02 Mar How to Transition Out of Owning Your Company
by Josh Hunter
Entrepreneurship has long been seen as the road to building wealth. This usually occurs during the years the business grows, when business owners may pay themselves a salary commensurate with the success of the enterprise.
However, another way for entrepreneurs to acquire wealth is to simply exit or sell their business. No longer considered a sign of failure, transitioning one’s ownership of a business occurs frequently as markets, technologies, customer preferences or other factors change more quickly than they have in the past. It might be the right time to sell and collect the proceeds, or business owners may want to protect themselves from continuing or potential losses. They may also simply just want to explore other business opportunities.
So what exactly is involved with transitioning out of company ownership? Apart from the legal or tax-related ramifications, business owners must consider how to protect the assets in their companies and ensure the business is valued properly.
Decide if You Want to Sell or Discontinue Operations
This might seem like the first question to be asked, but there’s often no simple, clear-cut answer that works for everyone.
Entrepreneurs often wrestle with the word “ownership.” For many, they own 100% of their business: They started it from the ground up, with plenty of sweat equity. They pride themselves on what they’ve built.
However, “selling” does not necessarily always have to mean selling 100% of the business. The transition of ownership can look like taking on a new partner or investor, with day-to-day responsibilities only shifting marginally. Various scenarios need to be explored, because even the salary business owners pay themselves will most likely change when new managers and co-owners become involved. The point is, business owners looking to step down from day-to-day operations of their companies have many options.
Further, shutting down a business altogether might incur significant tax considerations and complicated arrangements with creditors. Heirs to a business owner’s estate may also be something to remember when making the decision.
Value all Assets at the Time of Transition
During the years of owning a business, owners are paying themselves a salary, paying employees their salaries, arranging financing with creditors, and banking any profits. However, other assets might have accumulated in value, including intellectual property, brand names, equipment, real estate and even customer lists.
When selling all or part of a business, it is important to understand the value of all assets that the business owns. Wealth advisors specializing in valuation can help entrepreneurs with this process since there are different methods professionals use to value a company.
Commercial Real Estate Considerations
With interest rates at historic lows and SBA loan programs for owner-occupied commercial real estate, many entrepreneurs have become commercial real estate investors as a way to accumulate assets and acquire additional income streams. However, if an entrepreneur sells a business, what will become of the property in which the business operates? There are generally two strategies to consider:
- Sell or close the business but keep the building. Here, you transition to becoming a landlord to new tenants. All associated real estate responsibilities will continue, so 100% retirement is most likely not going to happen.
- Sell or close the business and sell the building. In this scenario, the business owner frees herself from ownership and collects revenue from both the sale of the business and the commercial property.
Checklist for Selling a Business
It’s never a bad idea to begin assembling the documents needed to transfer ownership of your business. Every business is different, and every buyer has different needs, but the below checklist includes some, of the important documents needed in a transaction that transfers of ownership of a business:
- Articles of incorporation, annual reports and documents outlining the business’ legal structure
- Records of capital raises and liquidity events
- Business plans
- Accounting records, including company financials, cash flows, profit and loss statements and projections
- Tax returns, audits, financial valuations and other reports from third-party professional services providers
- Intellectual property, including patents and trademarks
- Marketing plans, strategy and assets, including website domain names and social media accounts
- Customer lists, including the business’ customer relationship management (CRM) tools
- Employee compensation and benefits obligations
- Technology assets, including owned and leased hardware and licensed software
- Additional operational information, including capital expenditures, commercial leases and investments in R&D
How Long Does It Take To Sell A Business?
A variety of factors influence the time it takes to sell a business, including factors outside of the owner’s control, like how the economy is doing in general. According to data compiled by business broker BizBuySell and reported in Inc. magazine, business owners should anticipate a period of 6 to 11 months until a sale is finalized.
Business owners can do their best to prevent bottlenecks, such as assembling the documentation cited above. They can also consider hiring a business broker to find a seller or engage in their own marketing campaign.
Once You Exit, Start Again
While the time may have been right to sell the business, it’s never a bad idea to consider entrepreneurship once again. Your track record will attract not only new opportunities, whether as a sole proprietor, partner or silent investor but also new sources of financing or investors willing to back your ideas.
Serial entrepreneurship has become more common. By doing this over and over, serial entrepreneurs put themselves “in control of their financial destiny rather than subjecting themselves to the whims of the market,” notes Investopedia.
Transition is never easy, regardless of years of experience in building, buying, selling or investing in companies. It’s never a bad idea to choose a wealth advisor with experience helping entrepreneurs make the right decisions surrounding the transfer of assets, tax implications, and helping you navigate and select the strategies most appropriate for your needs. Advisors can also help business owners create a succession plan long before the decision to exit has been made. This key preparation step can help ensure a smooth transition out of company ownership and is worth the time on the front end of the lifespan of a business. It’s worth discussing with your advisor.