Involvement – The Second Variable in Your Selling Equation
By Brian Goodhart
Involvement is perhaps one of the most complex and personal variables involved in the selling equation. Unlike valuation, there are no trained professionals in this field who use proven methods to arrive at a mathematically sound option. Involvement is inherently personal and as such its entirely unique to the sellers and their personal situation. To arrive at a good solution here, a business owner must be introspective and collaborative with the people to whom he or she feels closest.
Let’s start simply – what do I mean by involvement? When I speak about involvement, I’m asking a business owner how long and in what way she/he wants to be involved with the business post-transaction. This generally breaks into two categories – Professional and Financial.
Professional Involvement is that list of roles and responsibilities you are comfortable or willing to have with the buyer post-close. For example, are you willing to work in your current role post-close? Are you willing to work in the business, not in your current role, but rather in some newly created position? Do you not want to work at all post-closing? To focus in on this I usually ask sellers to think of it in three ways:
- In your ideal world, what operational role or responsibilities would you have after the closing of the transaction?
- What are you willing to do operationally, but not excited by?
- What responsibilities are you absolutely unwilling to do after closing?
As you can see, the amount of variation here is quite extensive. Many, if not most business owners have a core group of responsibilities that they’re good at and a number of ones that they’ve taken on out of necessity. (Remember that all good CEO’s should be constantly firing themselves). It is only natural that after closing a seller would want to offload some of those tasks onto the buyer. And it is only natural that the buyer would want to take over some of these tasks that they feel they can do more efficiently and free the seller up to do other, higher value-added tasks if they so desire. Prior to selling I encourage business owners to sit down and really think about what they want their post-close professional life to look like.
Financial Involvement is as personal as Professional, but with some financial planning thrown into the mix. We’ll delve into sale structures during a later part of this series but suffice it to say the vast majority of business sales are not consummated solely by a single purchase of all of the stock or assets at a single point in time. Most transactions have elements that occur over time and a degree of risk-sharing between the seller and the buyer. If that is the case, then the seller retains a level of financial involvement in the business even after the transaction is complete. For example, perhaps a buyer offers a sale structure that is 60% down and 40% in a note payable over 10 years. In such a situation, the seller has a keen interest in the long-term success of the business as he or she will be expecting the buyer to make their annual payments regularly.
Another potential scenario would be a seller that offered an earn out component to the transaction. If a seller offered 60% down and 40% in an earn out dependent on a share of pre-tax income, then the seller will take an even more keen interest in the long-term success of the business as their earn out payments will vary based upon the vagaries of the company’s pre-tax income. Still another option would be a buyer that offered a seller an equity position in the combined company going forward. In that case once again the seller is very interested in the long-term success and may have financial involvement that could extend for quite some time.
None of the scenarios discussed above are objectively good or bad. Each scenario could be right for the seller if it meets their expectations of value and risk-sharing. But this is where the personal and financial mix. Many sellers who want to stay involved professionally with a business are more comfortable with sale structures like those described as they will be participating, and potentially sharing in, future value creation. For those buyers who want less professional involvement, they may feel more comfortable with less risk-sharing and financial participation as they may feel that their ability to drive value will be limited.
In any case, prior to beginning the sale process, I strongly encourage business owners to begin a deep dive into what their desired level of involvement will be post-transaction. There simply is no right or wrong answer. But by working this through in their own minds with the counsel of family, colleagues and their financial advisors, it is possible to narrow down their desires enough to allow for meaningful discussions at the right time.
Brian Goodhart is Capstone’s Director of M&A Advisory Services. If you would like to speak with him about the process of selling a business, please email firstname.lastname@example.org