Keeping the Owner of the Business on as a Consultant When Buying a Business

Questions from Venture Magazine to the MAXIMA Group:
For the prospective buyer of a business, the decision to retain or refuse the services of the current owner as a consultant is one that should be carefully considered. Why part ways with the guy who established a well-functioning, profitable business? He may be the one with all the business contacts and relationships you’ll need to succeed. But what will that relationship look like? Will the owner be comfortable in the new role? Will he be co-operative? How much do you have to “give” to that relationship and how much do you get to “take”? Overall, the transaction involves much more than money. It’s about personalities and emotions, as well as practicalities.  

MAXIMA’s Reply:A positive working relationship with the Buyer and Seller would include considering each of the related stakeholders and their priorities:
1. Staff
2. Clients
3. Suppliers
4. Bank
5. Landlord
6. Sellers exit plans and time lines
7. Buyers strategic plan for buying the business

These priorities should be considered within the negotiations process as one of the building blocks for a successful deal. Sharing expectations of this critical role after the deal has been finalized can be viewed as an additional grab by the buyer and could challenge the working relationship going forward.

The majority of deals require the Owner to stay on for a period of time except in case where existing team members take over (i.e.: Management Buyout). While there is no specific matrix to calculate the duration of the exiting relationship, typically the “Work Agreement” time frames are driven by complexity of operations, relationships involved, how well the company is positioned to perform without the owners involvement, and how well the Seller has developed the product and service offerings to consistently meet market expectations. Typically the larger the company, the better the processes and less hands on required by the owner. With smaller companies the owner may be the drive gear that keeps everything working.

Different Buyers have different priorities:
• A newbie Buyer to the Sellers marketplace will want the time to confirm everything from “how” and “what” to “who” and “for how much” “from where” and “for how long.” This requires time and access to the knowledge base.
• Even a Buyer experienced in the company’s products and services will want to be comfortable with the company’s offerings and reason why clients are loyal. The challenge is there is no easy way to transfer the history of all the relationships, history, and experience.
• Typically the hidden asset in a sale; staff, suppliers, alliances, customers, and even the bank will need time to evaluate and measure the impact of the “new guy”. It is common to somehow link the Vendor financing to some kind of “work out” term. No Buyer wants their new opportunity to crash and burn because somewhere someone stops doing what they should be doing or starts changing the “secret herbs and spices” that made the transaction worthwhile in the first place. The ideal position for the Buyer is where the Seller has some form of vested interest in future continuity of the business. While the terms of the financial structure are negotiated in the structure of the deal, Seller participation provides a confidence factor to the Buyer (and the Funders) when the Seller is willing to remain in some role going forward. How much is this worth to the Buyer when this role demonstrates to all the stakeholders the business is “running steady as she goes”?

Things to remember:
1. Buyer and Seller should strike a fair deal to allow for a mutually acceptable working relationship going forward. Whether justified or not, an unhappy Seller typically has a lot of influence with all the stakeholders at the table.
2. Suppliers will use their historical relationship with the Seller to discuss the merits of the Buyer and what they might expect from their future working relationship.
3. Staff will meet off site with Seller and ask questions like what kind of future do they have with the new guy, or ask for the Sellers impressions on the new guy. That Sellers opinion can have a big impact on whether the staff stay or take the opportunity to refresh their career path. When they leave so do the contacts, history and bits and pieces of a system that worked well enough to justify buying.
4. The bank will often get a first impression and verify it with a conversation with the Seller where they measure the Sellers experience and impressions so far.
5. Many of the stakeholders will be looking for a “nod” from the Seller whom they may have worked with for years.
6. Alliances or product suppliers in a Distributor situation often have clauses where they have the right to veto or terminate future supply based on their comfort level with the Buyer. Part of this will typically include a private conversation with the Seller whom they have history and probably a trust.
7. While review of the Top clients is always a consideration in the valuation and negotiation process, it is definitely in the Buyers interest to ensure continuity as these relationships carry a heavy weight in the future. A Buyer needs time to develop some of their own track record with the top clients. Typically a positive relationship with the Seller helps ensure the baton passes seamlessly.

All of these potential stakeholders’ opinions warrant including a strategic plan for how the Seller will assist the Buyer through the transition process. Typically good planning should include some form of “fit for purpose” role for some time frame for the Seller. The truth is the Seller knows more about that business, the people, and the history than any outside consultant ever will. The access to that information requires the relationship to be based on a degree of trust and integrity. Every Buyer has to decide how much that is worth to the deal going forward. While every business model is unique, the expectations from both sides should to be included in the negotiations and legal papering of the deal, not after the fact. This clear agreement of expectations between the Buyer and the Seller should assist the “changing of the guard” to be appropriately managed.

Performance expectations to be addressed in some form:
 a) Role / title / and how presented to all stakeholders.
b) Clearly identify what knowledge to be transferred and how this will be managed.
c) Clearly model how internal day to day functions of Seller will be transferred over to the new leadership.
d) Hours of work.
e) Meetings expected to attend.
f) Introductions to key stakeholders with clear agreement of what will be covered.
g) Introduction to bank relationship even if Buyer intends to change.
h) Wind down schedule for Seller to include the milestones required to meet all the expectations.

Financial compensation:
a) Strategically the basic Work Agreement should be framed in negotiations process with compensation for the Sellers work out term as part of the building blocks of a fair deal.
b) Rate of pay; which is usually tied into how milestones are achieved. Typically we see full time for a period, down to a few days per week for appropriate term, then one day a week, then formal exit, then only occasional special functions i.e.: senior employee retire etc.
c) This is generally easiest to manage when the structure of the deal somehow relates performance of company to compensation. i.e.: Maintain or exceed the same volume with Top 10 Clients for a year would allow for some form of bonus at end of term.

In the end the Buyer wants to have bought a company that meets and exceeds previous performance history. What could possibly go wrong with this? The fact is every Buyer eventually thinks they are smarter than the Seller. Every Seller has a very high opinion of the value of their experience and business savvy. During the negotiation process the expectations should identify what expectations were mutually agreed as realistic. This is where common sense should reign and allows both parties to develop a sense for whether or not they can work together. When either party is operating with a great deal of personal restraint in order to get the deal done, it makes no sense to stay working together for one minute longer than required to pass the baton.

On the other side of the coin, we have seen over confident Buyers who decide “how hard can it be” only to find out the value of business is declining everyday as staff leave or Clients decide to test other service providers, or all the energy is going into solving new problems rather than maintaining course long enough learn what it takes to really get the job done. In cases where the role and expectations are not clear or simply tied to time (i.e.: 12 months) the opportunity for frustration and challenges to the business can escalate dramatically.
a) While Seller knows he has cashed the cheque so the business is sold, having the Seller involved at the same level as prior to sale, can trigger many opportunities to conflict with Buyers ideas of how operations or decisions should be made.
b) In some cases the Seller has been mandated to “run” business as usual. In most cases the real purpose of having that Seller around is to allow the Buyer to identify the critical dots to be connected and assist in managing any damage control required for the stakeholders.
c) If the Buyers goal is to work together to insure the best knowledge transfer and have the Buyer take full reigns as soon as possible, at some point the situations start repeating themselves and two decision makers are redundant. Both parties should agree how to address that before it becomes a problem.
d) In most cases the Sellers world has significantly changed. While he was responsible for the business outcome for years, now he has “the money” and it is a whole new world. If the expectations were not discussed early in the negotiation process any new suggestions of “we need you to do this or that” can lead to significant disagreements and frustrations.
e) While the Seller is on their way out anyway, the fact is a lot of the stakeholders have some form of loyalty to the Seller. Few people, including the Seller have the discipline to keep their opinions to themselves, so now everyone is hearing bits and pieces from the disgruntled Seller… and the Buyer is focusing on damage control instead of running the business. Keeping them on or cutting them loose? Answer: This should be a deliberate and integral component of the strategic planning in the negotiation of the deal… or leave this to the end only to find the consequences more painful than the process.

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