Pave the way for success when buying or selling a business
By Dave Driscoll
The Letter of Intent (LOI) is a very important document between buyer and seller in the sale of a business. An LOI contains the essence of the deal as discussed between the parties prior to the creation of legally-binding documents. It identifies the buyer(s) and seller(s), the authority to buy and sell, the price to be paid, the terms and payment of purchase price, buyer contingencies, due diligence, and other important items.
Another significant element within an LOI is the transition assistance period. This defines how long the seller will remain after the sale to assist the buyer in understanding the operation of the business. Consider this transferring the flag, the tribal knowledge, or the “secret sauce” that made it all work for the seller. The transition assistance period specified is actually as important as the price paid and the other terms of the sale.
Think about it…the buyer has invested money and made financial commitments based on the expectation of continuing the historical cash flow of the business. The buyer is assuming the operational risk of the future. The only way to manage that risk is to thoroughly understand the details of how the business runs. The seller is the linchpin for the transfer of critical knowledge to the buyer.
The transition assistance period outlined in an LOI is as unique as the transaction itself. I don’t known of any buyer who hasn’t required the seller to stay on for a while after the sale. The seller’s presence after the sale will comfort and reassure the employees and customers that the business is being carefully handed over to a new owner. The seller needs to help the buyer build positive relationships with key personnel, recognize the company culture, and learn any systems that impact daily operations. This is also the seller’s time to thank those who helped make the business successful, while also expressing confidence in the buyer’s capabilities and intentions. The buyer should be introduced to major customers, vendors, advisors (accountant, corporate attorney), relevant community leaders, and any other people integral to the business’ activities and outcomes.
The transition assistance period can range from 30 days to many months, depending on the complexity of the business, the buyer’s prior industry experience, and the time a buyer may need to feel comfortable with any processes/procedures. Needless to say, a seller usually wants to make the transition as short as possible to begin his/her next phase of life. The buyer is not in a position to fully know how long is long enough – they don’t know what they don’t know – so they typically want the option of a longer timeframe to ensure proper training and hand-off.
Often, the structure is staged, with a seller required to assist full-time initially, and tapering off as the buyer becomes familiar with the operations. A 90-day period is frequently specified, where the seller may be required to be onsite for 40 hours per week for the first month, onsite or available for meetings or consultation for 20 to 30 hours per week the second month, and then only available for consultation (possibly offsite) for 20-30 hours the final month. In some cases, the buyer and seller may agree to a number of hours of phone consultation following the transition period. Again, these terms should be negotiated based on the situation.
Typically, the seller is not compensated for the transition period as it is considered part of the sale agreement. A seller may negotiate compensation if the buyer requests a long transition period or if assistance continues after the initial period has ended.
Buying a business is a substantial step, requiring a buyer to assume the risks for future business profitability. Having time, post-closing, for proper handoff is essential for a buyer’s successful operation of their newly-acquired business. Using this time effectively and efficiently is the buyer’s responsibility; not doing so could lead to a disastrous start for a new owner. Remember, the transition period is mutually beneficial because the seller has a vested interest in the new owner’s success in terms of any earn-out payments, seller financing repayment, and preserving the legacy of the company he/she built.
Dave Driscoll is president of Metro Business Advisors, a business brokerage, valuation, and exit planning firm helping owners of companies with revenue of up to $20 million sell their most valuable asset. Reach Dave at [email protected] or (314) 303-5600. www.MetroBusinessAdvisors.com.