Handling transfer of ownership when most business is relationship based
March 21, 2024
by a searcher from University of Victoria in Vancouver, BC, Canada
Have a business under LOI right now in the construction services space. The business does zero sales or marketing, which is common in many of these businesses we're all trying to buy and surely part of the investment thesis for many of us.
All of the sales/projects come inbound and generally unsolicited. This is because of the reputation of the business, yes, but also largely because the business is an extension of the current owner's reputation and long tenure of working with the same builders/general contractors/commercial landlords.
I'm looking for ways to mitigate this risk and would welcome any other suggestions, ideas, or things that you've tried. Part of the strategy is keeping as much of the team in the field the same as possible so that the people actually working on the job sites don't change.
Top options as we see them:
- Earnout, tying the owner's proceeds to performance so that they're incentivized to make a smooth and full handoff
- Partial buyout, similar effect, but keep the owner on as a minority, say 10% owner over 3 years to use as part of the narrative "John still owns the business, I've just invested in it and joined him as the general manager" until I can establish my own reputation. Pay the sellers a premium over time because the de-risking is valuable to me.
Any other thoughts or suggestions?