Around three-quarters of business owners regret selling their business within two years of the sale. One of the key causes for this dissatisfaction is that the handover to the new owner didn’t happen smoothly. If you are an owner-operator selling your business, you need to put a lot of thought into this handover to the new owner.
Anything that happens after the contract going unconditional is considered here. All obligations on the parties during this period needs to be detailed in the Sale & Purchase Agreement (SPA). Both you and the buyer need to agree the terms before the SPA is finalised.
TEQ have been advisors in many deals, representing both buyer and seller. Here we provide an overview of what to expect as the vendor as you step through the transition out of your business.
Before Settlement
Prior to the settlement on your business, you will generally be getting things ready for handover. The only additional activity for the owner at this time is documenting anything that is undocumented but needs to be transferred to the new owner.
The buyer should be focused on planning their first three months of ownership – generally referred to as the 100-day plan. A key part of this will be getting them and any new employees up to speed. They may want to discuss their plan with you to get your input. They will want your assessment on what is feasible, and whether anything is missing. You don’t need to give them feedback on their plan, but it is a good idea to maintain friendly relations.
Pre-Settlement Inspection
In most cases, the buyer will come on site once before settlement to undertake a pre-settlement inspection. This is typically three to five business days before the date of settlement. This gives them time to communicate any defects with their lawyer, who then has time to notify your lawyer, who communicates the issues to you. While the buyer may notify you of defects directly at the inspection, both sides should ensure all issues are in writing. Technically, the only defects they can raise are those that have arisen since the contract went unconditional, or issues that could not have been readily observed prior to the inspection. Discuss any defects with your business broker and lawyer to get their advice. Just because it is listed by the buyer, it doesn’t mean you have to address it at your cost.
A single pre-settlement inspection is included in the standard SPA. The terms may be different if you are using a bespoke SPA.
Pre-Settlement Transition
In some cases, the buyer will want to start the transitioning process before the sale has closed. This is generally because of an uncommon or seasonal activity happening in the business that they want to observe or be a participant.
You should only allow this to occur after the contract has gone unconditional. It is a good idea to spell out the basis of their involvement in your company in either the Sale & Purchase Agreement (SPA) or a separate contract. Keep in mind that the business is still yours, and you make the operational decisions until settlement, and bear the liability for all aspects of the business until this hand-over.
As a matter of practice, anything that may burden the new owner after settlement should be discussed and agreed with the buyer.
The buyer (or their representative) is there to observe and learn. They are not a free resource for you to treat as an employee.
An important downside that you should consider is having the buyer onsite for, say, two weeks can turn into a two-week pre-settlement inspection. Any issues the buyer has may get flagged as defects to be remedied by settlement. I am not suggesting you should hide any real problems with assets and systems of the business. Simply be aware of the risk before agreeing to this.
Having the new owner onsite before settlement can also be confusing for your employees.
It would be unusual for a pre-settlement transition period to be longer that two weeks. Your business broker should be able to provide boilerplate clauses to the standard SPA to cover this period. I recommend you check the SPA for anything about the business that you could be required to change before settlement before agreeing to pre-settlement transition clause. In one deal I was involved in, the buyer was given pretty free reign to observe the activities of the business. Toward the end of this period, they added two more employees to the list of people that needed to be exited from the business before settlement, the cost of which was borne by the vendor (i.e., redundancy costs). The buyer simply didn’t click with these two employees during the transition period.
Pre-Settlement Works
In some rare cases, the buyer may ask to have access to the business before settlement to undertake work, like signwriting, renovations, or even install new equipment. Again, this would need to be spelled out in the SPA if you agree. The buyer has no rights to undertake any such work without your consent.
My general advice is to hear the buyer out, and if the work could have any material negative impact on the business while you still own it, do not agree to this work being undertaken. It exposes you to significant potential risk.
At Settlement
There is no great ceremony that takes place at settlement. Most of the details are dealt with by the lawyers.
What you need to check is that all of your obligations have been fulfilled. These may be listed in the SPA as terms, or as warranties. Warranties are statements of fact about the business that you have made to the buyer. You need to ensure they are still true at settlement.
Post-Settlement Transition
If the buyer wants your help learning the ropes of the business, it will typically be in the weeks following settlement.
The default handover period in the Standard REINZ/ADLS Sale & Purchase Agreement for a Business is for you to work two weeks, full time, and your time and costs for this two-week period are included in the business purchase price agreed. If the buyer wants you for a longer period, the two of you need to do some more negotiation before the SPA is signed. The main thing I would urge you to do is set an appropriate hourly contract rate in the SPA for any time after the first two weeks.
If the buyer wants you to work in the business, or even just be available to answer questions, after the two-week transition period then you should be paid for your time, and you’ll both need to agree the pay rate and terms in the SPA. Further, the buyer can only expect you to carry on doing what you were doing before they bought the business – you don’t have to do menial tasks or things you are not skilled or able to do.
It’s essential to also clearly define the terms of this arrangement, such as your specific responsibilities, working hours, and extent of authority. These details can be part of the SPA, or in a separate contractor agreement.
Many buyers don’t know what they don’t know, and are therefore unaware of what they need to ask you for them to take over the reins.
Your presence is meant to help ensure a smooth transition of the business operationally. You possess unique knowledge about the business that is crucial for the ongoing success of the business under new ownership. This handover period gives the buyer the opportunity to observe and ask anything about their business, particularly things below the surface. Having well-documented procedures can streamline this activity.
Clued-in buyers will also use this period to maintain confidence among employees and customers during the change of ownership. In some cases these introductions are included in the contract as an obligation on you.
You may also be asked or obligated to assist (or even effect) the transfer of supply and customer contracts. This could involve anything from sending emails to a full-blown negotiation.
Post-Handover
You may agree to be available to take phone calls and answer questions for an extended period. Be careful not to let this obligation interfere with whatever is next for you, and that you agree an appropriate contracting fee.
If you provided guarantees to the buyer in the SPA, you need to ensure you fulfil your obligations for the term of the guarantees.
The After-Taste
As you can see, there can be a lot of activity involved as you transition out of your business. This can be an emotional period for owners as they also adjust to their post-ownership status. I often see owners who define themselves based on the business they own, and see it as what provides them the status in their community that they enjoy.
Once the business sale goes unconditional, you also should be developing your 100-day Plan. How are you planning to spend the time after the transition?
Celebrate the beginning of your new chapter with enthusiasm! Just as your business evolved and thrived under your guidance, the transition out of the business is your doorstep to opportunity and new adventures. And we are here to help. Reach out if you would like to discuss your business exit.