How To Transfer a Business to Another Person

Whether you’ve decided to pass the business down to family or friends, or are preparing your company for sale to an external buyer, the delicate process of a business transfer is an incredibly complex affair involving many factors such as legal requirements, financial considerations, and often emotional ties.

If you’ve found yourself wondering “how to transfer a business to another person”, the fiduciary financial professionals from Avidian Wealth Solutions can help you navigate and understand the process of how to transfer a business to another person in Texas. Business transitioning often includes a thorough financial plan; addressing matters from estate planning solutions to retirement planning for small business owners and, of course, formal exit planning. 

How do I change ownership of an existing business?

How does a business transfer work? If you’re selling your business instead of looking to transfer business ownership to family members, you’ll likely follow these steps:

1. Determine the value of your business. Before you can transfer ownership, you need to establish the value of your business. This valuation is crucial for setting a fair selling price and understanding the financial implications of the transfer. Valuing a business typically involves assessing its assets, liabilities, cash flow, market position, and future potential.
2. Negotiate sale terms with a potential buyer. Negotiating the sale terms is a critical step in transferring ownership. You’ll need to agree on the purchase price, payment structure, tax implications, and other relevant terms and conditions with the buyer. It’s essential to consult with legal and financial professionals during this process to ensure that the terms are fair and legally binding.
3. Prepare the business for sale. Preparing your business for sale involves addressing any outstanding legal or financial issues, making sure your financial records are up-to-date, and making the business as attractive as possible to potential buyers. Consider making necessary repairs or upgrades to the physical location, improving processes, cleaning up the accounting, and addressing any outstanding debts or legal disputes. 
4. Draft a purchase agreement. Once you’ve reached an agreement with the buyer, you’ll need to draft a purchase agreement. This document outlines all the terms and conditions of the sale, including the purchase price, payment schedule, transfer of assets, and any contingencies. It’s crucial to have this agreement reviewed by legal experts to protect your interests and ensure that all legal requirements are met.
5. Obtain necessary approvals and double-check compliance. Depending on your business’s structure and size, you may need to obtain various approvals and licenses to transfer ownership. This may include approvals from regulatory bodies, local authorities, or landlords. Make sure that you have all the necessary permits and clearances in place before finalizing the transfer.
6. Close the deal and transition. After the sale is complete, there is often a transition period during which you work towards a smooth handover by helping the new owner settle into their role. This may involve training the new owner, introducing them to key clients or suppliers, and assisting with the transition of employees.

How to transfer business ownership to family members

The best way to transfer family business might be to sell the business to your family, but if you’re interested in gifting or passing down the business, you still have a couple of options. 

When gifting interest to a family member it is important to consider two things. 

The first, is when you will have to pay gift taxes; and the second is exploring avenues that allow for discounted valuations to optimize wealth transfer. 

For example:

When it comes to gift taxes, the individual making the gift has to pay a gift tax if the gift is above the annual exclusion. As of 2023 the annual exclusion is $17,000 per individual (or $34,000 if a married couple chooses to split a gift). Gifts up to the annual exclusion do not face any taxation. This means that a married couple, who holds interest in a business, can effectively gift $34,000 worth of their equity to each of their children every year. 

An additional consideration is how to optimize the transfer of wealth through discounted valuations. For example, if private business interest is placed within a Family Limited Partnership (FLP), which operates like a holding company, then limited partnership interest can be gifted to third parties (like children) and receive a significant discount in their valuations. This allows for greater sums to be gifted over time. 

These types of gifting strategies can be coupled with the use of trusts, so as to ensure no loss of control over the business, and at the same time removing potential tax implications in the future (such as estate and gift taxes). It is important to understand the tax liabilities associated with gifting and estate planning; as these considerations will likely serve as a means to determine the best path forward for transitioning your business.

You should consult with both a trusted attorney and a Certified Public Accountant when completing a transfer of business ownership (yes, even if it’s to your family) to help make sure that the tax implications are properly considered. If you are planning on transferring business ownership to family members through your estate, consult with an experienced estate planning advisor and business succession planning professional who can help you put yourself and your family in the best position possible.

Continue reading about transferring ownership of property from parent to child.

What is the easiest form of business to transfer ownership?

Is there a business type or structure that is the easiest to transfer? Yes and no, while smaller and simpler businesses are much easier to transfer than large complex corporations, the structure of your business will often be decided by many other factors unrelated to ease of ownership transfer.

To better understand how your business structure may impact the transfer process, let’s delve into the common types of business structures:

1. Sole proprietorship. Because sole proprietorships are the simplest form of business, they are also often the easiest to transfer. Because there is no legal distinction between a business owner and their business in a sole proprietorship, these business transfers are often the least legally complex as well.
2. Partnership. Partnerships are essentially as simple as sole proprietorships, with the caveat that all partners need to agree on the direction of the transfer, which can be a rare thing in business. 
3. Limited liability company (LLC). An LLC combines elements of both partnerships and corporations, offering limited liability protection to its members while allowing for flexibility in ownership transfer. Transferring ownership in an LLC is typically done through an operating agreement, which should outline the process for selling membership interests. 
4. Corporation. Corporations are complex entities with multiple shareholders or stockholders, and transferring ownership in a corporation often involves selling shares of stock. The ease of transferring ownership in a corporation depends on the corporation’s structure: in closely-held corporations, the process may be more straightforward because there are fewer shareholders while transferring ownership in a publicly-traded corporation involves buying and selling shares, which can be complex and subject to regulatory requirements.

In general, the larger and more complex your business, the more difficult a transfer of ownership will be to execute. However, no matter the size of your business, you should plan to collaborate with trusted financial and legal advisors to execute your transition. 

Work with financial professionals who know how to transfer a business to another person effectively and efficiently

Those wondering how to transfer a business to another person should remember that the process is complex and multifaceted and that transferring even the simplest business demands careful planning, meticulous attention to detail, and the involvement of various professionals, including financial advisors, legal experts, and business appraisers. 

Transferring a business is not only about operations changing hands but also preserving the business’s legacy, maintaining its value, and safeguarding the interests of all parties involved.

It’s a process that can be emotionally charged, financially significant, and operationally challenging. Therefore, careful planning and the assistance of trusted professionals are essential to setting up yourself and your business for a prosperous future. 

Avidian Wealth Solutions offers a boutique family office experience to high-net-worth individuals, executives, and business owners looking to optimize their wealth and simplify their financial lives in Houston, Austin, Sugar Land, and The Woodlands. If you are ready to begin the process of stepping away from your business, start a conversation with Avidian today.

More Helpful Articles by Avidian Wealth Solutions: 

• Will AI Replace Financial Advisors?
• What is an Exit Plan (and Why Does it Matter?)
• What to Know About the Great Wealth Transfer
• How Is Passive Income Taxed?
• How Do Charitable Donations Affect Taxes?

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