Seller Compensation post close

October 24, 2022

by a searcher from Tulane University - A. B. Freeman School of Business in Austin, TX, USA

I had a question regarding seller compensation. We are currently in the process of negotiating the APA with the seller and he has mentioned several times prior that we’ll need to discuss his compensation during the 3-month transition period and for any ongoing work after that. Was wondering what the industry standard is for compensating the owner on top of the purchase price, I would think that handing over the business and a getting the new owners up to speed in our negotiated transition period would be part of handing the business over. About a 25% of the purchase price is in a non contingent seller note.

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Reply by a professional
from University of Texas at Austin in Austin, TX, USA

Complimentary 30-day transition support, with working hours to be approximately the same as when they were operating the business. I.e. if they were really working 20 hours a week, that's the approximate schedule that would be expected in the transition period. For any support past this period, we see a range of compensation structures - that are roughly A) an hourly rate, for consulting type of hours, usually virtually or by phone or B) If the seller will have a significant role in the business, then pay would be a market rate for those roles and responsibilities.

If you are seeking SBA financing:

The SBA 7(a) program prohibits the Seller from staying on as an officer, director, stockholder or key employee of the business after the Closing (though allows the Seller to be paid as a consultant for up to 12 months after closing for management transition purposes only).

Reply by a professional
from University of Dayton in Columbus, OH, USA

I've seen in past deals with owners who want to stay "involved" for various reasons whether that is to "protect" their sellers note or stay on the health insurance. Packages guarantee a number of hours a week during the transition period at a hourly rate. Any time over is at the agreed hourly rate and the hours diminish month on month until end of transition period (20 hours a week to 10 hours a week, etc). After the initial transition it's structed as a consulting agreement with a minimum number of hours per engagement at agreed rate.

Largely you are paying to keep your top supplier and customer relationships warm until new ownership can establish their own.

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