You’re the Boss Blog: Selling a Business? It’s the Details That Count

Creating Value

Are you getting the most out of your business?

When we last left Holly Hunter, she had sold her business. She had received her down payment but the following payments had stopped after about a year. And it was obvious she had made some mistakes.

While Ms. Hunter’s mistakes are easy to spot in retrospect, it’s also easy to understand how sellers fall into these traps. She was ready to move on. She thought she had a good deal. She was paid about a third of her selling price of $1.4 million in cash and the rest was held as a seller’s note. And for about a year, things went well, at least on the surface.

But there were problems brewing, starting with the new owner’s decision to change the nature of the business. This is hardly an unusual thing. I generally advise selling business owners that they should expect to be disappointed by what the buyer does with the business, and that certainly proved to be the case for Ms. Hunter.

Some of the problems were related to an important hire Ms. Hunter had made before selling. The hire, a certified financial planner, was in tune with Ms. Hunter’s method of operation and investment advice. As time went on, however, this person became more and more disenchanted with the type of service and products being offered by the new owner. The employee felt she was being pushed to sell products that weren’t appropriate for her clients, and she didn’t think the new owner was interested in her concerns.

Eventually, the employee left the firm — and took along most of its staff and clients. This could not have happened had Ms. Hunter retained ownership. She had made sure that her employee signed a covenant promising not to compete, and the agreement made sure that the employee understood that Ms. Hunter’s clients and staff belonged to Ms. Hunter and the firm. There was clear legal language in place stating that both were off limits if the employee were to leave.

When the firm was sold, however, the transfer of the non-compete agreement to the new owner slipped through the cracks. As discussed in previous posts, Ms. Hunter had hired a business broker who did not represent her interests exclusively. We also know that her lawyer was not an expert in mergers and acquisitions. That, combined with Ms. Hunter’s inexperience in business sales, made it easy for this issue to be missed.

From the outside, it looks as if the new owner was not keeping his eye on the ball. It’s pretty hard to lose most of your clients and employees and not know that trouble is afoot. As a result, both he and Ms. Hunter became big losers. With both employees and clients gone, there was no cash left to pay the note that was owed Ms. Hunter. The buyer declared bankruptcy, and there were no assets left for Ms. Hunter to attach. She did try to sue her ex-employee but was informed that the covenant was not transferred and as a result there was no legal remedy.

When you sell a business, it’s often the seemingly small details that become crucial, especially if the seller doesn’t get paid in full and chooses to accept a note or an earnout, which is the promise of future compensation tied to the performance of the business (I’m not a big fan of earnouts!). Ms. Hunter learned these lessons the hard way, losing more than 50 percent of the purchase price through non-payment of her note. She found there was no remedy, only additional legal bills that she would have to pay.

Unfortunately, Ms. Hunter’s story is not unusual. When owners sell their businesses, they routinely enter transactions in which they essentially agree to serve as a bank for the buyer. The new owners get to run the business as they wish, and they rarely are interested in hearing advice from the selling owner. Several months down the road, if things start falling apart, the problems surface when the new owner “forgets” to pay the old owner. Suddenly, it becomes clear that years and years of work are not going to pay off the way the selling owner expected.

Do any of these lessons resonate with you? Have you done anything in your business to make sure that, when it’s time to leave, you manage to protect the value you have spent years building?

Josh Patrick is a founder and principal at Stage 2 Planning Partners, where he works with private business owners on creating personal and business value.

Article source: http://boss.blogs.nytimes.com/2013/01/10/selling-a-business-its-the-details-that-count/?partner=rss&emc=rss