Change is inevitable in business. In time, you may decide that it’s time to pass your business on to another owner, as health, personal concerns or a desire to start another business may have you looking for an exit strategy. To get the most out of your business, and to keep the legacy you’ve built from being eroded, it’s important to act smartly when transferring your business to another owner.
Transferring your business to a partner is a great way to ensure that the reputation and values of your business remain intact. By transferring the business to a partner you’ve worked with, you have the chance to hand off the reins to someone you can rely upon to continue the business in the way you’ve conducted it. Executing the transfer correctly is important to ensure that you get a good value for your interest in the business, and your partner’s interests are protected when you cash out of the business.
The first thing to consider when you’re deciding whether to sell your interest in the business is if that’s the option you really want to take. Once you sell the business, even if you’re able to still work there in some capacity, you won’t have nearly the influence on decisions that you did when you held an ownership stake. Also, if you announce you’re selling the business to a partner and then change your mind, you risk alienating the partner and causing turmoil for your business and your employees. If you’re just feeling somewhat fatigued by running the business, you may want to take a brief sabbatical before announcing your intent to transfer the business to your partner.
If you’re sure that this is the course you want to take, you should first approach your partner and inform him or her of your plans. You’ll need to talk finance, because your partner’s financial health plays a big factor in whether you’ll be able to execute the transfer, as some partners may not be able to afford to buy out your stake. You’ll need to discuss financing for the buy out and a timeline for your departure.
Next, you’ll need to have the business valued. A business valuation takes into account the current and future earnings of the business. You could do the valuation yourself using your records, but it may be advisable to have a financial professional do the valuation, to prevent possible disputes between you and your partner. A business valuator can also help you navigate the tax implications of selling the business. Once the business has been valued, you can calculate the value of your share of the business and begin negotiations with your partner over price.
Chances are that your partner will have to secure some type of financing to purchase your share of the business. How you structure this deal depends on your needs and the wishes of your partner. You may choose to allow your partner to make an upfront payment and then pay you a portion of the business’ profits over a period of time to purchase your interest. You may choose to go the route of a traditional bank loan, with your partner borrowing the amount necessary to purchase the business and paying you all at one time. It’s up to you and your partner to work out a plan that works out best for you both. Having a financial professional or attorney on hand to answer questions and set terms can be extremely helpful.
Once you’ve got the terms of the deal settled, you’ll need to firm up the timeline for your departure and transfer of ownership. This includes giving your partner full access to any company assets, files, property, etc. he or she may not have had access to before. You’ll also need to provide training on any aspects of the business that you’ve handled exclusively on your own up to this point. As the date of your departure draws closer, you’ll need to settle all unfinished business requiring your attention to ensure a smooth handover.
Also, once the time of your departure is settled, you’ll need to inform your employees of the upcoming change to allow them to begin to adapt to the transition. Springing a big change such as this on employees unexpectedly can cause morale problems and disruptions in the operation of your business.
After the business is transferred, you may want to work out a deal with your partner to be retained as a consultant to help insure the post-transition period runs smoothly and to answer questions your partner may have once he or she assumes full control of the business.
A well-planned and well-executed transfer can help you reap the financial benefit of your years of hard work and also ensure that your business legacy remains in trusted hands.