Checklist for Transitioning a Business to New Ownership
The deal is closed. The purchase and sale agreement has been signed, and money has been passed from buyer to (former) business owner. The final step is to transition ownership of the business, which means closing the loop on a few final actions so the new owner can assume control of business operations.
Here’s an overview of the practical, legal, and financial items that need to be addressed.
What information needs to be transferred to the new owner after a business is sold?
Before the owner says their final good-bye and disappears into the sunset, they need to turn over all pertinent information necessary for the day-to-day operations of the business, such as:
- Alarm codes
- Computer, software and online application access codes, user names, and passwords
- Safe combinations
- Client list
- Supplier, vendor and distributor lists
- Keys to building, vehicles and file cabinets
- Equipment operating manuals
- Personal contact information
Does the business entity need to be dissolved after a business is sold?
If the business was structured as either a corporation or LLC, then the business entity needs to be dissolved. Here’s what the owner must do to dissolve the business entity:
- Meet with board members or partners and pass resolution to dissolve the business
- Notify IRS, using form 966
- File articles of dissolution with state where business was formed
What other steps needs to be taken to transfer or close a business?
The former owner (and ideally, his or her lawyer) should complete the following steps in order to cease business operations. If the business was formed as a sole proprietorship, it will close automatically once these steps are completed:
- Notify parties of all contracts assigned or assumed by buyer
- Notify creditors to explain how bills will be paid (by you or new buyer)
- Cancel business permits or licenses, assumed business names and other registrations
- Give cancellation notice on your lease (if it’s transferred to the new buyer)
- Cancel insurance policies not being assumed by new buyer
- Pay off all bills and collect accounts receivable not being assumed by buyer
- Distribute assets remaining in your business after the sale closing
- Close employer ID number with the IRS
- Close business line of credit
- Pay final wages to employees, plus payroll taxes and fees
- File necessary tax forms using the IRS “Closing a Business Checklist”.
Will the seller stay on board in any capacity after the business is sold?
In most business for sale transactions, the seller agrees to stay on board for at least a month to show the new owner the ropes and answer any questions that may arise. This is usually negotiated and agreed upon in the terms of purchase and sale agreement.
If the purchase is seller financed and the buyer agrees to pay off a portion of the business over time, the seller has a vested interest in a successful transition. They may take on an advisory role in the business for an extended period of time. The new owner should take advantage of the seller’s knowledge, skills, and expertise as much as possible. This is most important during the first three months of operations under new ownership. It is this time when the new owner will get into the weeds and get a good understanding of the nuances of the business.
How do you motivate employees to stay after the business is sold?
Most new owners heavily rely upon key veteran employees to keep the business running smoothly. As the new business owner, take the opportunity to set up a meeting with all your new employees. Introduce yourself and let them know how much you appreciate the great job they’re doing. This is also a good opportunity to give them a good reason to stay on board by offering them incentive plans, such as bonuses or profit-sharing plans. This will also motivate them to have a vested interest in the performance of the company.
Don’t underestimate the importance of preventing key employees from leaving at this point. Early on under new ownership, these people hold a lot of the keys to keeping the operation running smoothly. Until you get your bearings and have the chance to learn all the details of the business operations, these employees are worth their weight in gold.
This is also a great opportunity to connect with your customers and share the good news. The more information you provide, the more you will earn customers’ trust and loyalty. Similarly, “new management” creates an opportunity to bring back old customers and offer them something new. If you own a restaurant, announce new menu items. If you own a retail store, announce new products. You can share the good news through an online marketing campaign or a grand reopening celebration.
Your attorney and broker should guide you through this final post-closing process. At this point the deal is complete! You can now notify your employees and make an announcement to your customers, suppliers, and the general public. Congratulations!