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Selling Your Business – Part IV

| May 26, 2011 | Business Planning

In Part IV of our blog regarding the sale of a business, we take a moment to focus on the need for the seller/business owner to shore up his business management infrastructure. For many closely-held businesses, this is an area in which sellers and purchasers alike are often left wanting. Purchasers who may be expanding through an acquisition into a new market segment, or into a new region of the country, will frequently want to continue to employ most, if not all, of the seller’s existing personnel after closing. For that reason, these purchasers will be keenly interested in the depth and breadth of the seller’s management team beyond the seller himself or herself. In most cases, it will be these senior (and even mid-level) executives, along with the seller, who will be responsible for ensuring a smooth and orderly transition after the sale, and who will be so critical in determining whether the purchaser’s investment in the seller’s business is justifiable.

Many business-owners started their own business venture precisely because they wanted to be in an environment where they could control their professional and financial destiny. What’s more, many business-owners made the initial decision to venture-out on their own only after becoming frustrated with corporate organizations that were inexorably confined by corporate hierarchy and frustrating politics. Their desire to disassociate themselves from anything resembling their previous bureaucratic corporate culture, coupled with their need to keep overhead costs as low as possible, often leads to a business that lacks executive management beyond the founding owner. For those purchasers who will be relying heavily on the existing management team after the closing, this is a real cause for concern.

Most purchasers assume that the founding owner/seller will likely be far less motivated to assist the purchaser after the closing, especially in those instances where the seller receives all, or even a significant portion, of the purchase price at closing. Additionally, when the founding owner is the primary point of contact with the most critical customers of the seller’s business, the purchaser will often have concerns that such important relationships may be in jeopardy once the business is sold and the founding owner’s role in the business lessens. In both cases, the purchaser can’t help but begin to wonder whether the business really has any “goodwill” value that extends beyond the seller. When those thoughts begin to occur, the prospective purchaser may become concerned enough with the post-closing viability of the business that he or she elects to either pass on the transaction as a whole, or use it as justification for reducing the purchase price offered to the seller. In either case, the seller stands to lose.

To maximize the amount the seller expects to receive at closing, the seller must locate and train the right person(s) who can leverage the founding owner’s skills and relationships, and help demonstrate to the purchaser that the business has intrinsic goodwill value far beyond the founding owner. Of course, this does not happen overnight, and is something that the seller/business owner must begin to develop well in advance of a sale. At the same time, the founding owner must be careful that he or she is not training-up his or her new competition.

Our firm frequently advises our clients about how they can best manage the delicate balance of bringing on new management personnel without putting at risk the business they have worked so hard to build. To the extent we can assist you in addressing the legal issues related to building a management structure that will maximize the value of your business, please give us a call.