It is common practise in the context of a business sale for the seller to stay with the business for a period of time. This may be a set period of time, e.g. six months, or until a new product or service launch; or, it may be until a certain goal is met, such as a set net profit percentage increase year on year. If you are planning on buying a business, you can look to agree with the seller how long they should stay on, and develop a business transition plan that you each agree on. But what is a good length of time, or should they even stay on at all?
Below is an overview of the pros and cons of the most common business transition strategies. Which one you pick is up to you.
The Seller Leaves Upon Completion
One option is for the seller to move on as soon as the sale is completed. They may be eager to move on to a new project, and you may be eager to make the business your own. This is the default option unless you each specify that you would like the seller to stay on for a period of time. There are major pros and cons to this approach.
You can immediately start changing company culture. If you have a particular way that you like to run your business, and the previous owner is uncomfortable with it, this can cause conflict.
You can approach the business with a fresh vision. You may wish to take the company in a different direction, e.g. making or selling something new, winning larger clients, or just doing things differently. The seller may have their own vision for the business, which is often, partly, the reason why they stay on after selling.
You don’t have to pay the seller for their time. When the seller stays on, it is typically because the buyer offers them a performance-contingent bonus. If you don’t keep them on, you don’t have to pay them.
You choose not to benefit from the guidance of the seller. Depending on the experience of the seller, they may have been a part of the industry for many years. They can give invaluable guidance on what to do and how to do it if they stick around.
You choose not to build a business relationship with the seller. Although the seller may be moving on, they may simply be starting a new project, or may return to the industry one day. By building up a working relationship with them you may in time create a valuable contact. You could also leverage the seller’s contacts.
The seller may not want to. In the case of a family business transition, the seller may not want to leave immediately; if their moving on is a necessary condition in your negotiation, they may refuse to sell to you.
The Seller Stays for a Contingent Bonus
Alternatively, the seller could stay on. But there are multiple ways in which you can arrange this.
One way is to offer the seller a contingent bonus. A contingent bonus is a bonus paid out when certain goals are met. That could be a percentage improvement in year-on-year net profit; it could be the successful launch of a new product or service; or, it could be anything else you might want. This is typically over a set term, but you could arrange them to stay on until the figures are hit or the launch commences.
The terms of the bonus are for you and the seller to decide. But the pros and cons remain the same.
The bonus will be contingent on something that benefits the business. It’s a win-win scenario: the seller gets a bonus, and the business transition process is successful.
You can enjoy the expertise and advice of the seller. This can set you in good stead moving forward.
The prospect of the bonus can be used as part of purchase negotiations. You can use them to negotiate the sale price lower. As a simple example, you could offer £80,000, the seller requests £100,000, and you counter offer £85,000 with a £10,000 contingent bonus.
You will have to agree a fee to make it worth the seller’s time, and that could be substantial. You could aim to achieve the same target, but without the seller’s involvement, saving money.
You and the seller may step on each other’s toes unless you clearly define your roles. The seller may view the business as ‘their baby’, and not take easily to letting go of the reins.
The Seller Stays On in a Different Role
Finally, you could consider having the seller stay on in a different role. This could be as a board member, as an adviser of some kind, or in an unofficial capacity. Again, the terms of this arrangement are for you and the seller to decide; you can do whatever you’re comfortable with.
The seller could stay on long-term; as long as you need them. You could arrange for them to stay on for years, or even indefinitely.
The seller may not adjust to being in a different role. If they’re used to calling the shots, they may not enjoy taking a back seat.
How Long Should The Seller Stay On After They Sell?
There are no right or wrong answers. They should stay on for as long as you each agree that they serve a useful role.
Even the pros and cons above don’t always apply as the size of the business, the industry in which the business operates, and even personal factors can prove more important.
It’s for that reason that we recommend talking to Chelsea Corporate before making any decision. We make buying a business quick, easy, and painless process! We can talk with the seller on your behalf, offer advice based on our years of experience, and give you everything you need to thrive when buying a new business.