A frequently asked question that I hear from business owners that are considering selling their company is, “If I am going to be asked to stay on for an extended period after the sale, I might as well not sell in the first place.” The time required for the seller to stay on after the sale is based both on the type of buyer and also on how the seller can be utilized in the “new” company.
Private Equity Groups acquire firms to expand their portfolio for their investor partners. The PEG will not be interested in running the company, and will want management to stay after the sale to continue running the company. This period will usually be for several years to stabilize and continue the success of the company. Equity groups frequently take the position that the best person to continue operations is the previous owner. The amount of money paid in salary will usually be much less than what the owner received in his ownership tenure.
Individual buyer coming out of Corporate America: Buyers coming from “CA” usually do not have specific industry experience. As such, the length of time required to stay usually depends on two factors –
- The more technical the firm, the longer it would take a new owner to be ready to take over. If the buyer has prior specific industry experience, that will significantly cut down on the training required by the new owner.Competitors buying a firm in their specific industry usually have the lowest requirement for the seller to remain with the firm. Competitors characteristically have people on staff that can be inserted into the owner’s position that will not only have industry experience, but will be able to integrate the acquiring firm’s method of operation. Typically, the seller will be able to leave the firm in a month or two after selling to a competitor.
- The other factor determining how long a seller will have to stay on, is the specific skills required of the owner in continuing the success of the company. Many sellers have developed certain skills needed for the continued success of the firm. On the other hand, the last thing many former owners want is a 9 to 5 daily job. This issue can be mitigated for both parties by a consulting agreement in which the seller only comes into the office to assist in his special tasks when required. Many consulting situations are therefore based on an “hourly” requirement. Most sellers are more open to working part time to assist in transition when they can enjoy their newfound “freedom”.
Some of the best win-win situations are set in motion by the seller staying on as an outside salesperson. The seller has the industry knowledge and is aware of the capabilities of the firm and often these experiences make the seller the best potential salesman for the new owner. The buyer will want to compensate the seller on commission only and for new customers only. The buyer has the concern of retaining existing cash flow, and as long as the new owner is a commission only salesman any new customers will be a positive for the business. Many sellers are burned out in running the company, but like the idea of being an outside salesman and a continued income stream.
The SBA loan is the most used financing vehicle for small business transfer. The requirements for this program are changed frequently in the current economic climate. One of the more recent changes is that the seller cannot stay longer than one year after the sale. The reason for this requirement is to prevent fraudulent sales in which the seller gets money for a “false” sale and actually stays as owner. Many expect this requirement to get overturned for the benefits of a seller’s continued involvement in the success of the company purchased. Buyers seeking SBA financing need to be aware of this requirement, and determine in the beginning of a deal how long a seller will need to stay in the offering they are considering.