When is it time for an entrepreneur to retire after selling a business?

A new M&A expert study reveals that three-quarters of entrepreneurs want to keep running their business after it's sold. These numbers show that the people running the business are becoming more attached to it, and that the sale of the business does not have to mean the end of the founder's involvement.

At the same time, the study raises the issue that founders are too late and could hinder the future of the business by making it difficult for new owners to do their job. Hence the question — when is it better to stay put, and when is it better to leave?

Motivations

As part of an international study, 200 founders of mid-market private companies were asked about the motives for running a business and selling it. The researchers found a clear division between the youngest and oldest entrepreneurs. At the same time, the younger group is much more likely to want to continue working in their business after it is sold. Among 45-54-year-old entrepreneurs, only 30% see themselves continuing to work after the sale of the business. Among this group, many founders presumably want to retire.

When asked why they are so worried about leaving their business in the hands of buyers, about 41% of entrepreneurs said they fear that buyers will not properly take care of their business. 23% said they fear their business will not be able to grow under new management. And 16% answered that the main reason for their concern is the staff. These numbers are very worrying. Why are business owners, especially young ones, so convinced that only they can make their business successful?

In fact, it seems that the main motive for wanting to stay after a deal is a sense of attachment to the business. Entrepreneurs put all their energy into building their company, and handing it over to a buyer can be heartbreaking. The study found that the feeling of "the deal is not right" is the main cause of failures in agreements. It accounts for more deal rejections than due to inappropriate structure, timing, or pricing.

Earning considerations

One of the main reasons a seller might want to stay after a business is sold is to ensure that the criteria for any deal to make a profit are met. Some buyers may offer sellers more money for their business if it hits certain milestones after the sale. Often sellers want to play their part in achieving these metrics.

Earn-out deals are usually offered when there is a mismatch between what the seller is hoping to get for their business at the time of the sale and what the buyer is willing to pay. They almost always assume that the seller will stay with the business for a significant period of time in order to help the company meet its set goals, which will allow you to get the rest of the value of the transaction.

When to exit the business after a deal?

Of course, in many situations this is possible. In fact, the transition period, when the former owner is still free, is often very important for a successful transaction. There are several types of work that a seller must do to help the buyer take over the reins of the business. Examples include:

• Guiding the customer through the day-to-day operations of the business
• Guiding the buyer through practical procedures (how the office/warehouse/factory, etc. physically works)
• Guiding the buyer through the processes, procedures and crises that may arise
• Establishing contacts between the buyer and key suppliers or customers
• Providing buyer information about personnel
• The seller remains in contact with key contracts or customers for a certain period

While it is preferable to retain the seller for this transition/training period, it should end after the agreed time period. At the stage of negotiations on the deal, this point should be taken into account. But you should also leave room for a buffer period in case there are more complex issues than expected, or, for example, if there are special requests from key clients.

Agreeing to stay with the company until the deal closes, resolving non-financial, operational and HR issues can help the seller negotiate a better upfront cash deal. It will also help you avoid the anxiety associated with waiting for a deferred payment.

The key to making this period a success is to clearly understand that the seller does not have the right to make important decisions after the sale. He or she may find that they continue to be involved in the process, indicating that they have not fully transferred control to the buyer, and this may adversely affect the future of the business. After all, the buyer now has to manage the business, for better or worse. The seller must agree to this if he accepts the buyer's cash.

Recapitalization

For entrepreneurs who really don't want to part with the company, there is an alternative. Recapitalization — is a term used to describe the process where the seller transfers part of the company to a private equity buyer who receives a stake in the business while the founder remains in charge. This can be a particularly good option if a business owner is looking for a cash injection during a period of great growth prospects for their business.

For those of you who are founders of a company, when considering an exit strategy, keep in mind that selling a business involves a period of mourning and adjustment. Prepare for the emotional impact of delivering what you have put your heart and soul into over the years.

For buyers, in some cases it makes sense to involve the founder at an early stage after the purchase or takeover of the company. However, you need to clearly define the conditions for such participation and the period during which they will be available to you. Remember — you will become the owner from the date of the transaction, and the future of the company depends on you.