Deal Structure If Seller Stays As An Employee After Acquisition.

January 08, 2024

by a searcher in Paramus, NJ 07652, USA

Looking to get some thoughts on an acquisition before I move forward. Here is a quick summary of the main points:

1) 35 years old service business that's owned by two owners. One owner wants to sell and retire and the other would prefer to stay and plan for an exit/retirement within 5 years or so. Sellers are open to financing up to 50% of the price since the seller will stay on for at least 5 years as an employee.
2) Is it a good idea to keep the seller as a full-time employee post acquisition? He was hinting about getting $150k in salary. SDE is around $450k after paying that $150k salary. Thinking of offering $1.2 million which is a bit less than 3x multiple of SDE. My feeling is that they'll probably accept the offer since one of the owners really wants to retire and move out of state.
3) Per new SBA rules, this will have to be structured as a partial buy-out. The seller will need to have some equity in the new entity in order to work as an employee post acquisition. I can give him 5% or so just to satisfy this requirement.

Overall, I'm thinking this could be a great first acquisition opportunity for me. My risk is mitigated with the big portion of seller financing and I have the seller working full time to help continue running the business for a few years.

What am I missing here? I appreciate any thoughts or ideas on this.

Reply by a lender
in United States

I think back to the not so long ago SBA SOP days with no partial buyouts allowed. Bank decision makers for years preferred it that way for many fair reasons and I would bet most still do today ^redacted
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I recall a few business partnership buyout credit requests reviewed from over the years. Majority partner came to me clearly NOT in a happy business ownership structure separation stage. That came with huge risks, refusal of exiting partner signing non-compete, frustrations and undue stress impacting the overall business.
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It may seem easy today, but when push comes to shove, who really is in charge? Who do the employees, clients and vendors side with? If it has always been done this way, who's to say your ideas as somewhat majority owner will be implemented without a bit of kick back?
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Be cognizant of who is giving you feedback, and what is in it for them to be giving you that direct feedback. Sometimes sleeping single in a double bed is the best route to go. You're 100% in control.

Reply by an intermediary
from Universidade de São Paulo in São Paulo, SP, Brasil

It's important to keep one or more founders until you complete the transition to your management team, since these are the guys who know the inner workings of the company. In this case, make sure he signs a lockup agreement with you, so he won't be able to leave earlier than expected. For the founder that is leaving, it's also important to sign a NDA and Non-Compete agreement, so he won't be able to compete directly with you after leaving, since he probably knows a lot about this business/market. Consider giving more than 5% of equity to the remaining founder in order to reduce up front cost of acquisition and salary, and also to motivate him to stay focused working for the business to grow so he can benefit more from this upside. Consider also having a "call option" which grants you the right to buy his equity in the future, so he can leave not only as an employee, but also no longer holds any share of the business...

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