Ensure a smooth transition to the buyer; collect the fu l value you bargained for.
Objective
Meet your obligations to the buyer post-closing and make sure the buyer meets their obligations to you.
Tasks
Create a list of milestones and deliverables each party owes the other, with deadlines and the person responsible. Manage expectations for any responsibilities or obligations you have to each other. Maximize your return from the sale and minimize your potential risks and liabilities.
Best Practices
In most business sales, there is a transition period. You, as the seller, may have agreed to stay on for a while to help the buyer come up to speed. You may have provided seller financing, which requires you to keep tabs on the business to ensure you get your payments. The Purchase and Sale agreement may also include an escrow “hold back” or “earn out” that pays you in the future based on certain agreed upon events or milestones. There may also be accounts and relationships that must be assigned or transferred after closing.
The closing is usually just the first step in getting paid and extricating yourself from the business. To get the full value you bargained for, you must take additional actions, or perform certain duties, for the new owner. If your sale was “as is, cash at closing,” with all accounts transferred on the day of closing, CONGRATS, that’s amazing! You’re done – go enjoy your life!
If there is work left to do, here are some best practices for plowing through them.
Whether or not you deliver the things you promised to do post-closing may determine whether you get all, some, or none of the money coming to you. Even if you got all the money at closing, the agreement likely requires you to perform certain tasks. Failure to perform those tasks could result in the seller taking legal action to recover damages sustained. Let’s not have any of that!
Transition milestones and deliverables typically fall into one or more of four buckets:
- Account/Agreement/Relationship Transfer or Assignment – everything the new owner needs to continue operating the business without missing a beat, that you agreed to transfer or That might include things like the lease, vehicles, equipment, name and trademark registration, licenses and permits, customer contracts, supplier contracts, employee contracts, utilities, vendor relationships, inventory purchase order or lending relationships.
- Owner Training – a certain period of time, usually days or weeks, that you or the appropriate person will train the buyer on all the important aspects of running the
- Sales Projections and/or Accounts Receivables – achieving the sales you said the business was on target to achieving in the next year or two, and the receivables you said would be Escrow hold backs and earn outs are usually the mechanism used by buyers to ensure they get the benefit of what they bargained for.
- Seller Employment or Consulting and/or Non-Compete – getting paid to continue working in the business, typically governed by a separate In some business sales, this may even include stock or ownership units in the company now controlled by the buyer. If there is no ongoing relationship contracted for, there is likely a non-compete provision you need to honor.
Make a separate list of all the things you agreed to do post-closing. Delegate them to the appropriate person if you are not handling each item yourself. Put the deadlines on your calendar. Check the list each week.
As you complete the things you agreed to do, document them in writing and send a note to the buyer confirming the item has been satisfied according to the agreement. In that communication, invite the buyer to reply within a certain number of days if they believe the item has not been satisfied according to agreement. Make it clear that if you do not hear anything to the contrary within a reasonable period, you will consider the item fulfilled. Silence equals consent!
Conversely, you should do the same for items the buyer owes you. If the buyer misses a payment or fails to fulfill any other promise, you should put them on notice in writing and ask for a specific date for resolution. Don’t allow things to drag out or accept a verbal promise to make good on any breach. Your failure to insist on timely compliance may signify your acquiescence of the delay, or the buyer may not take the matter seriously.
This practice of documenting each deliverable or breach in a timely manner establishes clear expectations on both sides. You need to manage the transition, or it will quickly get away from you. In my experience, when a deal goes bad after the purchase agreement is signed, it’s because one side or the other failed to manage expectations or did not take the appropriate action to correct the problem when it first arose.
Deliver EVERYTHING you promised to do after the sale, even if the buyer seems indifferent or ambivalent about it. If for some reason you cannot perform (which is not unusual by the way), be forthcoming with it and ask the buyer for suggestions on a potential remedy or substitute. Depending upon how material the issue, you may simply have to give up all or part of the payments that were withheld. With any luck, if the issue is not significant and you have been good to work with otherwise during the transition, the buyer may give you a pass.
Tools and Tips
Upon signing the Purchase and Sale Agreement, double check every recurring expense in your personal name which will be assumed by the buyer and make sure those accounts are taken out of your name. The same goes for your business accounts where you are a personal guarantor. Things like domain names, web hosting, internet, and business phone account. You may be surprised what accounts you have in your name that your business uses.
An open-source project management tool can be handy in managing post-sale milestones and deliverables. Check out Slack, BaseCamp, Trello or Asana. Take a pro-active approach to managing the transition. Help make the buyer successful. It will come back to you in spades.
Summary
Transition Management is the act of FINALIZING the deal and receiving the FULL price. There is usually a transition period required by the buyer. The transition period may come with delayed payments, hold backs, or earn outs. It may come with you, as the seller, financing part of the acquisition and needing to collect payments, plus interest. The deal isn’t done until all your money is in the bank, and until you have delivered on the things you promised to do after the closing.
Do not let these things fall through the cracks. Create a list of all milestones and deliverables promised by the parties to each other. Assign deadlines for each and document in writing their completion. Manage the expectations of the buyer and insist that the buyer meet your expectations according to agreement. Get paid!
On to the next adventure in life!
Examples
- Transitional Services Agreement
- Checklist of Items to Transfer Post-Closing