Seller compensation after close

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July 25, 2024

by a searcher from Miami University of Ohio in Cleveland, OH, USA

I am nearing a signed LOI and one of the concerns is what the sellers will be paid during the transition period. How have other people handled this?

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commentor profile
Reply by a searcher
from University of Maryland at College Park in Havre De Grace, MD 21078, USA
Echoing thoughts from above with a slightly different perspective and suggestion. Separate in your mind (and the agreement for negotiation purposes) the seller's responsibilities as 1) the training period & 2) the transition support period after that training period. During the training period, the seller will spend much more time and effort in active participation. The secondary transition period comes when a seller is out of the business and is mostly interested your success because of their motivation to be paid or see their legacy succeed. The motivations for the two periods are very different. During training, the deal (even if closed) can unwind due to covenants in the agreement causing irreparable harm to you and the seller and of course the business. During the support period, the seller is concerned about any further compensation due (holdback, seller note, earn outs, standbys, etc...) and is more likely to help when they know their success if also yours. With that said if you have any hiccups that you are going to offset the note by without the understanding of the seller - be sure to work closely before they stop answering the phone/email while they are on the beach or on the boat.
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Reply by an intermediary
from Washington University in St. Louis in Chicago, IL, USA
I always start wi the what we think is needed to properly train and transition the business - usually as an estimate of percent of time, e.g 100% for the first three months, 50% for months 4-9, and 25% for months###-###-#### that is just an illustrative example).


Then based on the preferences of the parties decide if it will be an hourly or fixed fee arrangement. Fixed fee gives visibility into amounts for each party, but could result in either the buyer paying more than necessary or the seller spending more hours than assumed because there is no disincentive to do so. An hourly arrangement encourages the buyer to be judicious in how many hours they ask of the seller, but it may lead to using them too little.

finally, we agree on the rate We often start with sellers current salary as a starting point (converted to hourly or percent), and then do a gut check on the amount. Again, you want it high enough that the buyer doesn’t see it as cheap labor and over use, but not so high that they won’t use the time the need for a successful transition.

Hope that is helpful - good luck!
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