To a large extent this will depend on the deal structure that is agreed as the buyer’s strategy for the business post completion will be linked to the type of deal structure they propose. We will therefore look at the three main deal structures in turn.
With all deals there is a period of hand over, typically 3-6 months, where the seller and the buyer will need to announce and manage the change in organisation with clients, suppliers and staff.
1. Fixed consideration and deferred payment deals
With deals where the consideration is paid on completion or where a small proportion of the consideration is deferred (but paid as a fixed amount), it is likely that the seller’s involvement will be limited to the hand-over period.
2. Earn-out arrangements
With earn-out deals where a portion of the deal value is paid post completion and dependent on the performance of the business, it is normally expected that the seller (or at least one of the outgoing owners) will remain involved in the business for the duration of the earn-out period, i.e. typically 12 to 24 months. It should be in both parties’ interests for the value of the earn-out to be maximised as much as possible through increased sales and profits and the retention of clients. The seller will normally have a key role to play alongside the buyer in achieving this.
Remaining involved throughout the earn-out also allows the seller to monitor the performance of the business directly, though this can also be achieved through the legal agreement that the seller will be allowed to review the management accounts regularly whether they are involved day-to-day or not. It is important to remember though that the relationship needs to be kept positive as disagreement will tend to impact the business performance.
From the buyer’s perspective, the continued involvement of the seller will allow continuity with the client base and thereby reduce the risk of clients falling away due to the transfer of ownership. However they will need to reduce the reliance on the seller and progressively take over the relationships during the earn-out period.
The seller is typically retained on a consultancy basis and paid on an agreed daily rate. Their involvement may ramp down in time from full time to a part time role with perhaps telephone support.
3. Retaining a shareholding
In deals where the seller retains a minority shareholding in the company, typically around 20%, the buyer and seller are effectively agreeing to grow the business together and so the seller typically retains a senior manager/director role within the business on an ongoing basis.
Many such deals also have an earn-out arrangement on the payment for the majority share so again both parties’ should be incentivised for the value of the earn-out to be maximised as much as possible and the seller will have a key role in this.
The seller is normally retained under an employment contract for their role in the new company alongside a shareholders agreement which allows for the eventual sale of the seller’s shares to the buyer based on an agreed valuation model.
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