What is a business transfer?
A business transfer is when one management entity passes its powers to another entity. There are different ways of transferring a business, but whatever form the transfer takes, it’s always a significant change for the people involved in the business.
Transferring a business isn’t just about laws, taxes and numbers. Entrepreneurs have often devoted much of their life to building their business, and the thought of handing it over to their successors can stir up a lot of emotions.
In addition, many entrepreneurs rely on selling their business to enjoy a comfortable retirement. That’s another reason why business transfers require careful planning. Business owners need to know how much they need to retire and ensure that their business’s value is in line with that amount.
To help you successfully plan your business transfer, here’s our seven-step guide.
1. Plan your business transfer
Selling or transferring a business can take several years, so thorough planning is essential, not just for your business, but for yourself too.
Advance planning for a business transfer is a key aspect of sound management and has many advantages:
- It helps maximize the value of your business, as it sends potential purchasers the message that the long-term success of your company is important to you.
- If you’re transferring a family business, it can help you maintain good relationships with your family members.
- It helps your successor to step into their role more easily. By planning for a transition period, you’ll help your successor better understand your organization’s culture and values as well as your work methods.
- You may be able to reduce the tax impacts, helping to maximize your personal wealth.
2. Define the objectives of your business transfer
With the help of experts like a business transfer manager and an account manager, start by determining the goals of your transfer.
This lays the foundations for your transition plan or succession plan, which will make the rest of the process easier.
How do you determine your goals? Ask yourself the following questions, and be objective in your answers:
- Do you want to take a complete step back from managing the business?
- What do you need to earn over the next ten, twenty and thirty years?
- How much do you need for your retirement?
- Who do you want to transfer your business to?
- Is the continued existence of your business important to you?
3. Identify your successor for your succession plan
Who do you want to transfer your business to? This is one of the most difficult aspects of the business transfer process. There are many possibilities. You might want to sell your business to family members, key employees or an external buyer.
Once again, you’ll need to make the best choice for you, taking into account your values and your goals. Here are some questions to help you figure things out:
- Did you build your business for your children?
- Do you want to make as much money as possible?
- Do you want to ensure the future of your business at all costs, going as far as to exclude your family from the process?
- Do you want to expand your business internationally?
These are difficult questions. There are experts that can help guide you through them and point out aspects you may have missed.
Here are some of the types of transfers that are possible:
- To employees of the business: You could decide to transfer your business to a manager, a member of the management team, etc.
- To family members: If you choose to transfer your business to family, there may be some interpersonal challenges to deal with. You’ll need to organize the knowledge transfer carefully and have a succession plan in place. Not all of your family members will have what it takes to run a business, and you might need to have some difficult conversations. If this is the case, you might want to hold a family meeting alongside a specialist who can facilitate the discussion.
- A mixed transfer: This is when you transfer the business to family and to employees.
- To another business: This involves transferring your business to another company, which takes over your operations. This type of transfer also requires careful preparation.
Once you’ve identified potential successors, set up some meetings to evaluate whether they have the skills that are important for you. Depending on your business, this might mean being capable of managing the finances of an SME or of finding and winning over private investors.
4. Determine the value of your business
To set a selling price, you’ll need to conduct an objective valuation of your business.
Sometimes, the price set by the owner doesn’t reflect the true value of their business. They may ask for too much, or even too little.
Seeking advice from a business valuation professional can be very helpful.
If you’re valuing your business now with a view to selling it in a couple of years’ time, it’s a good idea to do a second valuation at the time of transfer to confirm its value, as market conditions may have changed.
5. Draw up your business transfer plan
Now it’s time to draw up your succession plan, also called a transition plan. It should be drafted carefully and shared with everyone involved in the transfer, whether or not they work for your company.
A good transition plan should address these questions:
- Will you need to establish a transfer committee, and if so, what role will it play?
- What are your expectations? What are your successor’s expectations?
- Do you want to remain involved with the business as a consultant or board member?
- Does your successor need professional training or assistance?
- What is the timeframe for your successor taking over?
Your succession plan could extend over several months or years. Be sure to update it whenever changes occur within the company or the market at large.
6. Transfer ownership
Once you’ve reached this final step, you and your successor will choose the best way to finance the transfer, taking into account the implications with regard to tax, finances and regulations.
Financing solutions offered by your bank can help ensure success at this crucial stage. Your business transfer manager and account manager can offer you a range of solutions.
A common misconception is that businesses are sold in a single payment. Increasingly, the trend is to proceed with a series of partial sales of the business’s shares spread over seven or eight years.
For example, for family transfers, the children rarely have the required sum of money when the transfer takes place. They might start by purchasing 30% of the business’s value, followed by another portion a couple of years later, and so on.
7. Get help from experts
Given the amount of planning required and the information needed at each step, it’s important to reach out to labour law, tax and finance professionals for help drawing up your transition plan.
Your account manager can also assist you with your business transfer, leveraging their experience and our network of contacts to help you put together a support team. They’re also attuned to the human aspect of business transfers and can guide you through what is often an emotional experience. After all, transferring a business is about more than just the figures.
Find out how National Bank can help you transfer your business.
