Rehiring a seller as an executive?

January 04, 2023

by a searcher from University of Michigan - Ann Arbor in New York, NY, USA

Hey all,

Does anyone have experience offering post-transaction employment to an owner? It seems the owner would be interested in that for a company I'm considering. Given their expertise and the company's performance, employing him may make sense for this opportunity.

The main three questions I have are as follows:

A.) Should such an offer be discussed with the seller's broker?
B.) Is there any risk to SBA financing if the prior owner is retained as an employee post-transaction?
C.) I assume it's a valid practice to make an LOI contingent on signing retention contracts with key employees, which the former owner would be in this case. Am I mistaken?

I'll appreciate any info folks may be able to share. Thanks to all in advance.

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Reply by an intermediary
from University of Memphis in 5000 Linbar Dr, Nashville, TN 37211, USA

Appreciate the tag Luke. The responses have covered most the topic but none of us know the depth of the discussions between the parties prior to offering the LOI. The buyer's relationship with both the seller & the broker impact the seller's confidence in the buyer's financial capacity to complete closing, ability to run the business and if there is a seller note, the risk of repayment, Since most sellers & buyers have never gone through this process the LOI can be confusing and an attorney's responsibility is to alert the seller to all the risks (can be initially scary), so time may be needed to fully understand the impacts, requirements and risks. We are primarily buyside focused, we start discussions about the requirements for both sides, terminology, diligence expectations of the transactions as soon as the initial discussions get serious. Sounds like the seller will respond but they may be comparing the LOI to other offers, may be trying to understand some aspect of the offer, may not have an attorney with the time or experience to efficiently review and clarify the offer to the seller and/or may simply be drafting a counter to some of aspects of the offer. Give them time. Unless the offer had been fully discussed in advance, a seller needs at least five days in most cases.

Reply by a lender
from California State University, Sacramento in Seattle, WA, USA

With SBA, the seller can stay on for up to 12 months in a transition or consulting agreement role. Different lenders will take issue with having it worded as an "employment" agreement even if only up to 12 months. Check with your lender. Might be safest to call it a transition or consulting agreement. The nature of the arrangement will depend on what the seller's role is in the company. What do you need the seller to be doing for you to adequately transition the company. IF there are significant dependencies on the seller, this could potentially be an underwriting red flag. There needs to be an adequate transition arrangement with the seller and brokers should be preparing the seller for this requirement.

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