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What You Need to Know to Successfully Transfer Business Ownership
By Quiet Light
Whether you’re buying or selling an online business, there are several steps you need to follow in order to successfully transfer business ownership. Therefore, it’s best to plan ahead to ensure you are well-prepared when it’s time to close the deal.
In this article, we answer several key questions relating to transferring business ownership. These include:
- What’s involved in transferring ownership?
- What is the difference between an asset sale and a stock sale?
- How does your business’s structure affect the ownership transfer process?
- What can you do to minimize difficulties when it’s time to transfer business ownership?
How to Transfer Business Ownership
Before diving into the details about how to transfer business ownership, it’s important to note that you can sell a business as a stock sale or as an asset sale. We’ll go into more detail about the differences between the two in the following section, but for now, we’ll focus on the elements they both have in common.
Both parties sign the purchase agreement
The purchase agreement is a legally binding agreement that establishes all of the terms and conditions of the sale. This includes the purchase price, payment terms, training period, included assets, and other important deal-specific terms. In an asset sale, the agreement is an asset purchase agreement.
It’s essential that the purchase agreement is fully complete in order to avoid confusion or disagreements later on. Working with a qualified business Advisor, as well as experienced business attorneys, can go a long way toward helping you establish a fair and legally binding purchase agreement.
“The purchase agreement is a legally binding agreement that establishes all of the terms and conditions of the sale.”
Generally, the purchase agreement uses the letter of intent (LOI) as a reference point. The LOI is a nonbinding document that establishes the buyer’s offer. If the seller accepts the LOI, the next step is due diligence. Once the buyer signs off on due diligence, the two parties sign the purchase agreement.
Depositing purchase funds in an escrow account
When both parties sign the purchase agreement, the buyer deposits the purchase funds to the escrow account. Just like in real estate, a third party holds the escrow account and verifies funds.
Transferring business assets
Once the buyer funds the escrow account, the seller transfers all assets to the buyer. For online businesses, these assets may include:
- Domain names
- Social media accounts
- Email lists
- Business name
- Partner relationships (suppliers, etc.)
- Employee and contractor relationships
- Ad accounts
- Amazon accounts
- Software accounts
- Business documentation and records
Often, the process for transferring these assets is relatively straightforward. For example, many software accounts and website assets have built-in features to account for an ownership change. Other assets such as partner relationships may require a bit more legwork as it requires the cooperation of third-party individuals.
Releasing the purchase funds to the seller
Once the buyer confirms the transfer of all included assets, the escrow agent releases the purchase funds to the seller. Needless to say, this is typically a big moment for sellers as they’re finally able to see all of their hard work pay off. Even though the deal is “closed,” however, the process isn’t yet entirely complete at this point.
Training and transition
In the vast majority of deals, there is a training and transition period that immediately follows the deal closing.
As the term implies, this period is to ensure that the new business owner receives adequate training and support in order to succeed. Typically, this includes the seller teaching the buyer how to operate key elements of the business. Additionally, the seller often agrees to be available to answer questions that arise during the transition period.
The seller’s commitment to training the buyer is typically established in the purchase agreement. For example, the seller may agree to provide 20 hours of training per week for 30 days following the sale. Of course, the actual training period will vary based on the complexity of the business and the buyer’s needs.
“In the vast majority of deals, there is a training and transition period that immediately follows the deal closing.”
In certain circumstances, the seller may commit to staying involved in the business for an extended period of time, or even indefinitely. These arrangements are in the agreement and often an employment contract, earn-out, or other deal structure. A partnership agreement can govern each party’s business interest and establish partial ownership percentages.
Different Methods of Transferring Business Ownership
One of the most common questions is, what are the different methods of transferring business ownership?
As mentioned above, most acquisitions take place as either an asset sale or a stock sale. In both situations, the business’s assets are generally transferred from one party to another, but there are some key distinctions that separate the two.
In an asset sale, the buyer acquires only the business’s assets from the seller. Furthermore, the buyer acquires assets that are specifically included in the asset purchase agreement.
In some cases, the buyer may acquire all of the business’s assets. However, it’s not unusual for certain property not to be part of the sale. For example, if the previous owner has their laptop and a vehicle listed on their balance sheet, the two parties may elect not to include these assets in the sale.
Because the business entity doesn’t transfer in an asset sale, the buyer doesn’t take on any liabilities that the previous owner may carry. Instead, those liabilities remain the seller’s responsibility. Additionally, in some situations, the seller may face “double” taxation in an asset sale—the entity pays capital gains tax for appreciated assets, after which individual shareholders pay taxes on the proceeds from the sale.
In a stock sale, the buyer purchases the business’s shares from the seller. In other words, the business entity transfers from the seller to the buyer, not just the assets that the business owns.
One benefit of a stock sale is that the seller can avoid certain taxes in many situations. But because the entity transfers, the buyer must agree to take on the business’s liabilities. This includes debt, outstanding sales tax obligations, and others. Depending on what those liabilities are, some buyers may be resistant to acquiring the business through a stock purchase.
“In a stock sale, the buyer purchases the business’s shares from the seller.”
How Does Your Business’s Structure Affect Transferring Business Ownership?
In many cases, the business structure may determine the options available for business transfer.
A sole proprietorship entity has just one current owner and cannot transfer to another person. Therefore, businesses that are sole proprietorships cannot transfer through a stock purchase, which means that the only option available is through an asset purchase.
When you sell a business as a sole proprietor, the assets transfer and the sole proprietorship entity is most often dissolved. The buyer acquires the assets and establishes a separate legal entity with a new EIN or uses an existing entity to acquire the assets.
Other business corporation entities such as a C Corporation or an S Corporation can transfer either through an asset sale or stock sale. In both cases, such entities must abide by their incorporation documents as well as all state and federal laws. Owners’ ownership percentage can affect the transferring requirements.
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How Difficult Is It to Transfer Your Business to a New Owner?
While the actual steps involved in transferring your family business to a new owner aren’t necessarily complicated, the process generally involves a lot of work. This is especially true when you consider the broader experience of selling your business.
“Regardless of your business, the process will be significantly easier if you get organized, plan ahead, and come up with a clear exit strategy.”
Before you’re ready to transfer ownership, there are several steps that precede the transfer. These include getting a valuation, creating your marketing package, receiving offers, negotiating, completing due diligence, and signing a purchase agreement. Although these steps can be intensive, a skilled business Advisor can facilitate the process to maximize your chances of closing a successful deal.
When it’s time to transfer ownership of your business, there are several factors that will determine how difficult it is to transfer. These include:
- Deal size
- Documentation practices
- The complexity of the business
- The buyer’s knowledge and experience
Regardless of your business, the process will be significantly easier if you get organized, plan ahead, and come up with a clear exit strategy.
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