After the Exit: What To Do After Selling Your Business
In this guide, we’ll cover everything you need to know concerning what to do after selling your business. From weighing out whether or not you should stick around with the new buyer after the sale, the different ways — along with their pros and cons — of sticking around, and how an equity roll over works. We’ll even detail popular methods you can use to cope with your new life after selling your business — and a best practice for managing that new wealth.
You’re probably thinking about selling your business, about to, or at the very least, getting close to inking a deal. Great — you’ve made it this far, and the road surely hasn’t been easy. At some point during the journey of a business transaction, every seller wonders: what am I going to do after selling my business?
Throughout the negotiation process, you’re likely to have the opportunity to stay around and help the new owner. But is this even something worth doing? What makes it worth doing? If you opt to stick around, in what capacity should you help the new owner — and what constitutes fair compensation?
If any of these questions have crossed your mind, don’t stress. These are all normal questions that virtually all sellers ask themselves. The following pages will provide you with key considerations and knowledge you can leverage to make better informed decisions for life after the exit.
1. Should I stick around after selling my business?
When you first decide that it’s time to sell your business, you need to evaluate your own personal reasons as to why you want to sell. A major part of knowing that it’s the right time to sell is understanding your own motivations in selling the business to start with.
Importantly, the reasons why you want to sell can impact whether or not sticking around after your sale is a good idea. If your motivation to sell is primarily a financial one, then sure — sticking around could be a good idea. But if you sold because of burnout and felt a lack of motivation over the past couple of years, sticking around might not be the best idea.
When it comes to working for the new owner after selling your company, there’s one primary advantage: increasing the business transaction price. As the individual who started, grew, and operated your business for years, no one understands the business better. Continuing to assist in growing the business is your primary opportunity to convert that knowledge into cash.
For a buyer, an effective transition period could be the difference between success and failure in taking over your business. Though this is always industry specific, your buyer is very likely to negotiate for a transition period where you stick around.
Operating a business is complicated. Your experience could be incredibly valuable to the buyer. You understand the relationships with vendors, existing customers, other key individuals, and all associated contracts. If you agree to continue working after the sale, even with a limited timeline to show the new owner the ropes, you can use this as leverage to negotiate for a higher priced deal.
In this sense, the typical motivation for individuals to stick around their business after a sale is financial. There are other benefits as well, however. Sticking around can keep you both occupied and productive.
If you’re not a life-long entrepreneur with loads of business ideas to pursue, the transition after your sale can be difficult. You’ve developed habits and routines revolving around your business for years — filling that void is often times more difficult than initially imagined. Helping the new owner learn your former business and ensuring its new hands find success early on could provide a sense of fulfillment.
Maybe you’re not looking for that, however. If you wanted to sell because you felt burnt out and lacked the motivation to continue operating the business, sticking around isn’t a good idea. Just make sure you’re aware of this prior to agreeing to a specific deal structure.
In order to prepare yourself for whatever is next — whether that includes your former business or not — consider the following points:
- Take time off to rest. You’ll need some time off to decompress. Even if you opt to assist the new owner in a transition period, take at least a few weeks off in the meantime. You’ll need this personally and if you have a family, they’re likely to need some time with you as well.
- Try new things. You’re used to running your business your way and not having a lot of spare time. Most business owners find significant meaning in what they do — or, have done up until their business was sold. You’ll need to find that meaning, fulfillment, and purpose in other ways now. By trying new things, you might discover unforeseen ways to satisfy these needs that you never even thought of. This could be as simple as traveling periodically, incorporating exercise into your daily routine, becoming charitably active, or coaching businesses and becoming an angel investor.
- Be patient. 66% of entrepreneurs require two years or more to find a lifestyle they’re happy with.
If you’re like most entrepreneurs, you could have other business ideas lined up as well. Make sure you take the time to decompress before fully pursuing those.
In the end, whatever you decide to do after selling your business will significantly depend on the type and duration of commitment you dedicate to your former company and its new owner. The next section shows what that commitment could look like.
2. Post-sale roles after selling a business explained
If you do decide to stick around, there’s one important factor you need to consider. Your business, which could perhaps be deemed your ‘baby’, will now be in the hands of someone else. They will call the shots, not you. For some, this is a very difficult adjustment. If you fall under that category, sticking around might not be very appealing. Still, keep this in mind: since the owner changed, it only makes sense that the business will change as well. This is just what happens.
In addition to a different company culture and responsibilities, it’s very likely that your specific roles will change drastically, compared to what you’re used to. Instead of an active executive role, you can typically expect to play more of a consulting role. This isn’t always the case, however.
The depth of these changes will ultimately depend on the details of your after-sale involvement. The two most common forms of involvement include employment contracts and consulting contracts.
What is an employment contract?
If you agree to an employment contract, you will effectively become an employee under the buyer. As you can imagine, this is frequently a difficult adjustment for most sellers to make. You won’t have the free reign that you’re accustomed to and you may have to take orders from someone else — orders that you may or may not see eye to eye with.
That’s why an employment contract is generally perceived as a good short-term solution but a difficult commitment to make in the long-term. In a few months, you can pass on valuable knowledge while dealing with a temporary— albeit less than favorable — situation.
The obvious benefit to an employment contract is your compensation. Though you’ll receive a salary specific to the contract, just agreeing to a contract might enable you to leverage a higher priced deal. But there are additional benefits as well. An employment contract for example, is one of the only ways for you to continue receiving certain benefits including a company car, health insurance, or even an expense account.
Due to the nature of employment contracts, these are most commonly used in family businesses. Older generations tend to pass on the family business to younger generations, with an employment contract serving as a succession plan. In these situations, a younger, inexperienced ‘buyer’ usually has no ego trouble when heeding advice from an experienced, older family member.
When it comes to taxes for an employment contract, both salary and payments to you will typically be categorized as business expenses — and therefore deductible — for the buyer. In terms of the taxes you will have to face, expect to pay ordinary income tax from anything you receive as part of the contract.
Are you opting for an employment contract? Be sure that it is entirely independent from your business purchase agreement. This way, if the relationship with your buyer crumbles over the course of the contract, your deal will still be intact.
What is a consulting contract?
Under a consulting contract, you will serve as a consultant to the new owner. The details of this role — including the specified number of hours of consultancy per month and associated fees — will vary from contract to contract. In essence, you will be on call so to speak, but under most contracts, you’ll get paid regardless of the amount of services required.
Consulting agreements are most commonly used when a buyer has no familial relation to the seller. Instead of working under and taking orders from the buyer, you’ll be primarily needed to answer questions and provide input.
While this option may seem like the obvious advantage, there’s one drawback that you need to be aware of. A consulting contract will require you to be available for, potentially, the maximum number of hours you’ve agreed upon. This will cut back on other projects or aspirations that you wish to pursue. One potential solution is to create a consulting company where, as part of the agreement, the company provides consulting services. This way, other individuals can fill in for you in the event that you are unavailable.
With regard to taxes, payment received by you will most likely be taxed as ordinary income. Barring any crazy circumstances, these expenses will also be deductible for the buyer.
Buyer beware: Since your consulting agreement will be deductible for the buyer, there is serious potential for abuse. Make sure your compensation is within fair market value for your expertise, as the IRS is familiar with these types of transactions and their potential for fraudulent use.
3. Should you roll over equity into the buyer?
If a Private Equity (PE) firm buys your company, you probably have questions concerning the roll over investment that buyers will expect you to make. Your post-sale ownership percentage might also be a little confusing.
Whenever a PE firm buys a company, a two-part sale — often referred to as ‘two bites of the apple’ with private equity — is always a possibility. Here’s how that could work.
First, a PE firm will buy a controlling portion of your company. You’ll get to retain part of your company, usually 10% – 40%. But you’ll also get some cash right from the start.
Now, most PE firms will invest in companies as part of a larger strategy to grow a competitive position in a specific domain. This is sometimes referred to as a ‘buy and build strategy’. In this situation, after buying your company, the PE firm will buy other, similar companies to create one large company with a competitive advantage given the industry’s existing market.
With a plan that typically lasts 5-7 years, the PE firm will continue this development with an end goal of selling that larger company. For obvious reasons, this second sale is frequently referred to as the ‘second bite of the apple’.
Generally speaking, a PE firm will prefer an equity rollover deal for a number of reasons:
- First, it allows them to keep you around. Even a large PE firm considers your expertise valuable. While they look to bring their larger vision into a reality, you get to continue growing your company — most likely in the capacity of a division instead of an independent company.
- Second, your interests will be aligned with those of the PE firm. Since you will still be a minority stakeholder, you will want to maximize that holding by doing your part in increasing the larger entity’s value to the highest amount possible. In this sense, you will have to adopt the PE firm’s vision and strive toward it. At the same time however, remember that the PE firm still owns a controlling majority, meaning they are in charge. Of course, all of this is ideal for them: you have an incentive to adopt their vision and help it become a reality, while they are always calling the shots.
- Third, not only are your interests aligned, but you’re on board with a short timeline. In the roll over style deal that we’ve discussed, PE firms aren’t looking to spend years upon years growing this conglomerate. Any timeline beyond seven years is uncommon. Yet in order to achieve their vision, they need all entities involved to be on the same page.
- Fourth, the buyer needs less capital. You, as the seller, will be investing a portion of your profits from the initial sale back into the PE firm’s vision. And since you’ll be keeping a minority ownership of the entity, the PE firm does not have to pay out the full value of your company.
- Fifth, the seller has financial motives, which the PE firm is likely to dangle in front of you as leverage. For one, you should see significant amounts of liquidity from the initial sale of your business, while also maintaining the possibility of a second payout from the later sale. Yet — depending on the structure of your deal — there’s also the potential for tax benefits. In most cases you should be able to defer taxes from the rolled over portion of the purchase price. You’ll still have to pay those taxes at some point in the future, just not when the roll over takes place.
Should you roll over equity in a business sale?
Now that we’ve explained what rolling over equity is — and better understand a PE firm’s desire for this type of deal — you’re likely to still have two major questions: Is a roll over equity deal right for me and, if so, what should my post-sale ownership percentage be?
Naturally, the answer to these questions will vary based on your industry and specific niche, your personal situation, current market atmospherics, and a variety of other factors such as your recent growth trend. The best way to find concrete answers here is to turn to a neutral third-party — such as a business broker or investment banker — for a fair valuation and an overview of legitimate exit opportunities.
We can still examine some key considerations to get a clearer idea of whether or not a roll over equity deal is right for you:
- Tax deferred equity: Will your deal allow for a tax-deferred roll over? While you’ll still have to pay taxes on the cash portion of the transaction, taxes are likely to be deferred on the equity that you roll over into the PE firm’s equity.
- Corporate governance: Which rights will you still have after rolling over equity? Will you have any sway when it comes to operations, key financial decisions, or future strategy? The importance of these are circumstantial and will depend on your own personal preferences.
- Your responsibilities: The details of your role and responsibilities after an equity roll over can also cause concern. Ultimately, you will have to identify the role and responsibilities that you would like to have — and negotiate for those. This will all be tied to the equity percentage that you do roll over. Most sellers want to continue leading their organization, which is possible: your company could become a division in the larger company, with you as the head of that division.
- Background check: Instead of just taking the PE firm’s word for it, reach out to several clients they have worked with in the past. How have they behaved in previous partnerships?
- Fees: In some cases, PE firms will charge a number of fees that you won’t see until official paperwork is drafted. These fees can often come as a surprise.
That’s why, during an early stage of the process, it’s a good idea to ask for any and all associated fees forecasted by the firm. To give you a better idea, the fees can include the following:
- Origination fees
- Management fees
- Finder fees
- Transaction fees
- Breakup fees
- Admin fees
As you can see, there are a lot of factors that come into play when determining if a roll over equity deal is right for you. Keep in mind that while the criteria above can lead you in a certain direction, consulting with a trusted professional is always ideal.
Regardless of the path you decide to pursue, one thing is certain: you are likely to receive a large sum of funds following your business transaction. For most sellers, this amount equates to the most they’ve ever had in their possession. It also means that these same individuals will be unsure of how to manage that wealth, protect it, invest it, and grow it — for them and, hopefully, future generations.
One way this can be done is through “vintage risk”. Here’s the general idea: irrespective of how you choose to diversify, you will essentially be bound to the price at the time you invest. This can be particularly attractive when making a large investment and being cautious of market conditions. For example, if you sold a business in 2007 and invested a large amount all at once, regardless of how diversified your investment was, you are likely to have suffered irreparable losses. Vintage risk can come in handy here.
Life after your exit — in terms of the extent you work with a buyer, future endeavors independent of your former business, and the management of your newfound wealth — is often times unchartered waters. To minimize your risk of rough seas, keep the aforementioned points in mind and always explore every potential possibility before making strong commitments.
Further reading: Interested in consulting with an investment banker to help with the sale of your business? Review our comprehensive guide on how to find the right investment banking firm.