Letting go of a business that has been built on your hard work is never easy. It’s natural to want to protect the legacy of a life’s work – the brand and the relationships with employees, suppliers, and customers. It’s also not a cake walk for the new owner to be handed the keys and a wave goodbye. There are many things a new owner needs to know in order to be successful at taking over the business. Not all of these details can be addressed before closing the deal and that is why there is typically some form of a transition period with every business sale.
What is the role of the previous owner during the transition period?
The role of the previous owner is to formally walk the buyer through a day in the life of the business. How this exactly looks will vary among different types of businesses, but for the most part it will involve:
- A complete review and execution of daily, weekly, monthly and annual operational tasks
- Detailed review of processes and procedures
- Introductions to key employees, customers and suppliers
Basically, any small detail that could impact the business needs to be discussed during this period in order to set the buyer up for success.
How long to stay on after a sale?
This varies greatly depending on the deal. However, a general rule of thumb for a regular business sale is about a 1 to 1.5 month transition period. Set a transition period that will allow you to get everything you need from the previous owner before setting out on your own.
There are some factors that can impact the duration of a transition period:
- Business Model – A more complicated business model with extensive relationships will require more time to effectively hand over to a new owner.
- Size of business – A larger business with more staff, customers and suppliers and inherently more tasks can take longer to get a buyer fully up to speed
- Buyer experience/knowledge – Some buyers are completely new to business ownership and need more hand holding, while others may be acquiring the business from within the same or similar industry and have the confidence and experience to take the business over quickly
- Pre-closing transfer of knowledge – There are times where buyer and seller prioritize the training items in advance of the formal closing in order to shorten the training period post-close.
Regardless of the agreed upon transition period, the transfer of critical knowledge to a new owner sets a business up for a smooth start under new ownership. Remember - don’t overstay your welcome! Once the job is done, let the new owner take the reigns.
Transition Period Structure
Many different types of arrangements exist for sellers staying with the business after a sale and it is typically a reflection of the motivations of both buyer and seller. Some previous owners want to do other things, while some would prefer to stay and help.
The structure for this period takes shape based on the needs of the business, the buyer and the seller. One of the largest factors that can affect this structure is whether or not the negotiated deal terms defers a portion of the purchase price into future years. Seller financing or earnout clauses that have payment riding on a company’s future results may have more seller involvement in the transition period to protect the outcome of business results and lower the risk of not getting paid.
Here are some examples of how a transition period could be structured:
- 1 month in person training period followed by phone counselling and guidance for a set timeframe
- Agreed upon “free training period” plus the right to retain addition training at an agreed upon compensation
- Specialized employment contracts whereby the former owner is hired on as a consultant, operations lead, or perhaps a salesperson. It can be mutually beneficial to both parties, helping a seller to ease out of the business while giving a new owner its best chance at success.
Want to Sell and Get Out Quickly?
What if your goal is to sell and walk away immediately after a sale? This goal is more probable if you have a smooth running operation with a strong management team or a second in command in place that can become responsible for the transfer of knowledge and relationships to a new owner. The delegation of tasks to a well skilled team or manager well in advance of a sale will help you to achieve your goal of a quick departure. Design your business so that it can run without you, then there will be less reliance on you during the transition period.