Consider seller’s role in business, transition

By Scott Bushkie – CBI, M&A Advisor

Scott Bushkie - Cornerstone Business Services

When buying a company, one key factor in your success is the transition that happens immediately afterwards. You need time with the previous owner to understand how and why they operated the business the way they did. And you need their support to transition customer relationships.

As you think about negotiating for the seller’s time after a sale, think about their role in the business. Do they have a strong, empowered management team? Or did the seller operate the business from a place of tight, centralized control?

The more the business is reliant on the seller for day-to-day operations, the longer you’ll most likely need them to stay on. But if the seller’s main role is strategic oversight, they can transition out more quickly, once they’ve shared their philosophy and vision.

Consider client contacts as well. In many small businesses, it’s the owner who holds the key customer relationships. The last thing you want to do is call a customer and simply announce you’ve taken over.

You want the seller to introduce you and explain why they chose to sell to you: “Ann, meet John. He and I really connected over issues like ethics and quality control, and I think he’s going to do a great job. I believe he will be a great partner for you for many years to come.”

As a buyer, you want to build enough time into the transition process to make sure those relationships will transfer over. And, you want enough time to capture all the business information the owner keeps in his or her head.

One Year, Four Phases
One transition model I’ve seen, particularly in smaller businesses, is a year-long phase out. For the first three months, the seller commits fulltime-plus attention to the business as he or she teaches you the business and helps run regular operations.

For the next three months, the seller works a standard workweek, stepping back into a support role. At this stage, for example, the previous owner is still going along on sales calls, but the new owner is the one driving conversations.

In the third quarter, the seller moves into a part-time role. Perhaps this is an opportunity for the seasoned leader to mentor a younger professional, or maybe there’s some special project to complete before they leave.

And finally, the seller goes home but remains available for phone calls and consultations. They no longer work in the business, but they’re still there as a lifeline if you need one.

Time to Go
In any business transition, there comes a time when the seller needs to walk away or be sent away. One business owner shared his story with us recently, praising the relationship he had with his company’s former owner. He described a collaborative, supportive relationship, using words like “mentor” and “friend.”

But he went on to tell us about how the time eventually came when he had to let the former owner go. He had reached the point where he was ready to make bigger changes—changes that just weren’t feasible with the previous owner present and active in the business every day.

It was a gut wrenching conversation. But with the old owner gone, the buyer was free to revamp business strategies, introduce new technology, and foster younger talent. And, some time later, he actually invited the previous owner to come back, on a part-time basis, to do the kinds of hands-on work he had always liked best anyway.

Trust and Transparency
In the end, open and honest conversations are best. If the previous owner is going to continue working in the business, plan to check in once a quarter. Ask yourself if the arrangement still makes sense, and recognize that at some point, one or both of you is going to want to end the relationship.

Because no matter what contractual agreements are in place, the success of any transition comes down to the buyer and seller trusting each other and working together in good faith. When that happens, the results are spectacular. And when it doesn’t, the results can be equally tragic.

Related articles:

Plan for a Transition Period

Business Owners Can’t Plan on Yesterday

How to Work with a Seller After You Buy Their Company

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A thought-leader in the industry, Scott developed the Cornerstone Process to offer investment banking M&A-level services to the lower middle market. The result is a closing ratio that’s more than double the national average.