Outside the Box Transition Plan

December 10, 2021

by a searcher from University of Illinois at Urbana-Champaign in Dallas, TX, USA

Am looking for some creativity on diligencing, structuring, proposing and executing an acquisition for an opportunity akin to that below. Using this scenario, perhaps this discussion could help future searchers who find themselves in a similar situation.

There's an off-market business owner who knows that he wants to sell the business, but says that he still has some things to clean up to make it attractive to a buyer. He knows the process, having purchased this business from the original owner over a decade ago. I see this kind of hesitation as an opportunity to help the seller achieve their ultimate goal, place myself as the leading candidate to buy the business, and build a meaningful relationship to enhance the company's success. I am considering:
-Potentially working in the business while performing diligence and shaping the future growth plan collaboratively
-I could also serve as a consultant by advising/executing the required systemization (I could take compensation either directly, as a reduction of future purchase price, or in equity should the company be sold)
-Pursuing a heavy earn-out structure (making the deal non-SBA) or employment agreement so that the current owner benefits from the company growth

Am open to thoughts on ways to get creative when hearing that the owner is on the verge of prepping a company for sale, as well as the inherent tradeoffs of those approaches.

Thanks!

Reply by a searcher
in New York, NY, USA

Others have mentioned the costs of this method in terms of opportunity, but I'm not seeing them address what I see as the biggest downside and ultimate cause for me to avoid any similar setup: there is no guarantee the owner will sell at all and, if he does, it might not be to you. So under your three compensation arrangements, you run the risk of being (1) under-paid relative to the returns you could garner as an operator at your own alternative target; (2) earning a discount on a future purchase price that might never come to realization, and/or (3) earning a minority stake in a business that you don't end up controlling. And all of this is assuming that the target was worthwhile and ends up passing the diligence test in the first place.

If the owner is not willing to sell today because he wants to "fix" things in the business, in my opinion the best two options are to let him fix them and come back later or offer to incorporate the fixes into the valuation and save him the trouble, discounted of course for the fact that you might have to do them. And in the meantime, continue seeking a target that is actually willing to part ways with their company.

Reply by a searcher
in Lake Mary, FL 32746, USA

I might be getting into a similar boat, so this has been an interesting discussion to follow. I think one of the most important things would be to have as much as possible laid out ahead of time - roles, responsibilities, entry/exit valuation, etc. Don't leave anything up in the air that would derail the final transaction. Also, to @Ted Leverette's earlier point, make sure the exit valuation is fairly priced. No point in you putting in a lot of time and effort and then having to pay a premium to acquire the business.

Have you considered taking some form of minority interest? If the deal doesn't work out, he's obligated to repurchase the shares at a predetermined price, or if he sells to someone else at a higher valuation, you get your shares sold first without earn-out, etc. You achieve alignment, he gets a partner versus an employee.

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