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

INTERVIEW notes with Alberta Venture Magazine February 2010
Story: So, You’re Keeping the Owner as a Consultant

Interview questions from Venture

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 be 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.

We want to give our readers insight into what they might expect when buying a business under the condition that the former owner remains with the company for a defined period of time as a manager or consultant.

• What is the value of retaining the owner?
• How common is this and why does it happen?
• What are the potential pitfalls?
• Why would a former owner agree to do this?
• How can you get the most out of the relationship?
• How do you calculate what the former owner is worth?
• What should you consider to create a reasonable compensation package?

MAXIMA's Reply:

1. 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 roll after the deal has been finalized can be viewed as an additional grab and will challenge the working relationship going forward.

2. The vast number 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).

3. While there is no specific matrix to calculate the duration of the exiting relationship, typically 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 can become the drive gear that keeps everything working.

4. Different Buyers have different priorities.

1. A newbe Buyer to the Sellers marketplace will want the time to confirm everything from the hows and whats to the who's and for how much from where and for how long.
2. Even a Buyer experienced in the companies products and services will want to be comfortable with the companies offerings and reason why clients are loyal, however there is no easy way to transfer the history of relationships and experience.
3. Typically the hidden asset in a sale; staff, suppliers, alliances, customers, and the bank will need time to evolve and adjust to measure the impact of the “new guy”.

5. 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, it provides a confidence factor to the Buyer and his Funders when the Seller is willing to participate in some obvious position to demonstrate to all the stakeholders the business is “running steady as she goes”.

6. Things to remember:

Buyer and Seller should strike a fair deal to allow for a mutually acceptable working relationship going forward. An unhappy Seller whether justified or not typically has a lot of influence with all the stakeholders at the table.

1. Suppliers will use their historical relationships to discuss the merits of the Buyer and what they might expect from their future working relationship.
2. 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 read on the new guys personality, quirks, impressions. 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 work well enough to justify buying.
3. The bank will often get a first impression and verify it with a conversation with the Seller where they measure the experience and impressions so far. Many of the stakeholders will be looking for a “nod” from the Seller whom they may have worked with for years.
4. 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 trust.
5. While review of the Top clients is always a consideration in the valuation and negotiation process, it is definitely in the Buyers interest to insure continuity as these relationships carry a heavy weight in the future. A Buyer needs time to develop some of their own track records and typically a positive relationship with the Seller helps insure the baton passes seamlessly.
6. All these opinions and influencer's more than warrant including a strategic plan for how the Seller will assist the Buyer through the transition process.

7. 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 needs to be included in the negotiations and legal papering of the deal, not after the fact. A clear agreement of expectations between the Buyer & the Seller should include how the mantel of leadership is clearly passed over.

1. Performance expectations:
   1. Role / title / how presented to all stakeholders
   2. Clearly identify what knowledge to be transferred
   3. Clearly model how internal day to day functions of Seller will be transferred over
   4. Hours of work
   5. Meetings expected to attend
   6. Introductions to key stakeholders with clear agreement of what will be covered
   7. Introduction to bank relationship even if Buyer intends to change
   8. Wind down schedule for Sellers roll to include the milestones required to meet all those expectations.
2. Financial compensation:
   1. Strategically the basic Work Agreement should be framed in negotiations process with compensation for this work out term as part of the building blocks of a fair deal.
   2. Rate of pay which typically is 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.
   3. This is typically 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.

8. What can go wrong?:

1. 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. What could possibly go wrong with this?
2. During the negotiation process the expectations should have identified what expectations were 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.
3. 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.
   1. 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.
   2. 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 identify the critical dots to be connected and assist in managing any negative changes to the status quo.
   3. 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 them selves and two decision makers are redundant.
   4. In most cases the Sellers world has changed, while he was responsible for the 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. 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? This should be a deliberate and integral component of the strategic planning in the negotiation of the deal... or leave to the end only to find the consequences more painful than the process.