Best practices for agreeing for a minority share for the seller?

December 02, 2020
by a searcher from Henley Business School in Helsinki, Finland
Any experiences of successful arrangements with the seller keeping minority stake from the target company? What to be considered?
from University of Pennsylvania in Charlotte, NC, USA
.These are only a few of the considerations and issues that frequently arise. Invest in experienced legal counsel. Obviously, a contentious relationship between buyer and seller equity owners can put the business at risk. Better to ensure a meeting of the minds, alignment of interests and well-drafted documents before closing.
from Harvard University in Omaha, NE, USA
1. Just by doing this, you're adding in complexity right when you're taking over the company, and now you have to live with the seller on your cap table for potentially years to come. You are going to take that company to new heights; heights that seller couldn't achieve like you will. Therefore, what value does that seller provide you going forward? And if the seller is passive/silent and won't offer his/her opinion, etc., what value are they providing other than they saved you some cash at close? Wouldn't that equity better be kept by yourself (more debt then), or getting an investor that can provide value on the Board going forward?
2. I'd encourage to explore the psychological aspect of a small business owner selling their business. I've seen it three times, and my investors have shared similar experiences as well. There will be a huge mental shift as soon as the money hits the seller's bank account. They start thinking about that next chapter and letting go. For my sellers, by the 90-day post close mark, they had moved on with life. Available to answer a question if need be, but they moved on. Now add in an equity rollover, and they are likely still to move on (got that big bag of money) but now they get to profit off your work.
Furthermore, if you're to be the operator and if you are to get the buy-in of your employees/managers, a 100% clean break is better all around. Even knowing that the previous seller is lurking around can have an affect on your ability to do what you need to do with buy-in from employees/management.
I believe the simplest action is best for the future of your acquisition. 100% buyout. Pay the seller a consulting fee or a wage to stay on for a transition period, but then get them out.