a business contract violation.
4. Determine the Transfer Structure
Whether you decide to pass, reapportion, or sell your business, you must understand the nature of the method used. Some factors can affect your decision. Thus, study and review the agreement for the business transfer ownership.
Your legal and financial advisors can help you understand the contract. If you find any flaws, fix them right away to prevent problems. Further, it’s to ensure a smooth transition.
5. Notify Interested Parties
Apart from the leaders and employees, inform the external stakeholders about the changes, too. External stakeholders can include vendors, suppliers, and customers. As they contribute to the business’s success, it’s necessary to notify them about the transfer of ownership.
Vendors and suppliers must know about the changes to identify their new contact. Notifying the customers is a good practice as this shows that the business values them. Further, it prepares them for the new leadership.
Understanding Business Transfer Ownership
A business transfer ownership follows a thorough process. You must prepare documents, choose a successor, and consider other factors. With this, use this article as a guide if you are to transfer ownership.
Do you have any questions about your family business? If so, you can contact our team at PositivelyPeople for business consultations.