Owner Transition

searcher profile

February 11, 2021

by a searcher from United States Military Academy in Atlanta, GA, USA

What are your thoughts on transition package with the existing owner? Paid during the transition of the business period? Should the owner be compensated? (Transition 6-18 months) Is there a normal period?

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commentor profile
Reply by a professional
from New York University in New York, NY, USA
You see a lot of variation here in the market when it comes to this. Certainly a longer transition period (>3 months) would customarily have compensation attached to it; otherwise there won't be much of an incentive for the owner to work! When coming up with the purchase price for the business, this is just a cost to be included like any other transaction cost.

From a tax perspective, it's inefficient for the seller: they will pay ordinary income tax on this compensation, so sellers often want (or are advised to) forgo post-closing compensation in exchange for a higher purchase price, even if the dollars are the same.

Happy to discuss further if you like: redacted
commentor profile
Reply by a professional
from Marquette University in Kirkland, WA, USA
If you are getting goodwill, meaning the price is based on earnings and is greater than the value of the assets, then seller transition support should be included for a limited amount of time, 3-6 months depending on the size of the deal. The seller is to teach you the little intricacies regarding how the company creates profit. Anything after the initial time period is generally compensated. Put together a transition plan, week by week, to maximize effectiveness. Also, have the seller take a week of vacation about a month after the close as this will let the employees really know you're the new boss.
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