Seller involvement post closing.
How long can the seller stay?
By Steve Mariani
I’ve touched on this topic in the past but continue to see it pop up when including SBA financing in many of our transactions. You might also be aware of the SOP (Standard Operating Procedures) rule stating “The seller may not remain as an officer, director, stockholder or key employee of the business. If a short transitional period is needed, the small business may contract with the seller as a consultant for a period not to exceed 12 months including any extensions.” This seems straight forward but many times brings much bigger concerns depending on your buyer’s qualifications and the seller’s true intensions.
Here’s an example of what I’m referring to. In my area many businesses have outgrown their owners, or certainly their desire to handle the administrative burdens that their growing business has created. We see it all the time and the potential buyer recognizes this fact and instantly views this as an advantage or opportunity. Often the seller does not want to retire, but the passion he once had when starting and growing the business is gone because he doesn’t have the time to do what he loves and does best, creating great products or services and then selling them. He “just wants to go back to sales” is what I hear time and time again from potential buyers. Yet once the rule is explained to them, they cannot follow the logic included in the rule book because it doesn’t make business sense.
Although logic may not be the basis for much of the SBA rulebook, this is one I have researched in detail and today will share the reasoning behind it. It all boils down to keeping each transaction as “Arm’s length” to avoid an internal money infusion provided by SBA under the “acquisition guidelines”. They don’t want 2 partners using this product without an ownership change. The actual change of ownership rules states it must result in a 100% change of ownership. This is where it brings into question the separation of the buyer and seller. In theory (or their line of thinking) is that the owner could now sell to an employee or outside person but still remain in control of this business by creating a side agreement or partnership agreement that would allow the seller to continue operations utilizing the influx of capital. The SBA does provide other avenues for capital in this scenario but a change of ownership sometimes is less restrictive and could be much easier to secure. Expansion and growth capital many times is much more difficult and of a lesser amount and thus, is less attractive. A true change of ownership loan could be up to the full business value amount and typically is.
When a top level executive buyer is considering purchasing a larger size business, many times he will not become the salesperson or business developer moving forward, a position the current owner/seller may have been doing himself for years and truly enjoys. Now the concern becomes either replacing the salesman that has producing the majority of the business for the last few years or finding a way to keep him on for a period of time for a reasonable compensation. In these cases what we typically see is the frustration by the seller as he handles the sales, the office and all the admin duties that come with it. He never truly expected the company to grow to this point or maybe never understood what a company of this size takes to operate and again, just wants to enjoy his position as a sales person. The question becomes, is there any way possible to make this happen? To be honest, my standard answer is NO. I continue on to explain each of these rules and how an SBA lender will view the transaction during the underwriting process and if need be, secure the seller for the first 12 months as allowed by rule under a consulting agreement. After that, you’re on your own. What I can tell you is that in our 22 years of SBA acquisition financing we have never witnessed a lender discipline a buyer for continuing the relationship with the seller. We are not condoning this in any way, but we know it happens. I can also tell you that I don’t believe the SBA has post-closing police, but again, don’t quote me on this. What I can tell you from a meeting with an SBA higher up, this rule will not change.
In the end should or could a buyer employee the seller for longer than 12 months? Although I don’t think he should, he could and would only be breaking the rules of SBA and not any legal laws that I know of.
Again, we describe this because we are confronted with this situation frequently and our response is always the same. Here are the rules and we suggest you understand and follow them. The buyer’s response and actions may then be somewhat different, but at least everyone knows the rules.
In the end I must always believe everyone’s goal remain the same, success for our buyer.
Diamond Financial, building broker success since 1996.