Deal structures for semi-absentee business

by a searcher from The University of Michigan - Stephen M. Ross School of Business

2 years ago

Hi All,

I am looking to buy a small service business where I will be dependent on the seller who has agreed to stay on as a manager.  There are risks to her leaving, at least in the first year. Is there a deal structure that has been successful to keep a seller on?

Thanks

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7 comments

searcher from University of Calgary - Haskayne School of Business

In that instance, you want to include as much contingent consideration as possible and preferably have the vendor retain a meaningful equity stake. Large cash payouts change most Seller's perspective on life within the business.

1 year ago | like reply | 0 likes

searcher from The University of Michigan - Stephen M. Ross School of Business

^Searchfunder member‌ I had a similar situation and used an SBA 7a loan. You cannot have an earnout with SBA but you can have a seller's note that has hurdles that need to be met to get paid out, which is what I did. You can structure the note to offset some of your risk. For example, you could require the seller to remain involved full-time for 1 year and you could also have revenue hurdles, client retention hurdles, etc. The SBA does not allow the seller to be an employee for more than a year so you won't be able to put anything in writing that would require the seller to stay on for more than a year. The bank is also highly unlikely to confirm that the seller has left after a year.

1 year ago | like reply | 0 likes

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