Seller Spouse Works in Business
July 19, 2024
by a searcher from United States Air Force Academy in Austin, TX, USA
I'm looking at a business where the seller is CEO and the spouse is COO. There are project managers underneath them, but they are the only management. The business seems great except for this fact. The seller wants to exit but the spouse is willing to stay on for a period of time. Has anybody transacted a business like this? Are there any good ideas for ways to structure to reduce the risk?
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
As for having the one spouse stay on, if you are using conventional financing that is not a problem. If you are using SBA financing, you can only do that if the spouse has no ownership interest. If she has any ownership interest at all, you cannot guarantee her more than a 1 year employment contract when an SBA 7A loan is involved with a past owner.
If you do plan to keep the spouse on, I would highly encourage you to have a backup plan in place to replace that person if the need arises. I have seen acquirers in the past that have done this but then run into a problem at a later date. The first issue is that this employee sees their spouse not working and wants to take time away as well or quits unexpectedly. The second issue is that you might have issues if you are making changes to the business with how involved the spouse is and they can have undue influence on employees still being connected to the previous owner. So if you do plan to keep them on, be sure you know the risks, you have controls in place, and you are ready to replace them if something changes or does not work out going forward. I have also had clients have plenty of cases where it has worked quite well and the spouse has been a meaningful contributor. But if you plan for the worse, you will not be caught off guard.
If you have any additional questions or ever need help with financing, you can reach me here or directly at redacted Good luck with the opportunity.
from University of Michigan in Detroit, MI, USA
Assuming that's not a problem, this situation isn't all that unusual, and is basically just key employee risk. Although this situation is slightly better than standard key employee risk because the seller and the spouse are tied together.
As such, one way to mitigate it is to secure a seller note (ask for at least 10%-15% of the purchase price). That way, the seller (and the spouse) have a vested interest in seeing you succeed post-closing, including giving you enough time and support to find a suitable replacement.
In the short term, having the spouse stay on is probably a good thing for continuity and you should feel free to ask her to commit to some minimum term. Tie this promise to the note, by making a portion of the note forgivable if she quits early.
Hope that helps. Happy to discuss further. Feel free to DM me here, or reach out directly at redacted