Selling a Business: Three Vital Considerations Other Than Price

When selling a business, the headline often revolves around the sale price. However, there are other critical factors that play a significant role in ensuring a smooth and successful transaction. Here, I will discuss three vital considerations beyond just the sale price: the structure of the transaction, the employment or transition period, and the treatment of affiliated parties.

Structural Considerations

Structure of the Transaction

The structure of the transaction is a crucial element that can be as important as the sale price itself. While the purchase price is the headline figure, how and when the payment is received can greatly affect the outcome of the deal. The structure encompasses several components:

• Payment at Closing: This includes the portion of the payment that is guaranteed and received immediately at closing.
• Deferred Payments: These are payments that are made over time, which might include seller notes or earnouts. A seller note involves the buyer agreeing to pay the seller a portion of the purchase price over a specified period, often with interest. An earnout ties part of the payment to the business’s future performance.
• Equity Rollovers: Sometimes, the seller may retain a portion of ownership in the new entity. This could involve selling a majority stake but keeping a minority interest, allowing the seller to benefit from the future growth of the business.

The structure directly impacts the seller’s risk exposure. For instance, an earnout involves risk as the final payout depends on the business meeting certain performance targets. Therefore, negotiating a structure that balances immediate payment with potential future earnings, while minimizing risk, is essential.

People & Teams

Employment or Transition Period

The second vital consideration is the employment or transition period for the seller. Most business sales involve a transition period where the seller remains involved to ensure a smooth handover. This period can range from a few months to several years, depending on the business’s complexity and the buyer’s needs.

Key aspects to consider during this period include:

• Length of Involvement: The duration of the seller’s involvement should be negotiated to align with their personal goals and the business’s requirements. Ideally, this period should be as short as possible, with a gradual tapering off of responsibilities.
• Level of Involvement: The seller’s role during the transition period needs to be clearly defined. It could range from a full-time advisory position to a part-time consultant role.
• Risk Management: It’s important to ensure that the seller is not trading ownership for a job. The transition should be structured to reduce stress and pressure on the seller while allowing them to contribute to the business’s success.

This consideration ensures that the business continues to operate smoothly and that the seller can transition out without disrupting the company’s operations.

Other Key Considerations

Treatment of Affiliated Parties

The third key consideration involves the treatment of affiliated parties, such as employees, the business location, and the company’s name. Different buyers may have different plans for these aspects, which can significantly influence the seller’s decision.

Considerations include:

• Employee Treatment: Ensuring that employees are treated fairly and their jobs are secure is often a priority. Some sellers may negotiate terms that protect employees from immediate layoffs or significant changes in their roles.
• Business Location and Real Estate: The future of the business’s physical location and real estate can be a significant factor. Buyers might have plans to relocate operations, which could affect local employment and community relationships.
• Company Name and Brand: Maintaining the company’s name and brand can be important for preserving its legacy. Negotiating terms that protect the business’s identity can be crucial, especially for long-standing businesses.

Ensuring favorable terms for these affiliated parties helps maintain morale and continuity, which is essential for the long-term success of the business post-sale.

Conclusion

When selling a business, considering factors beyond the sale price is crucial for a successful transaction. The structure of the transaction, the employment or transition period, and the treatment of affiliated parties are all vital elements that need careful negotiation. These factors ensure that the seller’s interests are protected, the business continues to operate smoothly, and the impact on stakeholders is minimized.

By focusing on these considerations, sellers can navigate the complexities of a business sale more effectively, ensuring a favorable and smooth transition.