Blog Photo Seller Transition

Successfully transitioning the seller from being the “Most Important Person” (MIP) to a “Previously Important Person” (PIP) can have far reaching consequences on the success of the business you acquire. Anticipating this transition during the search process and being proactive about it once you are the owner will be essential to retain the value that a PIP and their legacy can have on the enterprise you take over, while mitigating some common risks.

Searchers are in a unique situation to move cautiously during the transition process. You will not be buying into a turnaround situation or needing to take immediate actions; your most important and urgent task is to learn to operate the business. You will therefore have plenty of time to take advantage of the wealth of knowledge that the prior owner has about the industry, customers, vendors, employees and other nuances about the business.

What you can expect

Searchers report a full range of outcomes from this process, from acrimonious legal disputes resulting in the seller starting a competitive business, to a lasting “relationship” akin to passing the business to the next generation. Each search is different and outcomes are challenging to predict.

A survey of two dozen searchers reveals that the range of seller “engagement” with the business spanned from “keys at closing” to 3+ years and averaged 8 months with 41% reporting it to be shorter and only 27% longer than expected. Searchers report that they felt the seller was no longer needed after 4.4 months on an average with a range of 2 weeks to 9 months. When asked to score the “relationship” with the seller after their “engagement”, on a scale of 1 to 10, the average was 6.6 with a low of 1 and high of 10 with 45% reporting worse than they expected. With this knowledge, searchers can feel somewhat more willing to accommodate the seller’s wish to “be around” after closing, since most overestimate their desire to hang around.

Doren Spinner at Muir Beach Capital says: “While your relationship may be great on the day of close, typically it deteriorates over time, often to a level with lawyers and shouting. Don’t bank on being the exception to the rule. Keep the overlap short and crisp with clearly defined roles.” In contrast, Mike and Linda Katz developed a close personal relationship with their seller that still existed after more than two decades and the seller claims that they were both his best “hires”.

While the economics of the transaction “align” the seller’s interests with yours, don’t be surprised if the seller’s emotional responses out-weigh the financial considerations. Pro-active communications with the PIP is essential.

Things can go wrong

Surprises are not uncommon once you can “get under the hood” with the business after closing and begin to interact with the PIP. One searcher found “The seller had not been truthful during the transaction about the state of the business and its clients. It also emerged that we had significantly different business and leadership philosophies which caused confusion with employees.” Another says “The previous owners were inappropriately directing employees during the transition causing me to significantly shorten the transition.” One searcher observed “The seller continued to behave as if he still owned the company and offered a new job to the General Manager to quit and come and work for him again within three months of the closing, despite our legal contracts”.

Another common problem area is during the resolution of Working Capital true-up and release of escrow funds. A searcher commented “Working Capital was a huge source of conflict, which I think is more typical than searchers would think. This is a difficult concept for most sellers to grasp and wrap their minds around.” Another found, “Financial true up for accrued vacations and correction for past 401k administration errors took a while for the seller to comprehend.”

Sometimes, the counseling from the seller may be off base, as one searcher found, “Listening to advice which boils down to do as I say, not as I did.” Or even in-genuine, as a search reported, “I recommend understanding very well the motivations of the seller and what he will do after close. I found the seller investing in technicians to compete with us!”

Expect conflicts and disagreements, including what one searcher found, “We had disagreements between myself and them on day-to-day and strategic business decisions in addition to the definition of roles and responsibilities for each of them under my new leadership.” Another found, “The sellers owned the building retained an office and we had to relocate to avoid the caustic relationship within the first year.”

Unusual situations may cause conflict, as one searcher/CEO found, “During a joint business trip to meet our travel coordinators, the seller wanted to continue to live at their relatively high standards by staying in up-scale hotels and using taxis that I had to pay for while I wanted for both of us to be more frugal.” Another searcher reported that, “Wage increases for employees who have not received raises in multiple years under the seller’s tenure were a strong point of disagreement.”

Things may go right

Generally, the owner can help with employees. Lars Gehre at Green Vault Partners says “The seller assisted during the transition to calm the organization and assure them that their jobs are secure. I was strong on strategy, but he was was great at explaining tactics. From little things like how to get past a receptionist to bigger things like how to run a behind-the-scenes protest of a government bid award, the seller had a lot of hard-won methods that we probably would have never figured out.”

Another felt it important to “really understand the relationship they may have with some of the existing employees and how the seller can help prior to the transition to ensure employee retention.” Also, one said, “Employees would come to me and ask for expenditures and I didn’t understand what they were asking for or why. He could get on the phone and act as translator between operations talk and business talk, and propose reasonable solutions that kept everyone happy.” One reported, “Employee perception was the most important. People felt reassured that the seller was around coaching me, and I made it a point to seem very interested in learning from him.”

Another area is customer and client background as Mike Donovan at East Range Partners found “The seller was very knowledgeable about specific, unique, ‘special’ circumstances involving customers, technologies, or employees, or idiosyncratic customer circumstances where gaining the unique knowledge of the customer’s ‘back-story’ was necessary. We also used him when we had transition meetings with a top handful of customer contacts with the former owner present.”

In the operations area, sellers have value as remarked by Ben Murray at New Forest, “It was noticeable that employees trusted the seller and just seeing him at the company was of reassurance to them. They also knew his ability to spot quality problems and our errors declined when I arranged for him to be around more.” Juan de Dios Aguilar at Padua Capital found that “The seller took charge of sales while I got a grasp of the rest of the business. He was highly motivated by the seller note and the year of our acquisition turned to be a great year for the company due to the sellers engagement post closing.”

Zack Belzberg at Northmont reported that “A key feature of my offer was keeping the seller around for 3 years. I just factored this into my returns math as additional purchase price. I am relying on seller for predominantly CFO responsibilities. It is nice to have someone around with 30 years of operating history.” Another searcher said, “Knowing what suppliers are reliable and which aren’t was really useful to me. Their having a good understanding of how the cash flows in the business saved me a lot of headaches early on.”

Finally, a searcher reported, “Having the seller running the day-to-day operations for those early 3-4 weeks and sitting in on first introduction meetings were tremendously helpful.” Sarah Moore at Kenston Green, said “Post close, you need all hands on deck and they were an extra set of hands. I got so bogged down with the “little” stuff that I almost dropped the ball on some of the ‘big’ stuff and the seller and wife caught some of the ‘big’ stuff with their extra set of eyes.”

On an upbeat note, another searcher reported, “No conflicts, he was just gone! After an often stressful 40 years with his company, he just wanted out. While he always took my calls after the close, he never once called me. He spent a lot of time fishing, and still drops by the office to give me fish!”

Advice from searchers

Searchers advise a number of ways to mitigate the risks associated with poor seller transition outcomes. Lars Gehre advises, “It is paramount to have a clear transition path, that both the searcher and the seller stick to. It is also important, pre-closing, to consider that the transition or employment with the seller doesn’t work out – what is the exit strategy, and do you have a mechanism included in the employment/consulting/purchase agreement to account for early termination of the agreements.”

Physical proximity to the business can be controlled in advance as Mike Donovan highlights, “Encourage them to swiftly step back from day-to-day management, clean out their desk and get them out of the driver’s seat, while keeping them available by phone and email to you and your managers for specific ‘high-value’ requests and situations.”

Putting yourselves into the shoes of the seller often helps smooth the transition as Helena Divišová says, “Be understanding. It’s hard for the the seller to leave the firm she spent her lifetime building and get used to not calling shots – they may even treat you like their subordinate, simply because they have never had a peer in their firm. My seller explained that it feels like getting a divorce and having to live in the same household with a new husband.”

Reflecting back, a Searcher/CEO says “12 months was too long; 4 months would have been ideal. The seller being able to let go is a real challenge. At month 12, the old owner wanted to extend and I had to remind him that we told the team that his consulting agreement would be for 12 months and anything different would create a lack of credibility and confusion.” Another found that “2 year employment agreement is far too long. 1 year at most. Agree in advance on what happens if seller or buyer wants to terminate the employment agreement before it’s official conclusion because it is worth some small financial hits to maintain peace, continuity and respect between you and sellers. Treat the expenses as part of your acquisition price.” Finally, one found that “A good relationship with the seller is essential, so be careful how you treat them while bargaining for the deal. If they use an intermediary to negotiate the tough stuff, it really helps.”

Your actions early on are critical, says a searcher, “My ability to deliver on promises and timelines during negotiations strongly elevated the seller’s willingness to trust me. You post-closing relationship with the seller will be determined by your pre-closing relationship. Understand that closing is the beginning of the end of your relationship with the owner.” Ben Murray says, “I would try to spend a good amount of time with the seller – see what their life is like today! What else do they have going on in there life .. identify what they actually want to do .. not just what they think you want to hear.”

As another searcher discovered, “The seller exited quickly, but his wife, the bookkeeper, also left after 2 months, which was very disruptive. For someone as key as a bookkeeper (or other operating role) they should not leave too early.” Sarah Moore gives a reminder, “Treat your seller the way you’d want to be treated – the business was probably the seller’s life. If they aren’t being intrusive, try not to just cut them off when they aren’t seemingly useful to you anymore. I allowed him to swing by just to say hi whenever he was in the area and he really appreciated this There is always something we were able to ask him about when he dropped by which made him happy and benefited me and my team.” Having the seller engaged in governance raised some concerns by at least one searcher, “Don’t promise a board seat, have a large seller’s note and don’t let them roll any amount of equity.”

What you will want

While you will learn a lot about the industry and markets during your due diligence, the seller has a wealth of knowledge that may be very difficult to extract and absorb until you are actually running the business. As you take over as CEO and form your own opinions and understandings, having them verified and reinforced or disputed by the seller is very useful.

You want the seller be confident that they selected the right buyer for their business. Surfacing the expectations of the seller around post-closing issues during the IOI negotiations and due diligence and dealing with them will avoid problems after closing. It will take some prompting and repeatedly asking the same questions.

What the seller wants

The weeks leading up to the sale can be a very emotional time for the seller. Thinking about separating from a business they have led for decades can be disorienting. While tantalized by their future, the seller will not be sure how to pass the reigns before they can fully step away.

Most sellers will will have difficulty not playing an active role. Some sellers will fear the loss of meaning and structure in their lives – no longer having a place to go every day, not participating in day-to-day operations, and not being included in major decisions. As you move through negotiations, due diligence and even post-close, expect the seller’s attitudes to change – strive to be accommodating.

Be attuned to what is “special” to them and what they may want to take along with them. In my own case the PIP wanted to keep the “vanity” license plate number from his company car and to be sure his father had access to a key-making machine to duplicate keys for his friends. I listened and made sure it happened. Furniture, photos, memorabilia may be of no value to you, but provide a deep emotional connection for the seller. These small “gives” make it easier to achieve concessions on more important issues as they come up during the transition.

As a PIP, they will need you to plan their role after closing. Leaving it undefined leads to tension and uncertainty, so best to clarify their title as founder, or advisor-to-the President. Paul Thomson at Scottish American set up an extra office and gave the title of “Chairman” to Jim Yates and regularly utilized his skills for interviewing new employees and as a resource on the specialty insurance business. Demonstrating your willingness and capability to learn raises the trust level the seller has in you both before and after closing.

When you repeatedly ask the owner their reason for selling the business, inquire about their intentions for life after the business is sold. Some have clear plans, but most remain focused on running the business until closing and the funds transfer. Gently reminding them to be thoughtful about it will nudge them to start considering their options.

Stepping into your new roles

Once you take over, every change, no matter how small, will be scrutinized by everyone and reflect back on the previous owner. Move slowly with your changes as you learn the business. Avoid the terms “we won’t be doing it this way anymore” and stay focused on satisfying customers and fixing what might be broken. You will be in a fishbowl, with everyone observing the dynamic and you can’t ignore the level of scrutiny of your interactions with the PIP. Stressing continuity in the early months is much more important than an emphasis on change. It is expected that things will be different and you will be judged on how quickly you initiate these changes.

You can certainly expect employees will seek out the prior owner, either formally or informally, as it will take time for you to earn their trust, as long as 5 year! Over the transition period they will slowly loosen their bond with their previous leader and shift it to you. Don’t expect immediate “loyalty” just because you are the new boss. The previous owner earned it over decades, and it will take time.

As with your staff, customers and suppliers will also be soliciting “opinions” about you from the prior owner, not just for curiosity but also to assess competency. As time goes on, you will be able to establish your own credentials and trust levels, but the seller has a strong influence in this arena for the first 6-12 months of your ownership. Take care to make changes only as fast as your trust level grows.

Take up any disputes with the seller off-line and in private. Judge the relative importance of “being right” and acquiesce on things that can be deferred or are not significant. Let the owner’s quirks, like opening every envelope, be their legacy that you respect. Don’t spend a lot of energy revisiting or pointing to old policy as “wrong” or “not right” – focus on future and what to do now to keep the business running and customers satisfied! BE patient as this may be tough for you and restrain yourself from overhauling the business too quickly.

Over-communicating goes a long way in reducing the seller’s sense of being “left out” or “disregarded”. They will appreciate your asking their opinion and remaining engaged. Even if you don’t take their advice. In public, showing respect, praise and gratitude works better than overt or implied criticism of prior practices. After-all, the seller got the business to where it is and deserves recognition for that accomplishment.

Having been a searcher, a MIP and PIP myself, I have seen all of these dynamics play out. Unlike the valuation, legal and logistics issues, these transitions were a moving target and like any relationship in life, take work and patience on both sides to be successful. Getting it right is as important as the financial considerations.

Search on!

Feel free to share some of your own best practices or experiences in dealing with these issues in the blog comments. I encourage comments and dialog, allowing all in the community to learn from both my views and the views of others – a virtuous learning cycle. Jump right in! I frequently update individual blog posts, add to the Reference section and Search tips, so visit www.jimsteinsharpe.com website regularly.