Do You Need to Train The Buyer After You Sell Your Business?

You just sold your business… congratulations! Now you can move on to the next chapter of your life, right?

Well, not so fast. Chances are, you’ll be spending a bit more time in your business as a consultant or employee to help the buyer get started. 

You may be excited about the prospect of training the buyer and setting your business up for future success. Or, you may be anxious to move on after many years of hard work. 

No matter which camp you’re in, I urge you to read further. Employment and consulting agreements have financial, legal, and emotional implications that need to be considered. The more you educate yourself now, the better prepared you’ll be when dealing with actual offers.

At MidStreet, we’ve helped negotiate hundreds of consulting and employment agreements. We created this article to walk you through best practices and answer some common questions.  

What is the Training and Consultation Period?

So, what exactly is the training period? And what would your responsibilities be? There are two key goals involved in the training and consultation periods:

1. Help the new owner absorb the operational aspects of your business including systems, operations, and other key components
2. Transition key relationships with customers, vendors, and employees

In most transactions, the training period begins immediately following closing. It may be as short as a month or two, or extend to a year or longer. It all depends on the perceived needs of the buyer, your preference as the seller, and negotiations during the deal process. 

If you have strong feelings about the length or type of training, make sure you work with your business broker or M&A advisor early in the process to let them know what you would prefer.  

Details will be outlined in your purchase agreement and can usually be broken down into two parts: 

1. Training & Consultation
2. Independent Contractor Agreement

1. Training & Consultation

Training and Consultation are two distinct obligations and are generally included in the purchase price of your business. “Training” is considered on-the-job training. For example, you’ll be expected to be on-site, visiting with customers and suppliers, or attending trade shows. 

“Consultation”, on the other hand, extends beyond the initial training period and gives the buyer access to you through phone, email, and text. 

At MidStreet, we believe it’s best to negotiate a block of hours for the training period. For example, “One hundred fifty hours to be used within three months of the date of closing.”

We’ve seen sellers agree to provide several weeks of training at 40 hours per week. They then spend the first couple weeks training, and the remainder sitting around watching the clock with nothing to do in an attempt to fulfill their obligation. Not fun. 

By scheduling a block of hours, both buyers and sellers can make the best use of the training period. Scheduling specific times helps to ensure the seller isn’t being forced to waste time and the buyer is able to maximize the available training.

We often see sellers train full-time for the first week or two, then begin to cut back on hours as the buyer gets more comfortable. Often, first-time buyers negotiate more training time than they end up needing. 

Before the sale, they feel it’s critical for the seller to stick around and help run the business for an extended period. But quickly, the buyer gains confidence running the business and the seller is no longer needed in the transition. 

The more familiar the buyer is with your industry, the less dependent he or she will be on you. While it’s common to see the entire block of hours not get used, it’s a good idea to keep a log and have the buyer sign off on the training when it's complete to prevent future disputes. You know what they say - an ounce of prevention... 

The consultation period extends beyond the training period. During this phase you will make yourself available for telephone, email, or text consulting. We usually see the consultation period begin at closing and extend out six months to one year. 

Another common practice is to negotiate an hourly consulting rate in the event the buyer needs additional support beyond the initial training period. We’ve seen rates anywhere from $50 to $250 per hour depending on the amount and type of support needed.

To help tie this section together, here is a sample of wording contained in the Letter of Intent:  

Training. Included as consideration for the sale of the Business, Seller shall cause Mr. John Doe to provide one hundred fifty (150) hours of on-site training to Buyer. Said training is to begin on the date of closing and shall be completed on or before three (3) months from the date of Closing. In addition to on-site training, Seller shall provide phone, email, and text consultation to Buyer beginning immediately upon Closing and continuing for twelve months after the date of Closing. For all additional services rendered by Mr. Doe, Company shall pay Eighty-five Dollars ($85.00) per hour.

Your attorney will take the language agreed to in the LOI and work with the buyer's attorney to create more formal language to incorporate into your purchase agreement.

2. Independent Contractor Agreement

In the event the buyer desires more comprehensive support and wants to retain your services for an extended period, an Independent Contractor Agreement may be the best solution.

Like the Training and Consultation period, an Independent Contractor Agreement is negotiated early in the process and includes provisions for items such as the services to be performed, pay rate, and insurance requirements. 

We sometimes have sellers ask to be retained as an employee so they can retain healthcare benefits. However, this may not be possible. If you’re selling to a buyer obtaining a loan through the SBA 7(a) loan program (the most common source for small business acquisition funding), you must be considered an independent contractor (not an employee) and can’t stay on longer than one year. If this is something important to you, contact your broker for more details.

Although this doesn’t seem to make a lot of sense, it’s one of the rules we have to live by. Here is the actual wording from the SBA’s Standard Operating Procedures: 

SBA SOP 50 10 6: Except as provided below, the seller may not remain as an officer, director, stockholder, or Key Employee of the business. (13 CFR § 120.130) If a short transitional period is needed to assist the business, the small business may contract with the seller as a consultant for a period not to exceed 12 months including any extensions.

Our final advice on this section: Make sure all items surrounding the training period are clearly defined in the letter of intent. Training is a critical part of negotiations and it doesn’t make sense to move forward if your expectations don’t align with the buyer.

Why You May Want To Stay to Train the Buyer

The training period can be vital to the future success of the business. It may also be vital to your take-home proceeds. Chances are you’ll have a vested interest in the new entity, and it will be in your best interest to help the new owner succeed.

For example:

• There may be an escrow account due to you
• You may have a note due to you
• You may be the landlord, and the buyer the tenant
• Your personal reputation will continue to be associated with the business
• Your former employees will depend on you to have made the right decision in selling to the particular buyer, thus preserving their jobs
• Lenders and investors will want to see you stay for a period of time - in fact, it’s often required 

A training period can be looked at as a great way to help you get closure and peace of mind knowing you did everything you could to leave your business and employees in good hands. It has the added benefit of helping to ensure you ended up with the best possible price and terms. 

Do You Have to Stay?

Do you have to agree to stay and train the buyer? Of course not. You don’t HAVE to do anything. BUT... (and there’s always a but, right?), it's important to keep in mind, if you’re unwilling to be flexible on training or other deal terms, you’ll be severely limiting the type and amount of buyers willing to make an offer on your business. 

And limiting the type and amount of buyers will most certainly impact the price and terms you’re going to receive.  

It’s normal for a new owner to want some hand-holding during the transition period. Even if the buyer isn’t insistent upon you providing training, their lenders and investors may require it. 

For a buyer, their lenders, and investors, it’s all about managing risk. With a lack of training or transition, their risk goes up. Therefore, the price they’re willing to pay goes down. It’s that simple.

If you’re hoping to sell the company and leave quickly, your focus should be on the development of a strong management team. The more customers think they’re interacting with “the company” versus you as the “owner”, the easier your transition will be. 

Introduce key employees or managers to your major customers and vendors and look for ways to delegate responsibility. If you’ve gone to the trouble of establishing a good management team, less time will be required for transition. 

A secondary benefit? A well-developed team will add value to the sale. Buyer’s will take comfort in knowing key relationships and business knowledge aren’t walking out the door when you leave. 

What if You Want to Keep Working in The Business?

Some owners want to get away from overwhelming administrative and management duties, but still enjoy certain aspects of the business. They’d like to sell their business but aren’t quite ready to quit working altogether. 

Other owners see a clear growth path for the business, but may feel undercapitalized or unwilling to take on the additional risk required. 

If either of these situations sounds like you, a potential option is the sale to a strategic investor or private equity buyer. 

Instead of wanting you to move on within a year or less, private equity firms and some strategic buyers have a strong interest in keeping you on to help run and grow the business. We’ve seen these situations be very rewarding to both the seller and the acquirer. 

There are even situations where you may be able to retain a percentage of ownership and participate in a second sale of the business at some point in the future. Since the goal of private equity and strategic investors is to grow, the second sale can end up being more financially rewarding for you than the first. 

Instead of consulting agreements, long-term employment contracts can be negotiated as part of your purchase agreement. This would allow you to stay onboard for a few more years while still drawing an income and benefits.

To learn more about different types of buyers, read our blog “The 5 Types of Buyers for Your Business.”

How Training & Consulting Can Affect Taxation

When a buyer acquires your business, it’s important to remember they’re buying more than your inventory and equipment. The sale will also include intangible items such as a non-compete agreement, goodwill, and training.

Working alongside your CPA, an experienced business broker or M&A Advisor has the experience to help you prevent costly mistakes. In general, the IRS sets up a natural conflict between buyer and seller. Payments that get favorable tax treatment for a seller will usually create a negative tax effect for the buyer. 

For example, a skilled buyer may offer you a substantial consulting or employment agreement. At first glance, you may be tempted to take their offer. However, this arrangement is in the best interest of the buyer. 

Why? At further glance, it’s obvious the consulting/employment agreement was intended to be part of the deal price. Any amount allocated to a consulting or employment agreement is taxed at the ordinary income rate and not the more favorable capital gains rate. Even worse, self-employment tax is added on top. 

In short, ordinary income is bad for a seller. While you can’t get completely away from paying the higher ordinary income tax rate, you will want to avoid it as much as possible. To learn more about tax implications and the allocation of the sale price, read “What is Purchase Price Allocation in a Business Sale?”

Determine What Works Best For You

In most cases, you won’t be able to walk away the day after you close on the sale of your business. And in most cases, you probably won’t want to. 

You should adjust your expectation for the length of the training period based on the type of buyer you expect to buy your business. Certain buyers will need longer training periods to be more successful since they won’t know the ins and outs of the business. 

Be open with your business broker or M&A advisor about your preferences. If you’re not quite ready to leave immediately, let them know. Depending on the size of your business and the industry you’re in, you may be able to market your company with a specific buyer in mind and maintain a role with the company.

The next step is for you to figure out what kind of buyer is most likely to purchase your business. Learn more about the different buyers and what types of businesses they purchase by reading our blog “The 5 Types of Buyers for Your Business.” 

If you want to sell your business and want to speak to someone about what type of training period to expect, give us a call or fill out our contact us form. We're here to help in any way we can.