How to incorporate a company’s former owner into the new direction.Many small businesses are sold each year under terms where the former owner stays on as a consultant or employee of the newly acquired company.
Usually, this arrangement is designed to help the new owner with taxes or deferral of part of the purchase price. The rationale is that the former owner has a treasure trove of knowledge that can be of great value to new management.
Sometimes this consulting or employment arrangement works flawlessly, and the transition in management from old to new is smooth. As often as not, however, the relationship does not work out as intended. The new owner may feel that the old regime is undermining the transition or new direction of the business. The former owner may see changes being made which he or she feels are inadvisable. Sometimes the former owner simply loses interest in the business.
How can the parties ensure a productive relationship to manage this period of transition for the business?
Define Expectations … and Exits
Defining the expectations of the parties and the scope of services to be provided by the former owner is a first step that should be documented in an employment or independent contractor agreement.
The agreement also should include ways for the parties to gracefully unwind the relationship under appropriate circumstances. For example, if the former owner fails to achieve certain benchmarks, new management might retain part of the purchase price and terminate the relationship with the former owner with or without severance pay. To align the parties’ interests, either profit sharing or deferred payment arrangements can be incorporated. These can provide former ownership with an incentive to behave in a beneficial way for the business.
However, if the business does not perform well in spite of the former owner’s efforts, the former owner may have a justifiable complaint about the new management practices that jeopardize his or her income and, therefore, he or she may become a very disgruntled employee or contractor. Documenting ways to work through these types of situations will likely improve the chances for a successful transition period.
How to Be a Good ‘In-Law’
Businesspeople, especially in small businesses, often regard their companies as their “babies.” It can be very daunting for the former ownership when the company grows up and “marries” a new owner. Sometimes the new owner is a perfect addition to the family. Sometimes he or she just does not fit in, and the former owner needs to sit back and keep quiet unless asked to give input.
Every situation is different, and personalities and business practices have an unpredictable way of changing the outcome of these transitions. Perhaps the best that a parent can do, then, is to appreciate the particular nature of these circumstances, prepare and plan accordingly, and keep the best interests of the child as the basis of every decision.
