When is the right time for an entrepreneur to step back after selling the business?



New research from Livingstone Partners has found that three quarters of entrepreneurs want to continue to work for their businesses after they sell them. What’s more, among the 16-24-year-old group, 90 percent of entrepreneurs see themselves sticking around after a sale. These figures show that people running businesses are increasingly attached to them and that selling a business doesn’t have to mean the end for a founder’s involvement.

At the same time, however, the research raises issues about founders overstaying their welcome and potentially impeding the future of the business by preventing the new owners from doing their job. So when is the right time to stick around and when is it right to step away?

Motivations

The Livingstone Partners’ Heart of the Deal research questioned 200 founders of mid-market private companies about their motivations behind running their businesses and selling them on. The researchers found a clear divide between the youngest and the oldest entrepreneurs, with the younger group far more likely to want to continue to work for their business after a sale. Among the 45-54-year-old group, only 30 per cent saw themselves staying on after a sale. This would indicate that, among this group, many of the founders may be looking to retire.

When asked why they were so concerned about leaving their business in the hands of their buyers, some 41 per cent of entrepreneur said they feared the buyers wouldn’t look after their business properly. 23 per cent said they were concerned their business might not be able to grow under the new leadership and 16 per cent said their central worry was their staff. These figures are pretty alarming. Why are business owners, and particularly younger business owners so convinced that they alone can drive success for their business?

In fact, it seems that the main motivation for wanting to stick around after a deal is a sense of attachment to the business. Entrepreneurs put everything into starting their businesses and handing it over to a buyer can be heart-wrenching. Livingstone Partners found that a sense that the deal ‘didn’t feel right’ was the main reason deals fell through, accounting for more failed purchases than deal structure, timing or valuation.

Earnout Considerations

One of the primary reasons why a seller may want to stick around after they have sold their business is to ensure they fulfil the criteria of any earnout deal. Some buyers may offer sellers more money for their business if it reaches certain performance goals following the sale deal and sellers will often want to play a part in the business reaching these goals.

Earnout deals are often offered when there is a disparity between what the seller hopes to get for their business at the point of sale. And what buyer is willing to pay. They will almost always involve the seller staying with the business for a significant period of time to help the firm reach the designated performance goals that will release the remainder of the deal value.

Earnouts aside, can sticking around be the right move?

It certainly can in many situations. In fact, a period of transition, where the former owner is still available is often pretty essential to a successful deal. There are several jobs that a seller needs to fulfil to help the buyer take over the reins of a business. Examples include:
Walking the buyer through the day-to-day runnings of the business
Guiding the buyer through practical procedures (how the office/warehouse/plant etc. physically works)
Taking the buyer through processes, procedures and crisis situations that may arise
Making introductions between the buyer and key suppliers or customers
Supplying the buyer with information about staff
Remaining on as the contact with key contracts or customers for a period

Although keeping the seller on for this transition/training period is preferential, it should come to an end after an agreed period of time. During the deal negotiation stage, this can be arranged, but leave room for a buffer period too, in case there are more complex issues than expected or if there are specific requests from key customers, for example.

Agreeing to stick around till the acquisition settles, dealing with non-financial, operational and staff-related issues may help the seller to negotiate a better up-front cash deal and avoid the anxiety of waiting for a deferred earn-out payment.
US-based entrepreneur John West sold his second business, Silver Oak Solutions - a spend management business used by state governments - to CGI. He agreed to stay on for a period of 18 months to help ensure the transition worked for the customers. He helped ensure that existing customers transitioned into the new larger business that Silver Oak had become and the transition proved successful, as a result. West went on to start his third business, a sports cable network called Whistle Sports Network, three years after the sale of Silver Oak.

The key to ensuring that this period is successful is being clear that the seller has no power to make major decisions following the sale. He or she may find themselves continuing to involve themselves in a way that indicates they have not fully handed over control to the buyer, and this can be detrimental for the future of the business. It is, afterall, now up to the buyer to run the business, for better or worse, and a seller must accept this if they are accepting the buyer’s cash.


Recapitalisation

For entrepreneurs who really don’t want to let go - there is an alternative. Recapitalisation is the term used to describe the process whereby a seller offloads a portion of the company to a private equity buyer, who takes a stake in the business, while the founder remains at the helm. This can be a particularly good option if a business owner is looking for a cash injection at a time of great growth prospects for their business.

An example of this type of deal is the recent decision by Esure founder Sir Peter Wood, to stay on as Chairman of the insurance business following a deal to sell most of his 31 per cent stake to private equity firm Bain Capital.

For those of you who are company founders, when considering your exit strategy, bear in mind that selling your business does involve a period of grieving and adjustment. Prepare yourself for the emotional impact of handing over something you’ve put your heart and soul into for years.

For those buying from an entrepreneur, it can sometimes make sense to involve the founder in the early period after the takeover. However, for everyone’s sake, it’s best to be clear on the terms of this involvement and the period over which they will be available to you. Remember - you will be the owner from the day the deal is done and the future of the company is down to you.


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