5 Steps for Successfully Transferring Ownership of a Business

5 Steps for Successfully Transferring Ownership of a Business

One thing is true for all business owners: one day you will leave your business. Ideally, you’ll be able to sell your business and use the proceeds to fund your retirement. Yet transferring ownership of a business can be financially and legally complex. It’s important to have an exit strategy in place to ensure the best possible outcome for you and your business. While every business owner’s exit path is unique, here are five steps you can follow to increase the likelihood of a successful ownership transfer.

Five Steps to Take Before Transferring Ownership of a Business

Step #1: Assemble a Team of Trusted Advisors

Chances are this is the first time you’re selling a business—and possibly the last. Therefore, a helpful first step is often to consult with a team of experts. Working with trusted advisors can help you navigate the complexities associated with transferring ownership of a business. In addition, they can point out your blind spots and help you anticipate challenges along the way.

For example, your advisory team may include a business broker, valuation expert, accountant, tax advisor, and an attorney that specializes in mergers and acquisitions. Additionally, a financial advisor, estate planning attorney, and CPA can be helpful when it comes to managing your personal finances.

Step #2: Obtain a Professional Business Valuation

You may have an idea of what your business is worth based on rules of thumb. However, one IBIS World report found that 98% of business owners don’t know the actual value of their company.

It’s important to have a reliable valuation well in advance of transferring ownership of a business. First, it will help ensure you get a fair price when you eventually sell the business. It will also help you determine if you’ll need to supplement your retirement income with additional financial resources.

Step #3: Revisit Business Agreements

If your business is incorporated, the shareholder agreement typically includes specific guidelines for transferring ownership of the business. Similarly, limited liability companies (LLCs) are usually governed by an operating agreement, which may outline similar procedures.

Before pursuing an exit path, it’s important to review any applicable agreements that may restrict your ability to transfer ownership. Again, your team of advisors can help you better understand your options and determine an appropriate exit strategy.

Step #4: Determine How You’ll Structure the Transfer

When it comes to transferring ownership of a business, the options can become overwhelming. Ultimately, how you structure the transfer depends on a variety of factors. For example, your time horizon, personal financial circumstances, and potential tax consequences may all influence your decision.

In addition, you may structure the transaction differently depending on your successor. For instance, transferring shares to a family member may look different than selling to a third party. In some cases, a cash purchase may be ideal, while in others, you may want to consider seller-financing.

There are many moving parts that go into successfully transferring ownership of a business. Be sure to consult the relevant experts before committing to a strategy.

Step #5: Tell Vendors, Suppliers, and Customers that You’re Transferring Ownership of Your Business

Lastly, if you’re fully exiting your business, you’ll want to communicate your departure to all interested parties. After the transaction is complete, it’s generally a good idea to notify your vendors and suppliers, so you can introduce them to the new owner. They may also request that any contracts you have in place be updated or renewed.

It’s also good practice to let your customers know about the transition. In addition to thanking them for their business, you can prepare them for any potential changes they may encounter after you leave. Maintaining strong customer relationships can help ensure your legacy stays intact, even when you’re no longer at the helm.

Bottom Line: Transferring Ownership of a Business is a Team Sport

Your business is likely your source of livelihood, as well as your most significant financial asset. Unfortunately, successfully transferring ownership of a business isn’t guaranteed. In fact, surveys show that only 30-40% of businesses listed for sale ever actually sell.

One way to beat these odds is to start planning early. By assembling the right team of advisors and taking the necessary steps to prepare your business for sale, you can boost your chances of a financially secure future.

Oak Capital Advisors specializes in the unique financial planning needs of business owners preparing for retirement. If you’d like us to help you develop an exit strategy and financial plan that helps you meet your financial goals, please start by requesting your complimentary retirement readiness assessment.

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