Seeking Input on Deal Structure: Employee to Owner

searcher profile

December 11, 2023

by a searcher from University of Arkansas (System) in Fayetteville, AR, USA

I’ve been offered the opportunity to lead sales for a small business and acquire it in 3-4 years. The current owner intends to stay involved post-sale but in a reduced capacity.

While I trust the seller, I want clear terms for the purchase. We are in the early stages of conversation.

Seeking input on potential deal structures and any possible risks. Grateful for the group’s advice!

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commentor profile
Reply by a searcher
from Bentley University in Exeter, NH 03833, USA
Agree with Anthony above. I have seen this turn out poorly multiple times. If you pursue this then call all the deal structure for the future transaction in a contract now, and signed. Legit a purchase and sale for THE date 3-4 years from now, the formula that defines the valuation, etc. etc. etc. You do not want to leave this open-ended. Remember, if you grow EV in the next few years, or the seller gets to be hands off while his business spins off more and more cash, then not selling becomes attractive for him/her. Seller has you as an operator. You have no equity - no distribution. Seller is in growth and cash harvest mode and getting to step back some from the business. Promises do not work. Contracts do.
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Reply by a professional
from University of Michigan in Detroit, MI, USA
It's fairly common for existing owners to retain a minority stake in the company post-closing. This may be because they no longer want to be involved in the day to day, but are interested in upside should the new owner grow business. Whether the deal is asset based or equity based, you can end up in a similar position, say, 90/10 ownership. So that's an option. At the same time, you would enter into a stockholder or similar agreement, to make sure that that control rests firmly in your hands post-acquisition. Does this answer your question? If not, let me know and we can discuss further.
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