One of the issues that sellers of businesses frequently neglect to consider is the transition period as ownership of the business shifts from the seller to the new owner. Some buyers prefer a clean break, taking the reins from day one. This is quite rare. Most others insist on a transition period, requiring the seller to stay on for some time to make the transition a smooth one. There is no standard method for doing a transition. Either a clean break or a gradual turnover can work. What is imperative, however, is the understanding by the seller that to entice a buyer to buy, the buyer must feel the seller is providing adequate transition time to be able to learn the business.
Business sellers often ask us what we consider an appropriate length of time for a transition. The answer is: it depends. It depends on the many factors that will figure in the learning curve for the new owner. Some of them may be complex, some maybe not.
Among the questions to be answered are: who will take on the responsibilities of the departing owner? Will it be the new owner? Will it be a key employee who remains? Among the remaining employees, can anybody be trained to take on these responsibilities?
We often think of transition periods as being one of three varieties: short, medium, or long.
Short Ownership Transition
We think of a short transition lasting from one to three months. It usually involves a business that’s straightforward and has an experienced workforce in place. The new ownership has some experience in managing this type of enterprise. The transition involves introducing the new owners to the employees, key customers, top suppliers, and any strategic partners. Additionally, the new owner will need to learn the specifics and nuances of daily business operations. Several months of telephone consultations are usually built into the sale negotiation process.
Medium Ownership Transition
A medium-length transition would last from three to six months. It would be necessary when the sold business is a more complex operation, and/or the buyer may not be well experienced. The same introductions and transfer of knowledge as listed above will apply, but the buyer also may have to be coached through several business cycles or projects and be sufficiently trained to handle the necessary skills required by the business. The seller should be willing and able to devote the necessary transition time to make the sale work. It should be noted, there is typically no compensation to the seller for short-term or medium-term transitions, as it is built into the sale price and goodwill of the business.
Long Ownership Transition
A long transition, lasting 12 months or more, is rare, but we have seen them. In these cases, the seller usually stays on as an employee or consultant to the new owner. All of the above considerations apply, and the length of the transition is dependent on how long it takes for the new owner to acquire the necessary competence.
It should be noted that if the sale was funded through the Small Business Administration, the seller is not permitted to stay on longer than 12 months.
Summary
A good transition is vital for the business to succeed after the sale. The length and details of this transition should be worked out during the purchase agreement negotiation. Failure by the seller, upfront, to recognize that the offering of suitable training and the transition period is imperative to the success of a business sale could cause a deal to fall apart during the negotiation process. Conversely, if a buyer demands an unreasonable and excessive transition period, it may cause the seller to walk from the deal.
In our experience, after some back and forth, reasonable minds prevail and buyer and seller will agree to a period that they fundamentally believe will allow both parties to accomplish the training and transition needed to ensure a successful and smooth start under new ownership.
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If you need help putting together a strategic plan, please contact the Benjamin Ross Group at 215-357-9694 to speak with a professional business broker who can help you start the process.
