Structuring an off-market deal where owner remains as Operator
November 06, 2024
by a professional from Providence College in Providence, RI, USA
I have a unique opportunity but I'm unclear how to approach it.
Owner runs a tailoring business doing about $550K in sales and $190K SDE with 7 employees.
It's a small operation, but it intrigues me for two reasons:
(1) roll-up potential being such a fractured space;
(2) most importantly, he wants to stay on as the Operator.
He wants to sell while still having a "job". He needs something to do but at 50-something, he doesn't want to work for someone else or start a new business. Reason for selling is primarily because he is going to have a major surgery that will take him off his feet for###-###-#### months and he doesn't have someone to replace him. I was clear I would not be in the day-to-day, but open to jumping in when needed for that period. I think we can also hire someone for a manager role, even temporarily.
I think the best structure is to have him be operator with a salary while retaining some ownership. However, what price, what salary, what ownership stake... I don't know. Need to balance the risk in case he doesn't continue operating things. I'm open to exploring this all within a seller note or some other creative structure that balances such risk.
Thoughts?... How does this work as a nice simple investment that protects me given the risk a roll-up may not work, while also giving him enough value and a potential second payday when he officially retires?
from University of Michigan in Detroit, MI, USA
One option would be to let the seller retain a sizable minority position. Coupled with a structured buy-out, this would align incentives going forward. However, if the seller retains 20% or more, he may have to personally guarantee the loan, which, for obvious reasons, he may not want to do. Additionally, the more equity the seller retains, the more say the seller may want in how the business is run in the future.
Another option would be to let the seller retain a small minority position (if relying on SBA funding) or make it a 100% buyout (if not), and getting the seller to put up a sizable seller note. Again, this will align incentives. It would also put you firmly in the managerial seat.
But perhaps this is over thinking it. The seller has stated himself, he doesn't want to work for someone else. So long as you offer him a strong compensation package, perhaps that is all you need to do.
Parting shot: Is this the right business? It sounds like it is heavily dependent on the seller. It also sounds like he isn't in great health. How screwed are you if the seller has to stop working due to health reasons? How quickly can you put a succession plan in place? Just food for thought.
Hope that all helps. My law firm, Groundswell Advisors, LLP, is focused on helping searchers close deals. If I can be of any more help, feel free to reach out at redacted
from Bentley College in Miami, FL, USA
Seller Note with Retained Equity: Since the owner wants to maintain a role without giving up ownership, a seller note combined with retained equity could be a strong fit. He could stay on with a percentage ownership that’s gradually reduced over time, offering him stability now and a phased transition out.
Performance-Based Earn-Out: Another way to balance the risk of him stepping back unexpectedly is to structure a portion of his payout as an earn-out. This allows you to tie part of the deal value to performance metrics, giving both of you incentives aligned with growth.
Salary Agreement: Given his operational role, setting a competitive but reasonable salary can provide him with financial stability, especially during his recovery, while keeping overhead manageable. It can also reduce risk if a manager is eventually needed to step in.
Buyout Option: You could structure an option to buy out his remaining equity at a future point when he’s ready to fully retire, potentially at a pre-agreed multiple, giving him a second payday while letting you maintain control.
Having an advisor familiar with creative deal structures can be very helpful. DueDilio connects buyers with professionals experienced in tailoring financing and ownership structures to balance risk and reward. This might be a good resource if you're looking to explore further options or want assistance in crafting a structure that meets both of your goals.
Note: This response was generated using a combination of custom AI and my own internal data, research and experience in the industry to ensure it’s both comprehensive and accurate.