Business Succession Planning: 5 Ways You Can Transfer Ownership of Your Business
By: Barry E. Haimo, Esq.
April 5, 2021
Business owners spend their lives building up their businesses to be successful. With all the blood, sweat, and tears that go into growing a business, it can be hard to let go. Even moreso if you don’t really know where to start.
But most people understand that they can’t be in charge forever, and they want to ensure the continuation of their legacy by making sure their business will be well-run after they move on.
This is where succession planning comes in. Good succession planning spells out who will take over and reduces any disputes that may pop up between parties. This type of planning is vital for a smooth transition — and to reduce stress if there’s an emergency that transfers the ownership of the business at some point, such as death or illness.
What options are available to you?
Here are some of the most common ways to transfer ownership of your business to help you find the one that’s right for you.
Pass the Business to an Heir
Maybe you have family members who work in your organization and are considering passing the business on to them. There are some definite pros to this arrangement… but also cons.
For example, if there are multiple family members who want to take over the business, you must provide clear instructions regarding who the business will transfer to and how others will be reimbursed.
Additionally, it’s not a good idea to pass ownership to someone — even family — who is not currently involved in the business. And picking a single successor is always better than picking multiple people, so don’t try to make everyone happy with a power-sharing arrangement.
Sell to a Co-Owner
If you co-own your business, it seems natural to consider the co-owner as the right person to pass the torch to. In many co-owned businesses, there are already agreements in place to cover what happens if the other owner becomes incapacitated or dies, and that agreement is an excellent foundation for a business succession plan.
A buy-sell agreement is the best way to go about transferring ownership. In this agreement, the remaining owner agrees to purchase the business interest from the other owner. If this occurs due to death, then this agreement helps to guarantee that fair compensation is given to the family of the deceased.
Sell to an Employee
Yet another option to consider is to sell the business to an employee. This is a case where a buy-sell agreement is again the best option.
Typically, the employee agrees to purchase the business from you at a prearranged date, or in the event of your disability or death.
Sell Shares Back to the Company
You can also consider an entity purchase plan or stock redemption plan for succession planning.
In these plans, the business purchases life insurance on the owners, and those earnings are used in the event of one owner’s death to purchase the business interest. This leaves the living owner or owners with a larger share of the business.
Sell to an Outside Party
If there’s no obvious successor to your business, then you may consider selling to an outside party. It’s important to properly prepare your business for sale if this is the route you take, and to make your business as stable as possible to attract outside buyers for top dollar.
Want to learn more about business succession planning? Contact Haimo Law today.
Barry E. Haimo, Esq.
Strategic Planning With Purpose
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