Seller compensation after close

July 25, 2024

by a searcher from Miami University of Ohio in Cleveland, OH, USA

I am nearing a signed LOI and one of the concerns is what the sellers will be paid during the transition period. How have other people handled this?

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Reply by a professional
from University of Michigan in Detroit, MI, USA

There is no hard and fast rule. The seller will be heavily involved during the transition period (at least for the first few weeks), and may expect compensation at market rate. But I have worked on a number of deals where the seller is willing to provide transition services for free (that is, it's included in the purchase price). If you're making a strong offer and the sellers are providing a seller note, my opening position would be transition services are included in the purchase price, because a successful transition is in both of your interests. In addition, you could offer to pay the seller an hourly rate (whatever is market) for further consulting services over and above the transition services. For example, if you want ongoing support managing a client relationship for the first year (Note, if this is an SBA deal, you may not be able to employ the seller as a consultant for more than one year). Let me know if you want to discuss. Always happy to help further. DM me here or reach out at redacted

Reply by a searcher
from University of Maryland at College Park in Havre De Grace, MD 21078, USA

Echoing thoughts from above with a slightly different perspective and suggestion. Separate in your mind (and the agreement for negotiation purposes) the seller's responsibilities as 1) the training period & 2) the transition support period after that training period. During the training period, the seller will spend much more time and effort in active participation. The secondary transition period comes when a seller is out of the business and is mostly interested your success because of their motivation to be paid or see their legacy succeed. The motivations for the two periods are very different. During training, the deal (even if closed) can unwind due to covenants in the agreement causing irreparable harm to you and the seller and of course the business. During the support period, the seller is concerned about any further compensation due (holdback, seller note, earn outs, standbys, etc...) and is more likely to help when they know their success if also yours. With that said if you have any hiccups that you are going to offset the note by without the understanding of the seller - be sure to work closely before they stop answering the phone/email while they are on the beach or on the boat.

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