August 2014

3-Step Process for Transferring a One-Owner Business

Financial professionals who work with closely held business owners will help these entrepreneurs make plans to transfer the business. The plans typically deal with possible business sales in the event of retirement, disability and death.

Traditional buy-sell planning has focused on a business with multiple owners. What about the situation where there is only one owner of a closely held business? One-owner businesses are not just sole proprietorships; they also include single member LLCs and one-owner corporations.

Where the 100 percent owner of a business wants to make plans to sell the business in the event of retirement or death, there are only three choices. The entrepreneur can plan to sell to a third party, or plans can be made to sell to one or more key persons. The entrepreneur can also create an ESOP, which can be used to sell the business to all employees.

What if the entrepreneur is interested in selling one day, but there are no existing candidate third party or key person buyers? Under those circumstances, the business owner may have to create a future buyer for the business.

In most cases, creating a buyer does not mean putting a new friendly competitor in business. Instead, the entrepreneur must nurture a key person-or group of key people-to buy the business later.

How does the solo owner of a business do that? The process involves identifying the candidate key person, training the successor and executing the transfer plan.

Identifying the right person means finding a new or current employee-or employees-with the right business savvy. The key person must be trustworthy and financially responsible. Further, the future owner must display many of the entrepreneurial characteristics that the current business owner has.

Once the future buyer has been identified, training is next. Third party programs for business training, often offered by local universities, may be available. However, the best training for succession is usually conducted by the current owner of the business. Only someone deeply involved in a closely held business can provide detailed instructions about cash flow, customer relationships and employment issues.

The final step in creating a buyer for a one-owner business is to execute the transfer plan. That part can be the trickiest. Each business requires a custom approach to executing a business transfer. However, there are a few general rules that always apply:

1. The plan should be in writing.

2. The key employee should have financial skin in the game.

3. The plan should have checkpoints.

4. The plan should contemplate a possible change in circumstances.

5. The plan should be reviewed regularly.

We have helped many closely held business owners-including solo business owners-create plans to transfer their businesses. If you know business owners who need help in deciding how and when to transfer their businesses, we can help them, too.