Seller doesn't want to exit the business after the sale

searcher profile

November 09, 2023

by a searcher in Loudon, NH, USA

Two months ago I purchased a graphic design business with an asset purchase agreement. The primary asset in this transaction is the client list. The previous owners agreed to transition these client accounts to me. The agreement has no provisions for the owner doing contract work after the sale for me nor does it stipulate any compensation for referred clients that were NOT listed as part of the purchase. The sellers are not exiting the business as agreed to nor are they willing to discuss a transition timeline. They remain in direct contact with the clients, are quoting the clients projects and tasks and doing the work. They are then in turn sending me a bill for the work which also includes the earn out percentage. They are not allowing me to manage the client relationships or quote the client to ensure that jobs are profitable. I suspect because the majority of the valuation is an earnout, they feel that client loss may occur if they step out too soon. This is a very real concern because I am suspecting that the sellers WERE the business more than they disclosed. Never the less, I feel as is this a breach of our agreement and so far my efforts to work this out has not been successful. I wish to know if my assumptions are correct from a legal standpoint and what my options are. Has anyone been in a similar situation and/or able to offer some advice?

1
9
276
Replies
9
commentor profile
Reply by an intermediary
in Campbell, CA, USA
How long is the earnout? You indicated COE was two months ago. If the term of the earnout is a year, it figures that they might want to ensure there is some there there. If the earnout is for 3 months, I'd say you have big problems. You can always choose a couple of clients (a small sample size so as not to potentially damage too many client relationships) they're currently working with and call them to introduce yourself. This will feedback to the sellers and you will get a better idea of what their true intentions are by their response. How strong is your covenant not to compete? How much value did you put on it in your Allocation of Purchase Price? I would try the above before getting attorneys involved because once you cross that line, there's no going back and you have to be prepared for a long drawn out and expensive legal process. Also, you should start contacting all of the clients who they're not currently working with the sellers and introduce yourself and you should handle all of the new clients coming in the door.
commentor profile
Reply by a searcher
from Texas A&M University in Johnson City, TN, USA
APA or SPA? How are they billing you? Call your deal lawyer and figure out ASAP. Did you buy the web domain, emails? This is your nuclear option if you have it. Something like this with client relationships is a delicate thing though.

The good news here seems that the Seller seems positively engaged in helping meet your earnout expectations.
commentor profile
+7 more replies.
Join the discussion