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HAVENS MALCZYNSKI GRIGOLLA, LLP

Why Should A Business Owner Plan For A Business Transfer If They Are Not Retiring Soon?


Business owners – especially those who own closely-held businesses—should think of their business as more of a relay race than a sprint. By preparing for a transition early, they will have a long time to make the necessary preparations so that each small step in the preparation process is not urgent. This will allow for each step to be taken without having a significant impact on the business. It’s also important to be prepared for events that may cause a transition to occur but that can’t be foreseen.

When Should Planning Actually Begin?

Planning needs to begin before undertaking the event that’s being planned. Since there is no way to know when a transfer may become necessary, my advice to clients is that they begin planning right away so that they can have it in place. If it’s not needed for some time, it won’t cause any harm, and it will be there in case it is needed. If it’s a planned transfer, then the earlier the planning begins, the more time there will be to get everything in place, and the less disruption it will cause the business.

What Are The Events That Will Lead To A Transfer?

The main events that will lead to a transfer are retirement, illness, disability, and death of a key person in the business (e.g. the owner of the business, a member of upper management, or a member of operations).

How Can I Plan For An Unexpected Need To Transfer?

An individual can plan for an unexpected transfer by using a buy-sell agreement where each individual involved in the corporation, partnership, or LLC agrees that if anyone of them becomes disabled or dies, that the others will purchase their interests from them or from their estate. This is done ahead of time when we don’t know which one would be the seller and which one would be the buyer. An advantage to this is that the agreement is seen as being a good, bonafide agreement for tax purposes for the IRS, and all evaluations within that agreement can be used for tax purposes. In the buy-sell agreement, the individuals protect the interest of their own family or their estate and the value of the business if they are the ones who are the deceased or disabled. They also protect their own interest in being able to manage and operate the business with a reasonable plan for the transition if they are the remaining partner.

Can I Only Transfer Control But Keep Ownership?

Oftentimes, a person will transfer control but keep ownership of a business. There would be a period of time—perhaps 10 to 15 years – during which the owners would continue to be owners of the business but would not be involved in the management and operation of the business. In order to do this, they could create some sort of independent management team and train their replacement for daily management.

What Are The Steps For A Planned Retirement?

A planned retirement – whether it involves giving up ownership or keeping ownership and only transferring control—is ideally going to be a three to five-year process. First, the owner would select a candidate for the new management position and find someone who has an interest in the business and has shown some ability within the business. Frequently, it will be someone who is already a key person in the business. Once they have selected that person, they would take some time to mentor them, review the procedures of upper management, and cross-train them in any areas of the business in which they haven’t already been involved. Then they would transfer some of the routine management functions to that candidate so that they could manage the day-to-day routine for a period of time.

Once they have a handle on that, the planning and larger oversight management duties would be transferred to them. This would lead to a role reversal, meaning the former manager and owner would leave the role of primary manager of the business and serve as a consultant for a period of time. They would be there to advise the new manager as needed. After that period of consulting would be the retirement of the prior owner or manager.

For more information on Need For Business Transfer Planning, a free initial consultation is your next best step. Get the information and legal answers you are seeking by calling (626) 385-6303 today.

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