Interesting question. Is it best for an owner of a closely held business to stay on after the transition?
Smaller businesses may have larger amounts of value produced or support delivered by the owners, with management and owner positions often overlapping. There are a variety of benefits and drawbacks from either perspective, some of which include:
Buyer Benefits
• Time to transfer of knowledge
• Earn out aligns objectives and can reduce financial risks
• Near term performance confidence
• Smoother transition
• More family branding retention
Buyer Drawbacks
• Less negotiation power, and potentially higher price
• Resistance of the seller to change
• Staff confusion in leadership structure
Seller Benefits
• Income after the sale
• Maintain some lifestyle benefits, but with less responsibility
• Higher total transaction price including income
Seller Drawbacks
• Culture shock as the owner is effectively demoted
• Performance risks for earn out, including factors now outside of the seller’s control
Many other benefits and drawbacks can apply when the former owner of a family business stays on after a sale. The materiality of these aspects and what other aspects are relevant varies depending on the specifics of the business case and goals of the stakeholders.
