Becoming an employee instead of an owner....for 1 year.
September 20, 2019
by a searcher from Dartmouth College in Allentown, PA, USA
I'm pursuing an opportunity with a $12 million+ purchase price. The seller has agreed to stay on for one year post close, however, then he wants out of day-to-day responsibilities. I'm okay with this arrangement.
The opportunity was just presented for me to join the business as a key employee and work with the owner as President for one year. I would then buy the company at that time and allow the owner to fully exit.
The terms are such that the purchase price would be predefined and articulated in my employment agreement. I would have the full option to buy the business at this price in one year.
The benefits to accepting this employment-before-ownership path seem clear: (1) it gives me a year to learn the business before accepting full ownership responsibility; (2) company employees will be less startled as an "outsider" isn't the new owner over night; (3) banks prefer to lend to buyers who are current employees/ have relevant industry experience, so those lending discussions would likely be smooth; (4) we could structure my salary to be 100% equity based, so i'd be earning equity along the way; (5) all of these factors would enable me to raise less outside equity capital.
What is the downside of pursuing this employment-before-ownership approach? Is there something big that i'm missing?
from Southern Polytechnic State Univerisity in Clarkesville, GA 30523, USA
At the end of the year, the seller suddenly became "sentimental" about selling the business her father had started.
Hard lesson, but ultimately drove me to dive deeper into learning about EtA.
from Northwestern University in Naples, FL, USA
Very quickly after joining a business, nearly every search entrepreneur identifies myriad ways to run the business differently, and better, than the current owner. The problem is that until you are in the CEO seat, your ability to implement these ideas is completely dependent upon the willingness of the current owner to allow you to instigate change. Furthermore, when owners are preparing to sell the business, they are not looking to take on additional risk, so they are typically resistant to change. Most search entrepreneurs will find it extremely frustrating to ask for permission to make changes and be denied the opportunity to put their ideas into action.
Alternatively, if you do join the business and implement positive changes, do you think this will make the current owner more or less likely to want to part with their business at the previous valuation and terms? I’ve spoken to a number of people who have gone in as the number two and implemented impactful changes that dramatically improved profitability. Unfortunately, in most of these cases, the owner became resistant to actually selling their now much more profitable business under the previously agreed upon terms. Even if you have a signed agreement to buy under specified terms, unless the owner is a willing participant in closing the deal, they can resist completing the transaction. This leaves you with the choice between trying to enforce an agreement against someone with deeper pockets, who also has stronger relationships with customers, employees and suppliers, or walking away from the deal. Neither option seems attractive.
Option three is to continue searching to identify a great business with a seller that is willing to close a deal with you now. This ensures you have the autonomy to implement change to drive results and reduces the probability of the seller changing their mind and walking away from the deal. This is the course of action I’d recommend.