Recipe for a Successful Transition when Selling
Having sold multiple businesses, I’ve found ownership transition is never the same. Each sale has its own unique way of handing over the keys from one owner to the next.
Some buyers don’t want the previous owner around as they’ve determined the business process needs upgrading and the selling owner will only get in the way. Sometimes, the business is dependent on the previous owner and the buyer needs the seller to stay on for some length of time to maintain customers, vendors and staff. Another situation may include a recapitalization in which the seller will convert some equity to cash while continuing to maintain an ownership position.
More times than not, the buyer wants the selling owner to stay on for over one year. I’ve found one year can be too long. When I sold my conference and event company to my partners, we originally set up one year. After six months we realized I was not as engaged and the employees taking over my responsibilities had things figured out. If an SBA loan is involved, the SBA will not allow the selling owner to stay on beyond one year.
When selling your business, make sure you cover the following crucial areas with your buyer to ensure a successful transition:
- Why is Buyer Buying?
This is so important. Too often a seller doesn’t fully understand why a buyer is buying and then once the sale is finalized, they are puzzled by the changes, in the months ahead. Be sure to have extended conversations with the buyer as to their intentions: Will they maintain staff? Cancel certain product lines?
- Plan an Upbeat Transition Meeting
Once the sale has been completed, immediately gather your employees together to meet the new buyer. If you close in the morning meet, in the afternoon. This meeting allows you the opportunity to thank your team and also share why this buyer is the perfect match. Most buyers will not make changes right away; make sure you communicate this message as employees are concerned with change. Yet, also inform the employees of the positives ahead. I’ve found many companies become stale with the same owner for many years. Have the buyer talk about how things will improve: maybe better benefits or opportunities for growth.
- Financial Incentives
The transaction may include an earn out as part of the deal. This is where you are paid a combination of cash at closing and a percentage of future earnings. If you as a seller agree to an earn- out, you probably want to stay on long enough to ensure the business will achieve the stated goals.
I’ve found setting up transition bonus pay for key employees can also work well usually tied to staying on for a year. Sometimes, a percentage of this bonus is paid after six months and the remainder in a year. This can be paid by the seller, the buyer or both the buyer and the seller.
- Your Involvement
You may want to stay with the business for awhile as you may not be ready to retire. You like the idea of continuing to work and most times staying on helps sell your business as the buyer often wants you around to ensure a smooth transition. Yet, make sure you fully understand your transition agreement. You’ve always been the boss and realistically, how long do you think you will be able to work for someone else? Consider a short- term agreement that will renew after a certain number of months if both parties agree.
Follow this business transition recipe and you’ll have the ingredients to successfully move your business forward.
This article was written by Sam Thompson. Sam is the president and owner of Transitions In Business, a Minnesota based M&A firm that specializes in selling healthcare, business to business, transportation, manufacturing, distribution and construction/trade services companies. Sam is a Merger and Acquisition Master Intermediary (M&AMI) and a Certified Business Intermediary who has successfully guided countless business owners through the sale or merger of their company. Prior to becoming an intermediary, Sam was a successful CEO and business owner for 29 years before selling his $16 million business.