Many owners selling their business may find themselves becoming an employee after years (or potentially decades!) of being the boss. Often times, a buyer of a business will require a seller to remain in some capacity for a period of time after the sale, normally a period between one to three years. Because the seller typically possesses a vast amount of practical experience and know-how, it is imperative for the buyer to benefit from this expertise during a transitional period. Employees and management of the business have a strong trust in the historical owner, and transferring this support to a buyer is not automatic. Customers and vendors likely have a significant connection with the prior owner and so the buyer needs these relationships to stay in place. There needs to be a smooth transition from the old business owner to the new owner, and having the seller stay on in some type of meaningful capacity can be critical.
On most of the transactions with which I have been involved, a buyer will use an employment agreement to achieve this role reversal of the seller (“old boss”) becoming an employee of the buyer. The employment agreement will typically spell out the duties the buyer expects the seller to perform as well as the compensation (which can often be very lucrative). The seller will usually remain in an advisory position, assisting the new owner with various management functions. But this is where the frustration is borne – advising new management is NOT the same as making the decisions yourself. It’s true that the former business owner knows the business inside and out; however, the former owner doesn’t know what it’s like to be in an employee role instead of being the boss. I have seen quite a few clients struggle with this change in responsibilities.
The new owner may change processes and procedures of the day to day operations. Or the new owner may want to take the business in a strategic direction that the old owner is opposed to. This can include changes in product/services, entering new geographic markets, hiring/firing of employees, and decisions or eliminating divisions or products. While the seller, now employee, can offer their advice and counsel to the buyer regarding strategic decisions, the new owner has the final say.
While this can be rough adjustment for a selling business owner, it needn’t be a deal breaker or something to avoid, just something to think about and be prepared for. Another point to keep in mind is that many transactions will have “earn-out” provisions that provide additional purchase price to the seller based on the business’ success. Even if the new role and transition is difficult, it is clearly in the seller’s best interest to “play nice” to maximize any earn-out or contingent purchase price.
If a business owner has decided that the best thing for them to do is to sell the business, it is vital that they not only get the best price possible before the sale, available and to cooperate with the new buyer for the sake of their employees, customers, vendors, and oftentimes their own piece of mind.