After the Business Sale

Put up a business for sale, find someone looking to buy a business and be done with it, right? Not quite.

Quite reasonably, once they buy a business buyers like to make sure they know the intricacies of running it. And the important things to know about running a particular business are often not put down on paper, not because they are top secret but simply because they are things that the owner and the employees figure out instinctively as they go along. That’s crucial information about the business as far as the buyer is concerned. Hence most people who buy a business insist that the seller remains on board for at least some time after the sale.

Some portion of the money that you receive when you sell a business may be tied down to the condition that you stay on for some time as an employee, consultant or mentor. It won’t be for very long, since most people who buy a business have their own ideas about running it. But where you’ll be able to help is to show them important processes that cut costs and maximize efficiency.

Having to remain involved with the business even after you sell it might seem inconvenient, especially if you have future ventures (or your retirement) planned out. But remember, no businessperson likes someone breathing down their neck, so once you’ve played out your post-sale role, the buyer will be happy to see you go.

How To Choose Between an Earnout and Financing the Deal

In an earnout, if the company does poorly you suffer a loss. That’s how an earnout is structured so it’s up to you to see that the company does well. When you finance the deal and the business does poorly you may suffer an initial loss because of the buyer’s inability to pay you. But if the buyer consistently fails to meet payment deadlines, you will be legally entitled to repossess the company. You will still incur costs, since you’ll have to worry about other ventures you might have moved onto, as well as dedicate resources to getting your company back. But at the end of the day, you’ll have your business working for you.

Which method of sale you choose depends on you, your business, the buyer and your relationship with the buyer. As a general pointer, an earnout is an exciting, viable option with new companies in young industries. With older, more stable companies conventional forms of financing are usually adopted. A construction business is not prone to explosive growth (or collapse), so it wouldn’t make a lot of sense to structure the sale as an earnout. Whereas with a software company, a technology you’ve developed might one day be worth a lot of money, so an earnout is a good option to make sure you get suitably rewarded.

Employee or Consultant

Your position in the company after the sale, may be as an employee or as a consultant. Again, which one you choose depends on the specifics of your business sale.

1. As an employee
Functioning as an employee in the same company that you once headed can be a problem for your ego. But if the business for sale is a family concern, or you know the buyer well enough, the arrangement can work quite well. The agreement is made through a Seller’s Employment Contract which will detail the exact role you will play in the company, the salary and perks you will receive and, if it is a short term arrangement, the time period for which you will stay on as an employee. If you find you don’t have a problem with accepting yourself as an employee in your own company, then a Seller’s Employment Contract is a great way for you to continue to draw a regular salary, and receive perks that you’ve gotten used to- a car, insurance, business trips etc.

When drawing up the Seller’s Employment Contract, you need to be careful about the tax implications. The compensation you receive should be appropriate to the services you will provide, as specified by the contract. Your salary and perks will only count as deductible business expenses if you are doing as much work as you are supposed to, as a regular employee of the company. At the same time, if you do too much work for your pay the entire sale of the business may cease to be valid.

You will have to give up a lot of your responsibilities when you go from being the owner to an employee. So both you and the buyer have to be clear about what each of your duties will be. If necessary, discuss even such trivial things as how you will address each other in the company, after the sale. Talk to the buyer about concerns you might have about how you will take orders, how decisions will be taken etc.

If you’re only going to be around for long enough to see that things are running smoothly, try not to get emotional about letting go of the business. While she is busy trying to learn the ropes, the last thing the buyer needs is to listen to your gripes about how much you miss being the owner.

Seller’s Employment Contracts are effective within family businesses where the new, younger owner is mentored by the old owner, who has now become an employee possibly as a step towards retirement. The family association makes it easier to deal with the elder’s disgruntlement with her new role as an employee of her son, daughter, niece or nephew.

2. As a consultant When you sell a business to a buyer who is not a friend or family relation, you will most likely be required to function as a consultant after the sale. The agreement will entitle you to a certain compensation for which you will have to make yourself available for a specified amount of time every month (usually specified in hours). Of course, the buyer would much rather manage without you and will probably make every effort to do so. In case she doesn’t request your services during a particular month, as per the agreement you will still be entitled to your fee.

This agreement will be take the form of a Seller’s Consulting Contract. The contract can get in the way of your plans, particularly if you want to relocate immediately after the sale. You can get around this by starting a small consulting company, and draw up the Seller’s Consulting Contract between the buyer and that company. That way, you can send someone else in your place as a consultant if you’re busy with something else. However, tell the buyer that you’re doing this and assure her that any consultant you send will be as capable of doing the job as you. You don’t want to surprise her by sending someone else and then pointing out that your contract doesn’t say that you have to come in person.

Even with Seller’s Consulting Contracts, there are tax implications to watch out for. The compensation paid to you will be considered a deductible business expense to the buyer, but the money you receive needs to be appropriate to the time you commit, your experience and the market value for consultants with similar profiles.

The Seller’s Noncompete Agreement

Almost every buyer will insist on a non-compete agreement during the business sale. In any business where there is a substantial transfer of know-how during the sale, it is essential that the buyer protect her interests by making sure that you don’t immediately set up a new company that does exactly the same thing. If you do this, in all likelihood the buyer will lose all your old clients to your new company.

The non-compete agreement ensures that for a specified period of time, within a certain geographical area you will not set up a similar business. The agreement may also require that you not use or divulge trade secrets, client lists and other databases that you transfer to your client during the sale. The buyer will be required to compensate you for signing the agreement, which is a great deal if you have no intention of starting the same business again.

If you’re not sure that you want to rule out the possibility of going into business in the same field again, then negotiate with the buyer so that you minimize the limitations imposed on you by the agreement.

The points of the non-compete agreement that you want to negotiate are:

1. The geographical area within which you will not be allowed to start a similar business

2. The time period for which you will not be allowed to start a similar business

3. The exact limitations on the kind of business you can start. What if you don’t want to start the same business, but a related business?

4. The knowledge base that you will be allowed to use if you do start another business. If you move out of the geographical area, will you be entitled to use the same client lists? If you start a related business, will you be allowed to use the same processes that you developed for your earlier company?