Transition Services Agreement in SBA Funded Deals

by a searcher from Northwestern University

1 year ago

Question for you successful searchers out there that funded their deal(s) with the SBA 7a program:

How did you structure the transition period? Assuming the sellers were employees and officers of the target, did they resign at closing and became 1099 contractors? Did they receive 'regular' pay, or did you compensate them per hour worked? How did you deal with insurance and benefits for the transition period? 

Any examples and data points are much appreciated! DMs are open too

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6 comments

lender from Eastern Illinois University

If using an SBA loan and doing a full acquisition under the current rules the maximum agreement you can give the seller as part of the purchase contract is a one-year employment agreement. Whatever you agree to pay them for that first year does not count against debt service when underwriting the loan because it is seen as a one-time expense. The rule in the SBA Standard Operating Procedure just states you cannot contract with the seller for more than 12 months, but it does not state you cannot continue to employ them after the 12 months. Once you own the business you are in control and if the seller's continued involvement provides value and helps you to be successful beyond one year, then it makes sense for you to continue to either employ them or contract with them.

1 year ago | like reply | 2 likes

searcher from The University of Michigan - Stephen M. Ross School of Business

Nicholas, I bought my company from 2 owners. One was in a rush to leave for personal reasons so he only stayed on for a month to help transition. I did not pay him anything although I did cover his health insurance for that month. The 2nd owner stayed on as an employee for a year, which is allowed by the SBA. We negotiated a salary that we both agreed was similar to what it would cost me to replace him after that year. I continued to pay his health benefits and 401k just as I would a normal employee.

It's company/industry dependent and you many not need the owner to stay on that long but I was glad he did. There's also some risk that your personalities will clash or that the previous owner won't like having a boss. I was fortunate that this individual is an amazing person and we're still close today. During the DD process we really hit it off so by the time we closed I felt that risk was minimal but it's definitely a risk.

Also remember, you can always ask them to leave early but it will be difficult to convince them to stay after the agreed upon transition period.

1 year ago | like reply | 1 like

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