Business Ownership Transfer: Impact, Requirements, Process

To transfer business ownership, there are several steps you must follow. If you understand the process clearly, you’ll be in a great position to execute a smooth transition.

In this article, we discuss the importance of following the proper framework when transferring the ownership of a business. We also share actionable steps to help you prepare for a successful transaction.

Importance of Transferring Business Ownership Through the Proper Channels

When transferring business ownership, it’s important to follow the right process. There are a few key reasons for this:

• Ensure legal protection
• Minimize confusion
• Maximize the buyer’s likelihood of success

Legal Protection

Following the right steps for ownership transfer provides both parties with legal protection.

There are several legal forms for selling a business that buyers and sellers must sign. These specify important details such as the purchase price, payment terms, assets included in the sale, and many others.

If you work with a qualified Advisor, they can help you identify the various elements you should address when structuring the deal. Additionally, an experienced attorney can help you draft or review the various legal documents involved, including those that pertain to employment law.

“If you work with a qualified Advisor, they can help you identify the various elements that should be addressed when structuring the deal.”

Minimizing Confusion

There are a lot of variables involved when buying or selling a business. Without proper documentation and communication, it can be easy to overlook important details.

By following a clear framework, it becomes much easier to transfer business assets as well as knowledge. The legal documents mentioned above are one way to establish clarity about the terms of the deal. However, it’s also a wise idea to have the seller provide a detailed overview of how the business operates (i.e., an “Owner’s Manual”). Without clear documentation, the new owner may find themselves confused or frustrated. Needless to say, that can have negative repercussions for both parties.

Maximizing the Buyer’s Success

When the deal is spelled out clearly and the business’s details are thoroughly communicated, the buyer has a much greater chance of succeeding. In addition to sound legal documentation and clear operating procedures, most deals involve a training period following the sale.

During the training period, the seller provides guidance and support as the buyer steps into their new role as owner. Typically, this period is essential as it allows the buyer to see how the previous owner has been handling the business’s operations.

“During the training period, the seller provides guidance and support as the buyer steps into their new role as owner.”

If you’re the seller, it’s important to do whatever you can to help the buyer succeed when transferring ownership. This could include helping them understand social media strategies, customer experience metrics, entity formation processes, or even the latest news and developments in the industry. When teaching the new owner, try to remember what it felt like when starting a business.

If you’re the buyer, be sure to pay close attention to the seller’s guidance during the transition period. Whether you’re acquiring a large entity or a small family business, the training period can go a long way to helping you succeed.

How Your Business’s Structure Affects Transfers of Ownership

First of all, it’s important to understand that many online business transfers take as an asset purchase instead of a stock purchase.

Asset Purchase Vs. Stock Purchase

In an asset purchase, the buyer agrees to purchase specific business assets, as outlined in the Asset Purchase Agreement (APA) and operating agreement. For example, if you’re buying a content website, the buyer may purchase the domain name, media copyrights, and other intellectual property associated with the business. Other business assets, such as a motorized vehicle, might not be included in the purchase. Essentially, in an asset purchase, the buyer and seller decide which assets to include and not include in the sale.

On the other hand, in a stock purchase, the buyer purchases the entire business, which includes all of its assets and liabilities. 

Many small and medium-sized business transactions take place as asset purchases. In such a deal, the seller often dissolves their own business entity (i.e., as a sole proprietorship or Limited Liability Company) while the buyer creates a new entity.

“In an asset purchase, the buyer and seller decide which assets are included in the sale and which are not.” 

For a business that is a limited partnership, S corporation, or C corporation, the process can often be more complicated and involve multiple state filing requirements. Owners and investors who engage in such deals should seek legal counsel before proceeding to ensure liability protection.

By seeking counsel, it’s easier to find promising deals and avoid risky online business acquisitions.

What You Need to Transfer Ownership of a Business

There are a few key items and processes you should have in place before moving forward with a business ownership transfer. 

To transfer the ownership of a business, you should have:

• Asset Purchase Agreement
• Escrow agent
• Online accounts and digital assets

Asset Purchase Agreement

The Asset Purchase Agreement is the master of all documents in a business acquisition. It includes all of the deal terms that the buyer and seller agree to.

“The Asset Purchase Agreement is the master of all documents in a business acquisition.”

Given its importance, you should always review the Asset Purchase Agreement with an experienced attorney before signing. If any disputes arise later down the road, the APA will be used to verify the expectations and agreements that were established during the transaction.

Escrow Agent  

To protect both parties, business transactions typically involve an escrow agent. If you’ve ever bought or sold real estate, you’re likely familiar with how escrow works.

In the context of a business acquisition, the buyer transfers purchase funds to the escrow fund, which the escrow agent holds. Then, the seller releases the business assets to the buyer. Once the buyer confirms receipt of the business assets, the escrow agent releases the purchase funds. At that point, the transaction is complete.

“To protect both parties, business transactions typically involve an escrow agent.”

Transfering Online Accounts and Digital Assets

For online business transfers, the seller typically transfers all important online accounts and digital assets to the buyer. As mentioned, each digital asset being transferred should be clearly specified in the Asset Purchase Agreement. 

In many cases, transferring online accounts is as simple as updating the contact and billing information for the primary account holder. In the case of transferring domain names, most hosting providers have a simple and straightforward process for transferring a domain from one account to another. 

“For both parties, it’s an exciting moment when the deal is finally complete.”

Every online account and digital asset is slightly different, so it’s important to explore the specific transferring process for each asset in question.

For both parties, it’s an exciting moment when the deal is finally complete. Sellers can look forward to years of hard work finally fully paying off. For buyers, the moment signals the start of an exciting journey as a new small business owner. Often, buyers dive in to pursue the initial tasks such as getting trained, hiring staff, or choosing a business structure.

It’s important to note that if an SBA business loan is involved there may be some deal and transfer restrictions you need to be aware of. 

Steps to Make a Change in Business Ownership

Once you understand the key components involved in transferring the ownership of a small business, it’s time to execute. If you work with a qualified Advisor, they should be able to help you navigate these steps with confidence and clarity. 

Typically, there are several steps involved in transferring a business from one owner (or multiple owners) to another. These include:

1. Negotiate
2. Both parties sign the Asset Purchase Agreement
3. Buyer transfers funds to the escrow agent
4. Seller transfers business assets to the buyer
5. Escrow agent releases funds to the seller
6. Seller provides training to the buyer

This list only includes the steps that are related specifically to the process of transferring ownership. Before that process begins, there’s generally a period in which the seller is preparing to sell. During this stage, they list their business, communicate with buyers, and receive a Letter of Intent. If you’re a seller, be sure to research transferability tips that can increase the value of your business and help ensure a smooth transaction. 

Although each entity type involves slightly different steps, this framework can provide you with a clear roadmap for navigating the business transfer process.