By Scott Bushkie
We’re seeing something of a growing trend in lower middle market mergers and acquisitions. More and more owners are selling their companies and then staying on as an employee or consultant.
In years past, this is something we’d see just once in a while. The owner would sell to get rid of the management headaches, but stay on in sales or product development—or whatever he/she most loved about the job in the first place.
Now owners who become employees are more commonplace, and that’s a win-win for both the buyer and the seller.
We trace this trend to a couple of changes in the business climate. First, it’s a tough time to be a business owner. Sales are down, credit is significantly limited, and by all accounts the recovery will be slow.
By selling, business owners reduce stress and diversify risk. Plus, they better position their company for future success, as the new owner brings synergies, capital and/or new insight to the business.
But stressed out business owners aren’t exactly new. (In fact, the number one reason people sell is burn-out.) Even more significant is that banks are lending less money, meaning more seller financing is needed to get deals done.
Combine increased seller financing with a stressful business climate, and I’m hearing from a lot of potential sellers who wonder if a buyer would allow them to stay on as an employee or consultant.
For the seller, this means a few more years to collect a salary and health benefits. It also means the chance to baby-sit their seller financing. They can help the company grow (or at least maintain) profitability, and ensure they’ll be paid back accordingly.
Generally, buyers are pleased when a seller stays on, and will sometimes pay more for the opportunity. It reduces risk, creating an extended transition period in which staff and customers alike learn to get comfortable with the new owner, whether that be another company, a private equity firm or an individual.
Plus, owners are often the company’s key salesperson. When they can take off all their other hats and just focus on sales, the business gets a boost.
In fact, some sellers might leave equity in the company, so they can take a second bite of the apple, so to speak, with a buyout after the company has grown in maybe 3-5 years. Or they negotiate a performance based earn out (on top of the initial purchase price), to capture some of the value they bring to the new organization.
Again, in most cases the buyer is happy to keep the seller engaged. When it doesn’t work is when both parties have strong, but opposing, personalities. No matter how much a buyer wants the seller’s continued support, he or she is going to make changes. If the seller can’t make peace with that, they shouldn’t plan to stay.
Scott Bushkie is President of Cornerstone Business Services, a low-to-middle-market M&A firm. Reach him at 888-608-9138 or [email protected]