For one reason or another, many business owners will face a time when they need to transfer their ownership rights to another person or entity. Perhaps the end-goal is to sell the business, bank the proceeds and retire. Perhaps the intent is to pass it business along to the next generation. Other business owners may look to construct their business in such a way that the transfer of ownership provides an annuity of sorts.
An Outright Sale
The sale of a business in full typically includes a transfer of ownership immediately and payment is usually received at the time of sale. Among other things, a plan with this goal in mind might include steps towards solidifying the balance sheet or creating a “turnkey” package. The business owner might select this venue to fund retirement or perhaps the plan might purely be to build the business up, sell it for a profit and move along to another endeavor.
A Gradual Sale
“Brian” owns a small bakery. After the birth of his granddaughter, he now spends most of his time at his daughter’s home several hours away. Brian may opt to complete a gradual sale of his business. A gradual sale is a flexible option in transferring a business that tends to benefit everyone. After transferring business ownership, Brian no longer has to worry about running his business but is still receiving monthly income from the gradual sale. This option often benefits individuals that cannot afford an outright sale, but instead are able to finance a long term payment plan.
A Lease Agreement
Perhaps “Brian” has elected to take a full year off to accomplish his lifelong dream of traveling the world. To take care of his bakery, he’s decided to transfer ownership to a close industry peer through a lease. By transferring business ownership through a lease, you’ll commit to a contract that details the conditions and payments you’ll receive for the temporary rights to the business.
Handing Down the Family Business
Transferring ownership of the family business to a new generation is often more complicated than it sounds. Additional tax implications, such as estate and gift taxes generally arise for both parties. Proactive succession planning can help provide business stability, prepare for tax obligations, and make the ownership transfer as smooth as possible.
The Business Type May Make a Difference
As with many other regulated aspects of business ownership, the type of entity you own makes a difference. Your business type will affect what steps are required to transfer ownership as well as the tax implications of the transfer. For example, because Brian’s business is a sole proprietorship, he has total control over his business and therefore has full rights to complete a sale. The rules for partnerships, LLCs, and corporations, however, will require additional actions that are specific to their situation in order to complete a transfer of ownership. Because these steps tend to be situation-specific, it is very important to speak to an attorney, accountant and/or other business professional. Your business coach can work with you on developing the correct framework for your business to maximize results.
