Selling Your Business: How Long Will You Remain Involved Post-Sale?
Once a business sale has completed, many business owners want to know how long they will remain involved in their company.
To a large extent this will depend on the deal structure that is agreed as the buyer's strategy for the business post completion will be linked to the type of deal structure they propose. It will also depend on what your motivations for sale are too.
For example, if your motivation to sell your business is primarily a financial one, then you may be inclined to stay with the company after the sale goes through in a management, senior or consulting role.
However, if you're selling in order to retire or if you're no longer motivated to work for the company, you may wish to leave as soon as possible. It's important to really think about what you want to do post-sale, so you don't agree to do something you don't want to do.
In addition to considering the above, it's also useful to take a look at the 3 main deal structures and how they affect the length of time you'll stay involved. But before we do that, it should be mentioned that with all deals there is a period of hand over, typically 3-6 months, where the seller and the buyer will need to announce and manage the change in organisation with clients, suppliers and staff.
OK, with that in mind, let's get into each of the deal structures.
- Fixed consideration and deferred payment deals
With deals where the consideration is paid on completion or where a proportion of the consideration is deferred (but paid as a fixed amount), it is likely that the seller's involvement will be limited to the hand-over period (which, as we mentioned above, typically takes 3-6 months).
Deferred payments, otherwise known as vendor loans, are fixed and paid according to an agreed schedule, typically over one to two years and paid in regular monthly or quarterly instalments. As any bank would do, it is wise to request in the legal agreement that the buyer provides you regular financial reports. This way you can foresee any potential repayment challenges and take appropriate action.
The length of the hand-over period will ultimately depend on how reliant the business has been on your personal input, know-how and relationships with clients and suppliers over the years. However, we often see retiring business owners’ input taper down quite quickly from full time to 2-3 days per week to telephone support and a monthly meeting, as the buyer takes over the reins of business.
- Earn-out arrangements
With earn-out deals where a portion of the deal value is paid post-completion and dependent on the performance of the business, it is normally expected that the seller (or at least one of the outgoing owners) will remain involved in the business for the duration of the earn-out period, i.e. typically 12 to 24 months. It should be in both parties' interests for the value of the earn-out to be maximised as much as possible through increased sales and profits and the retention of clients. The seller will normally have a key role to play alongside the buyer in achieving this.
Remaining involved throughout the earn-out also allows the seller to monitor the performance of the business directly, though this can also be achieved through the legal agreement that the seller will be allowed to review the management accounts regularly whether they are involved day-to-day or not. It is important to remember though that the relationship needs to be kept positive as disagreement will tend to impact the business performance.
From the buyer's perspective, the continued involvement of the seller will allow continuity with the client base and thereby reduce the risk of clients falling away due to the transfer of ownership. However, they will need to reduce the reliance on the seller and progressively take over the relationships during the earn-out period.
The seller is typically retained on a consultancy basis and paid on an agreed daily rate. Their involvement may ramp down in time from full time to a part time role with perhaps telephone support.
- Retaining a shareholding
In deals where the seller retains a minority shareholding in the company, typically around 20%, the buyer and seller are effectively agreeing to grow the business together and so the seller typically retains a senior manager/director role within the business on an ongoing basis.
Many such deals also have an earn-out arrangement on the payment for the majority share so again both parties' should be incentivised for the value of the earn-out to be maximised as much as possible and the seller will have a key role in this.
The seller is normally retained under an employment contract for their role in the new company alongside a shareholders agreement which allows for the eventual sale of the seller's shares to the buyer based on an agreed valuation model.
So, in summary, if you're looking to sell your business and have the least amount of involvement post completion, you'll be more interested in agreeing a fixed consideration with as much paid on completion as possible. However, if you're still motivated to work in the business and continue to be a part of the company, you'll want to find buyers interested in retaining you and sharing the upside.
Would you like advice on the best deal structure for you in the sale of your business?
We would be delighted to offer you a free appraisal and indicative valuation of your business to give you guidance on its value and attractiveness to buyers, the most likely deal structure and whether now is the right time for you to sell. Our appraisal can take the form of either a face-to-face meeting, a web meeting or a telephone call, as you prefer.
Please contact us on 020 8090 9380, email [email protected], or complete the form below to arrange an appropriate time to review your exit strategy and the value of your business in confidence and without obligation.