When running a business, ownership changes are inevitable as things change over time. Be it retirement, a new opportunity or otherwise, ownership change will confront a business at some point. It’s vital to have an outlined plan of action when it comes to changing business ownership, to ensure a smooth transition with minimal stress and confusion. In this blog post, we will go over some key steps to take when changing ownership among existing owners of a business.
Determine the Reason for the Change in Ownership
The first step in changing ownership is to determine why the change is necessary. Some common reasons for changing ownership include the retirement of a partner, the need for additional capital to grow the business, or a partner wanting to sell their share of the company. Understanding the reason behind the change in ownership will help you determine the best course of action moving forward.
Review Existing Agreements or Contracts
Before any ownership changes take place, review the existing agreements or contracts among business owners. This includes shareholder agreements, operating agreements, buy-sell agreements, and other governing documents. These documents can outline rules and procedures for changing ownership, such as how the purchase price will be determined, what happens if a partner passes away, and who has the right of first refusal to purchase shares of the company. Understanding these agreements will help ensure that all steps in changing ownership are legal and follow the outlined procedures.
Appraise the Value of the Business
To determine a fair price for buying or selling ownership shares, it is necessary to have an appraisal. An appraisal establishes the business’ value, and forms the basis for negotiating ownership shares. Appraisals also help determine the most advantageous approach to buying or selling shares, such as a lump-sum payment or the installment purchase of shares.
Outline the Buyout Agreement for the Existing Owners
Once the value of the business is established, it’s essential to outline the buyout agreement.
This agreement should include the following terms of the purchase:
- The purchase price
- The payment method
- The timeline for the buyout
Many business owners opt for a gradual buyout, rather than a lump-sum payment. Include an outline of this agreement in all governing documents and contracts among partners.
File the Appropriate Legal Documents
After all steps have been taken, file the the legal documentation for the ownership change. This may include filing Articles of Amendment, transferring shares with the Secretary of State, and creating new shareholder agreements. Business owners and legal professionals should ensure that all changes in ownership are properly documented and that they meet all legal requirements and formalities.
Changing ownership among existing owners of a business can be a complex and emotional process. Proper procedure and guidelines will make the process easier and less stressful. Taking the steps outlined in this blog post will help ensure a smooth and successful transfer of ownership. Business owners and legal professionals should work together to ensure that all legal requirements are met. Keep in mind the changes that may occur with the shift in leadership. With proper communication, planning, and guidance, changing ownership can be a positive and successful transition.
Learn more and find out exactly what you need to do when you change the ownership structure of a business by visiting our Change in Ownership Wizard now!