There are many reasons why a business owner may need to transfer ownership of his/her business at some point. We have compiled them into 8 main reasons that include:
1-Estate and gift tax planning
Working with a financial adviser or wealth adviser to put in place an estate tax plan or a gift tax plan means you are anticipating a change of ownership in a short or long term. It is the best way to ensure continuity of the business beyond its founder.
2-Business owner’s disability or death
When unforeseen situations like the disability or the death of the business owner arise, it is most likely the business will have a new owner if there is a succession plan in place. Otherwise, there could be serious troubles ahead that could jeopardize the existence of the enterprise.
3- Key employee unanticipated exit from the business
When a key employee (an employee who plays a critical role in the operations of the business) leaves the company, a replacement is often hard to find. In the meantime, the company is losing business and thus value. Consider transferring ownership as an option if necessary.
4- Absence of a qualified relative to run the business
In most closely-held family businesses, when the business owner is not able for many reasons (e.g. retirement, sickness, disability, or other) to run the business effectively, it is often a qualified and willing close relative (son, daughter, grand child or other family member) who takes over. When there is none available, it is time to consider a transfer of ownership by selling the business.
5- “Entrepreneurial burnout” of the owner (usually after 5 to 7 years)
It is very common that business owners want to exit the business after many years of hard work to launch the business to its peak performance. That could lead to what is called “entrepreneurial burnout” of the owner who may consider looking for an exit strategy. One option he/she has is to transfer ownership to someone who can handle the business effectively.
6- Unsought approach by potential purchaser
When an unexpected buyer wants to purchase your business at a reasonable price or at fair market value, that is cause for pause for the business owner who may decide to sell (transfer ownership) or not to sell his business. The owner may be wise to seek advice from his/her attorney.
7- Marital dissolution actions (Divorce)
When a married couple that owns a business engages in divorce actions, it is often very disturbing for the owners who are unable to effectively run the business. The adverse effects of the owners’ inability to run the business are sometimes perceptible to the clients, the employees and the shareholders. It may be time to consider a transfer of ownership.
8- Business that is failing or going insolvent
When it is clear that the business is not generating the profits needed to sustain its viability as an enterprise and after the owner has tried all options available to rectify the situation, it is appropriate for the owner to consider an exit strategy. The owner may consider going into bankruptcy, liquidation, or sale of the business. A business valuation is needed to determine its fair market value.
Achille Ekeu, MBA, CVA
The Washington Valuation Group, LLC.
Achille is a Certified Valuation Analyst and Member of the National Association of Certified Valuators and Analysts (NACVA) in the DC-MD Chapter. He is also a Management Consultant Member of the Institute of Management Consultants (IMC-USA) in the National Capital Chapter. Achille can be reached by email at firstname.lastname@example.org or by phone at 1-240-274-9570.