Our firm’s substantial increase in closings compared to previous years indicates that the M&A market remains active and healthy. Even though good businesses are still in short supply, buyers remain motivated and tend to move quickly when they find the right match. In this process, many buyers are starting to ask owner(s) to be more involved in the transition to help mitigate their perceived risk.
For those business owners who have effectively built themselves out of the daily operations, the transition time may be minimal (less than 30 days). However, for those who are more involved in the day-to-day operations or need to be involved to successfully transfer key relationships, the transition time can vary from a few months to over a year in some cases.
Below are three key aspects to consider.
Documented Processes and Procedures
While most business owners have heard this before, a company that does not have documented processes in place can cause a buyer to quickly devalue it. For example, is the process for estimating a job/project available or is it arbitrarily in someone’s head? What about the onboard process for new hires and formal training? With today’s labor shortages, buyers are building in contingencies to replace or hire more employees after the sale. Therefore, the more documentation and processes are defined, the better. If this is not possible with the current staff in place then the seller should consider outsourcing this work to ensure it gets done.
To help address a buyer’s perceived risk, transition agreements (which are usually separate from the purchaser agreement) are becoming more common. These effectively extend the standard transition period of 30-60 days to anywhere from six months to several years. For the most part, these agreements are in the buyer’s favor and lengthen the unpaid time of the owner as part of the transaction. It is important these agreements are negotiated properly and considered upfront in the price/structure of the transaction.
Keep Transition Options Open
While the seller may have determined a bottom line on a purchase price, keeping options open regarding the transition period is important up front. After the seller has become more acquainted with the buyer, the seller usually has an idea of the necessary transition time needed for the company to continue to thrive. Recently, I spoke with a client who had sold his business with our firm a few years ago with the goal of retirement. Soon after closing, the buyer hired this seller for nine months before he “officially retired.” After many months of enjoying his retirement, he is now thinking he may pull a Tom Brady and “unretire” by going back to work for the buyer.
He not only cashed out from the sale at the height of the market but sold early enough to still have the option to continue working without all the overhead and stress of ownership.
The time to consider selling is when an owner has the most options available and not when options have been limited by factors out of the owner’s control. The majority of our business comes from referrals and we appreciate your continued trust in our firm.
Robert W. Amerine
President, Certified Business Intermediary (CBI)