Buyer Training After a Business Sale: How Much Should Sellers Provide?
You might be anxious to get started on the next chapter of your life as soon as the sale of your small business is complete. But chances are, you won’t be able to take the money and run.
Buyers typically look to sellers to train them on the ins and outs of the business, and it’s common practice for sellers to offer to train a new owner. The question isn’t whether sellers should provide training; it’s what training to provide and the amount of time to offer.
The type and duration of training a seller provides is so important that it often becomes a negotiating point in the sales process, and the details agreed upon are written into the purchase contract.
Why Include Training in Your Purchase and Sale Agreement?
Training might be required by lenders or investors who are financing the purchase. Even when it isn’t, offering training to the new business owner can work to the seller’s advantage. There are several situations when sellers have a vested interest in the business’s future success.
When Seller Financing Is Used
If the sale is seller-financed, it’s in your best interest to do everything you can to ensure the business’s future success so the new owners can repay the loan.
If your seller’s note covered only part of the purchase price and the buyer used an SBA 7 loan to finance the balance, the SBA becomes the primary creditor and the buyer will be required to repay that loan first. If the business flounders, there might not be money left to repay your seller’s note.
If you and the buyer weren’t able to come to terms on a purchase price, and the sale includes an earn-out (an additional amount the buyer agrees to pay for the purchase based on the performance of the business under the new ownership) you’ll also have a vested interest in seeing that the company succeeds.
To Manage a Business’s Reputation
Chances are your business has succeeded after much trial and error and because you’ve learned much from your mistakes. By passing on those valuable lessons, you reduce the likelihood that a new buyer will have to reinvent the wheel and risk quality or service.
To Secure Real Estate Income
When you retain ownership of the business’s real estate and the new owner is the tenant, it’s also in your best interest to make sure that the business succeeds . You’ll continue to receive the income you derive from renting the premises.
To Get a Higher Sale Price for the Business
Most potential buyers will consider training a key element of the sales transaction. Some potential buyers might not consider buying your business if you don’t offer training, leading to a smaller buyer pool, a less competitive sales process, and even a lower business valuation.
What’s the Difference Between Training and Consulting?
No matter their experience in the industry or running a similar business, buyers need to get their arms around the unique way your business runs. They must become familiar with your systems and processes, your customers, and any situations pending at the time of the sale.
Training aims to create a smooth transition for the new owner and management team. As a seller you are essentially transferring your insider knowledge as you would any other business asset, and that transfer becomes part of what you are selling.
Depending on the type of business, the training provided might acquaint the new owner with computer systems and applications, payroll and invoicing procedures, marketing and sales processes, and inventory procedures. Training can also involve briefing buyers and personally introducing them to the business’s employees, customers, and vendors.
In some cases, buyers need more guidance than training is designed to provide, and buyers want to continue the transition period by hiring sellers as consultants. Whereas the typical period of time devoted to training ranges from a few weeks to a few months, a consulting arrangement can last for a year or more.
Consulting arrangements aren’t part of the sales contract, and sellers are paid for their consulting services under a separate arrangement.
How Much Training Should Sellers Offer?
The amount of training you offer depends on the business and the buyer.
Mom-and-pop businesses, for example, might require little more than having a new owner shadow the seller for a few weeks to get the lay of the land.
Let’s say you sell a pet supplies store with two part-time employees. Your inventory comes from two or three vendors. Your long-term lease will run for at least another year, and you use over-the-counter software for accounting. Chances are a buyer won’t need much time to get familiar with your processes, your employees, and your vendors.
Other business types, such as an auto parts distributor, an apparel retailer with several locations, or an industrial equipment manufacturer, are likely to require a longer period of time for training. In addition to becoming fully familiar with ordering and inventory, manufacturing, and accounting, the buyer of these types of business must get acquainted with a host of employees and vendors.
In most cases, the buyer decides how much training they need, and buyer and seller negotiate the terms. They can designate not only the duration of the training, but also whether a seller provides full-time or part-time support and the items covered during the training period.
It’s a good idea to designate a number of hours for training rather than setting a schedule of the days and hours when training will take place. For example, instead of allocating five hours a day for five weeks, you might specify 125 hours of training to be completed within three months. That way, the new owner can use the training as needed, and the former owner won’t be forced to spend time with nothing to do.
Strategic Buyers and Private Equity Considerations
Strategic buyers and private equity buyers often want to acquire the business's management team along with the business. These buyers want the seller to stay on as an employee and include an employment contract with the purchase and sale agreement.
Suppose you manufacture your own brand of pet food, herbs, and organic supplements for dogs and cats and sell them at retail and wholesale to other pet supply stores. The new owners plan to operate your company as a separate, “fresh and organic pet food” division in their business.
Like most strategic buyers, this buyer will likely ask not only for a training period but for you to stay on for a year or more. The new business owners might believe you are the best person to manage manufacturing and packaging, maintain quality control, and understand the marketing required until the business is fully integrated into the buyer’s company.
You’ll want to negotiate terms such as whether you take on a consulting role or you become the division manager and an employee of the company. Likewise, your salary or fee, and your authority concerning items like hiring and firing and controlling the operating budget are all items you can negotiate and include in the purchase and sale agreement.
How to Use the Training Period as a Negotiating Point
As noted earlier, training is an asset you can trade just like any other business asset. After all, time is money, and the amount of time you’re willing to offer (assuming the buyer wants it) can add value, translating to a higher sale price.
Be aware, however, that training is treated as goodwill in the purchase price allocation and subject to ordinary income tax treatment–and therefore higher tax rates–than the rate at which capital gains are taxed.
To reduce your tax liability, consult with a CPA or your business broker before you set the training component in stone in your purchase agreement.
Selling your business can be made easier and more profitable with the help of a broker, who can use their skills to maximize value, market to suitable buyers, and negotiate favorable terms. They can also advise you on what degree of training is involved when transferring a business to a new owner. To find a broker that suits your needs, visit BizBuySell’s business broker directory.