Consider the voting rights and their ability to exit.. If they are a purely passive minority, a lot easier to handle than one that can block you at every turn.
There is a saying that the best shareholders agreements are the ones you don’t need to take out of the drawer, that is a long winded way to say, before you enter a minority and debate the details and give them rights, make sure you can work with them.
Also, check the standard minority protection rights in the jurisdictions that you are doing a deal, although you may think you are protecting yourself on the shareholders agreement, if the law grants him some rights, you won’t be able to get rid of them there....

I'd build in a right to buy-out the Seller. I've seen this done a number of different ways. One way would be to agree to buy-out the remainder of the Seller's equity at the same EBITDA multiple (i.e. a "call right") within a fixed window (maybe 5-7 years after closing) or after a triggering event (Seller's employment with the company ends). You could also give the Seller a corresponding "put right" to force the Company to buy the Seller out upon similar triggering events. If you go down this road, make sure you have flexibility on the purchase price payment terms so you don't get in a cash crunch. But this gives the Seller a second bite at the apple, which is something private equity groups always pitch to their targets.

I'd really focus on your relationship with the Seller. Is this a business partner that you want? Listen very closely to Seller's comments about any prior business partners he or she has had. History has a way of repeating itself.

Tagging a few Searchfunders who have commented on this topic in the past and should be able to share their insights here. ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌ , ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌,^[redacted]‌, ^[redacted]‌, ^[redacted]‌. To my commenters, THANK YOU for making Searchfunder a helpful community. We appreciate it!

In Canada, there are fairly solid minority shareholder rights in place that give some reasonable protection to those minority owners. We've used/see voting trusts and modified shareholder agreements that spell out limits and duties. Just keep in mind what they can't 'sign away' if they make a claim.

Also, tagging a few intermediaries that should be able to comment on deal structures where seller maintains a minority interest. ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌ , ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌,^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌,^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, To my commenters, THANK YOU for making Searchfunder a helpful community. We appreciate it!

Some good comments here. One thing to be thoughtful about is that regardless of the cap table and operating agreement rights post close, the seller likely has valuable relationships and knowledge so you always need to be thoughtful about working with them. I have dealt with difficult sellers who we have bitten our tongue with several times post close because of their value to the business. Be sure to play the long game.

The devil is in the details of the shareholder agreement. While protections do exist for minority shareholders, the shareholder agreement will govern on most matters. There is an emotional aspect that also has to be considered: the seller built the business and was boss now they have bosses. How will the minority position sit with them?

I have seen this done effectively particularly with roll-up and tuck-in strategies where seller might stay on to oversee a region, a LOB, or just focus on clients (rather than running the business) etc. Aligning up and down sides are key - pay particular attn to distinction bt shareholder, employee, voting rights, preference in your docs and bylaws/op agreement. Also consider minority control and liquidity discounts. Papering the deal can be easily handled by any attorney with M&A experience. Tax and PG are also implications for seller...but those are the same concerns the seller should be addressing either way. But good to be aware of counterparty's considerations.

Also, tagging a few lawyers that should be able to comment on deal structures where seller maintains a minority interest. ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌ To my commenters, THANK YOU for making Searchfunder a helpful community. We appreciate it!

I agree with Hiram that aligning interests is absolutely key. Another caution - one thing that I see quite a bit of - is that old employees will continue to look at the old owner/boss for approval for things tasked by new owners. i.e. there can be authority issues with the owner still engaged. It is important to get buy in from the seller as to what their role will be and how best to effectuate the needs/desires of the new owners. Be wary of power struggles. In anticipation of a potential issue, make sure to pre-negotiate a buy out provision with the seller if things are not working out.

In Mexico, special attention must be put to minority rights; put/call and drag along rights might play an important role while amending the target's by-laws.

80/20 is a great structure. Have the seller sign an employment agreement for 2-4 years. Seller will need a salary for full time work. Take out a life insurance policy to buy out 20% in case of sudden fatality

Besides the minority rights (mentioned by Luis Martel) and the[redacted]structure (mentioned by Russel Cohen) I think it is very important to execute a shareholder's agreement that may assure that the seller uses voting rights according the plans of the buyer.

If you are bringing on other investors (who may be professional investors), think about how you plan to give the professional investors access / your time vs. the seller....will they be on the board, or just an advisor? how will they react to finding out that other investors may be on the board etc. as a post above mentions...play the long game

I would say for the vast majority of transactions I have seen over the past 4 years, typically a seller is comfortable with anywhere from 35%-5% minority rolled equity. What makes a seller more or less comfortable is their post-close desire to stay involved in the business or plans outside of helping with the companies transition to a new buyer. One thing as an M&A advisor I always try to explore is a call/put option on the minority equity for a seller so they know when they can be fully exited, but at the same time share in some of the positive growth/risk. Often this can get a little complicated and not make sense in every deal scenario, but it gives the selling owner a timeline on when they can expect the additional proceeds of the transactional value to make its way to their bank account. Happy to talk through the subject further if need be.

Can't do it if you're doing an SBA deal.

I'll be the contrarian, and ask why do you want to do this in the first place?
1. Just by doing this, you're adding in complexity right when you're taking over the company, and now you have to live with the seller on your cap table for potentially years to come. You are going to take that company to new heights; heights that seller couldn't achieve like you will. Therefore, what value does that seller provide you going forward? And if the seller is passive/silent and won't offer his/her opinion, etc., what value are they providing other than they saved you some cash at close? Wouldn't that equity better be kept by yourself (more debt then), or getting an investor that can provide value on the Board going forward?
2. I'd encourage to explore the psychological aspect of a small business owner selling their business. I've seen it three times, and my investors have shared similar experiences as well. There will be a huge mental shift as soon as the money hits the seller's bank account. They start thinking about that next chapter and letting go. For my sellers, by the 90-day post close mark, they had moved on with life. Available to answer a question if need be, but they moved on. Now add in an equity rollover, and they are likely still to move on (got that big bag of money) but now they get to profit off your work.

Furthermore, if you're to be the operator and if you are to get the buy-in of your employees/managers, a 100% clean break is better all around. Even knowing that the previous seller is lurking around can have an affect on your ability to do what you need to do with buy-in from employees/management.

I believe the simplest action is best for the future of your acquisition. 100% buyout. Pay the seller a consulting fee or a wage to stay on for a transition period, but then get them out.

Great discussion topic and great comments above. I think the majority here will agree the considerations are highly situation-specific. Although repeating some of the previous good comments, some key considerations are: 1) What is the seller's motivation for or interest in retaining equity? 2) What is the buyer's motivation or interest in seller retaining equity? Does buyer require seller's ongoing involvement in the business? Or is the principal objective rather to reduce capital required to close? Both? Other? 3) To what extent will seller remain involved in an operating management or executive role? It's critical to have an explicit mutual understanding, as well as aligned economic interests, on this element. 4) If seller will continue to be active in management, an employment agreement is essential. 5) If seller will not be an employee, but rather passive equity, a form of transition services agreement is likely to be highly desirable[redacted]What is the expected capital structure at close and going forward? Buyer and seller may have different ideas about optimal or acceptable leverage. Is the debt non-recourse? If mezzanine financing (with an equity feature) is possibly involved, there are additional considerations. 7) As many have noted, a shareholder agreement tailored to the situation is a must. Foremost among the considerations in this respect is whether seller's equity is economically pari passu with buyer's equity. Consider drag-along and tag-along provisions and other terms such as a form of put/call (and funding for such) as previous comments have mentioned. 8) The tax implications of retained equity, and possible related employment agreements, need to be considered and understood by buyer and seller. 9) Is seller financing contemplated along with retained equity? If so, seller is in a position of cash flow on which he/she has a partial claim going to repayment of the note he/she holds[redacted]What is the likelihood of post-closing indemnification claims and the provisions related to settling such claims, including a dispute resolution mechanism?

.These are only a few of the considerations and issues that frequently arise. Invest in experienced legal counsel. Obviously, a contentious relationship between buyer and seller equity owners can put the business at risk. Better to ensure a meeting of the minds, alignment of interests and well-drafted documents before closing.

many complexities to consider - economics, governance, employment agreement as applicable, subsequent take-out or sale mechanics (put/call), how to treat future capital needs or subsequent transactions, etc. Tax treatment is a common trip-up for both buyer and seller, particularly as the split dips below 80/20, so be sure each party consults with competent M&A tax legal counsel