Compensation for seller for transition?

November 05, 2020

by a searcher from Massachusetts Institute of Technology - MIT Sloan School of Management in Los Angeles, CA, USA

Seller is requesting compensation for transition (has agreed up to one year of their time to help with transition). I don't anticipate the transition taking the entire year, and am of the view that the enterprise value being paid includes time/effort to transition the business. Wanted to get feedback and creative solutions on this topic.

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Reply by an investor
from Harvard University in Dallas, TX, USA

This was a while ago but when I bought the first company, even though it was losing money, I was told if you fall out with the seller within the first year, the correlation with the company going badly is very high. I made the seller chairman and he was paid something like $100k a year. I spent 2 hours a day talking to him about the industry, brainstorming ideas and learning. He was 79 when he sold me the company and I was a speaker at his funeral when he died 4 years later. There is of course a difference in the person who the employees think still runs the place, so it'll have to be clear, crystal clear, who is in charge. But dont be too frugal on it, its likely not a big number in the scheme of things and as in my example above I cant really even remember what we paid him.

Reply by an intermediary
from Wake Forest University in Winston-Salem, NC, USA

We typically see 4 weeks of transition assistance included as part of the price. After that, as ^redacted‌ mentions, a paid consulting/management fee agreement (fixed, $/hour, commission). In order to keep both sides happy with expectations, it is good to spell out how much time is expected (and we usually phrase it "up to x hours per week/month" and that usually steps down over time, particularly if the seller was looking to retire or move. As ^redacted‌experienced, we often see that the buyer needs less time than the max that they asked for.

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