The M&A Training & Transition Period
While often overlooked, the phase when business ownership shifts to the buyer is a pivotal moment in the sales transaction.
In the worst-case scenarios, inadequate training can lead to buyer failure, potentially resulting in the closure of the business and substantial financial losses. Conversely, in the best-case scenarios, a seamless transition paves the way for the new owner’s success.
Undoubtedly, the latter scenario is the preferred one. Here’s how we ensure that stage is confidently set…
Why is the Training Period Important when Buying or Selling a Business?
A training period serves as a crucial tool for buyers to ensure their success in their new business venture by providing them with the necessary insights and skills. In many business transactions, seller financing is involved, making the buyer’s success essential to prevent future payment defaults.
This training phase facilitates a smoother transition for the new business owner. While buyers may possess enthusiasm for their new venture, they might lack the specific skills required to run it effectively.
The seller typically possesses valuable operational knowledge of the business. During the training period, this knowledge is imparted, offering the buyer insights into the “tricks of the trade” and the factors that have contributed to the business’s success.
Naturally, every new owner aims to imprint their own identity on the business over time. However, a brief education on the fundamental aspects of the business can only enhance its potential for success.
Meet and Design a Transition Plan
Prior to the closing, it’s imperative for the parties involved to convene and meticulously outline the specifics of the upcoming training and transition period. This preparatory step allows for in-depth discussions on the transition process, ensuring a seamless and well-organized handover.
Effective communication is of utmost importance during this phase. Parties should openly discuss their expectations to prevent any unexpected developments in the future. We’ve encountered instances where a buyer continued their previous job post-closing, assuming the seller would maintain business operations during the training period. Holding a meeting with the seller can mitigate potential misunderstandings of this nature.
Suggested Agenda for the Sit Down
As the training period unfolds, several crucial factors warrant clear consideration:
- Operational Responsibility: Immediately following the closing, the buyer may not possess the full knowledge and skills to take the reins of the business. Therefore, it’s essential for the parties to determine who will oversee business operations during this training phase to ensure a seamless transition.
- Commitment to Transition: The buyer should convey their unwavering commitment to assuming business operations from day one. This entails diligently wrapping up any existing obligations to fully dedicate their attention to the business post-closing. Leveraging the seller’s knowledge becomes paramount, necessitating a clean slate of responsibilities before the transition commences.
- Defining the Training: Given the buyer’s unfamiliarity with the business, a collaborative effort with the seller is vital in outlining a comprehensive training agenda.
- Training Personnel: Discussions should encompass who will lead the training. In many cases, employees can play a significant role in facilitating the process.
- Post-Training Support: Additionally, it’s wise to discuss the seller’s availability for addressing any post-training queries. We recommend structuring this assistance on an hourly consulting basis, catering to the seller’s convenience. Our Closing Package includes a standard training agreement addressing this.
With a confident approach to these elements, the training phase becomes a strategic asset for a successful transition.
The Written Training Plan
Efficiency in the training phase hinges on a systematic approach:
Drafting the Training Plan: The seller should commence outlining the training plan during the due diligence period. This allows the buyer to seek clarifications on business operations, which can serve as the foundation for the training agenda.
Focusing on Essential Knowledge: The training agreement should be thoughtfully designed to equip the buyer with the vital knowledge and skills required for effective business management. While employees often cover technical aspects, the seller’s guidance is pivotal in managerial tasks, especially in areas like marketing and vendor/client management. This period also presents an opportunity for the buyer to establish relationships with key employees.
Post-Introduction Training: As the initial phase concludes, a significant portion of training can transition to email and phone interactions. It’s crucial to define the duration of support the buyer can expect, along with any limitations and expectations.
Tailoring to Specifics: Each purchase and training agreement is unique, mirroring the distinct nature of every business and buyer. Varied skillsets and experience levels further influence the specifics of the training agreement.
Ultimately, the goal is to groom the buyer for success, fostering a mutually beneficial outcome for both parties. A well-structured list of critical topics to cover during the training period facilitates a smooth transition and helps determine the necessary duration of training.
To ensure a seamless transition, consider documenting the following:
- Comprehensive Training Topics: Compile a list of all essential subjects for the training period, covering areas like customer service, office tasks, accounting, legal matters, and employee management, including hiring, onboarding, and training.
- Structured Training Agenda: Develop a well-organized agenda that outlines the procedures, tools, and skills the buyer needs to master. This agenda serves as a roadmap for the training process.
- Timelines for Clarity: Establish clear timelines not only for the overall training process but also for each individual step within it. This helps maintain focus and ensures progress tracking.
- Priority Setting: Prioritize items on the agenda to guide the buyer on what requires immediate attention and what can be addressed later in the training.
- Method of Training: Define the training methods, whether through written documentation, in-person instruction, or recorded video tutorials for complex processes, enabling the buyer to reference them as needed.
- Accountability and Documentation: Maintain a well-structured training spreadsheet, marking items as completed to track progress. Retain this record as a reference in case of future issues. Additionally, the buyer should keep all training materials provided by the seller for reference during the transition.
A clearly defined training plan fosters efficiency and ensures a successful handover of responsibilities.
How Long Should the Training Period Last?
The duration of the training period is variable, contingent upon the complexity of the business and the buyer’s specific requirements.
For relatively straightforward operations, a few weeks of training might suffice. In contrast, more intricate businesses may necessitate several months or even years of training to ensure a smooth transition.
Typically, a predetermined training period is included in the purchase price. Additionally, sellers often extend the option of ongoing consulting support, billed on an hourly basis, should the buyer require assistance beyond the formal training period. As time progresses, much of the training can transition to email and phone communication, allowing for flexibility and convenience.
Additional Tips for Ensuring a Smooth Transition
Training Focus. These agreements are solely for training and consulting purposes, and not for the seller to undertake operational tasks within the business. Requesting the seller to perform routine duties can strain the buyer-seller relationship, which should primarily revolve around knowledge-sharing and skill development.
Explicit Agreement. The definitive purchase agreement (DPA) should incorporate a well-defined “training agreement” clause between the seller and the buyer. This clause should leave no room for ambiguity, outlining the duration of the training, specifying the number of hours, and defining the terms under which training will be provided. Failing to establish these specifics can lead to post-sale disputes, and sellers may even face legal action if they are accused of inadequate training.
Documentation of Completion. It is imperative to obtain written acknowledgment from the buyer upon the conclusion of the training period. This documentation serves as a safeguard against potential disputes. Neglecting this vital step could leave room for the buyer to claim insufficient training as a basis for defaulting on payments. Managing the post-sale relationship, particularly in relation to the training period, is of paramount importance. Our training agreement package includes a provision for the buyer’s signature upon successful training completion.
Should I Start Training the Buyer Before Closing?
I am currently in the process of selling my business, and the buyer has inquired about commencing training before the official closing. Do you recommend this, and what are the associated risks?
In short, we do not recommend initiating training before the closing.
Why is that?
The primary reason is buyer’s remorse. In the vast majority of cases we’ve encountered, when sellers began training buyers prior to the closing, it often led to buyer’s remorse and, subsequently, the cancellation of the transaction. Fear tends to be a significant factor.
But why does this happen?
Running a business is no easy feat. If a buyer gets a sneak peek into the complexities of running the business before fully committing, many of them tend to change their minds when the practical challenges become apparent.
Selling and buying a business inherently involve risks. At each stage of the transaction, both parties must make firm commitments to proceed with the sale. By requesting early training, the buyer is essentially attempting to avoid taking that final leap. In essence, they’re asking if they can test-drive your business before making the purchase official.
How should you address this situation with the buyer?
It’s crucial to explain to the buyer that early training carries several risks. One major concern is the potential for your employees and customers to learn about the impending sale. If they do, and the buyer decides not to proceed with the purchase, you might incur financial losses—such as losing employees and customers. Additionally, you would be required to share sensitive information during the training period, information that should only be disclosed once the buyer is fully committed to the deal.
The buyer might perceive this as an opportunity to extend due diligence, potentially leading to negotiations for a lower price if they uncover additional issues during the training period. In some cases, buyers aim to gain a head start so they can be operational on the day of closing.
However, it’s crucial to note that in about 90% of cases where both parties agree to commence early training and mechanisms are put in place to protect the seller, they later change their minds, deeming it not worthwhile. If the buyer expresses interest in early training, it’s advisable to address and discourage the idea promptly.
If you do decide to proceed with early training, here are some mechanisms to mitigate your risks:
- Different Closing vs. Change-of-Possession Dates: Consider having the closing and the “change of possession” (COP) on separate dates. For example, the transaction could close on January 1, while the COP occurs later (e.g., January 31).
- Non-Refundable Training Fee: Charge the buyer a non-refundable fee for early training. If the closing doesn’t occur before training begins, this fee should be credited toward the purchase price at closing. Ensure your attorney drafts language strong enough to make the fee genuinely non-refundable. Be cautious, as legal disputes may arise if undisclosed business defects surface during this period. Commence training only after receiving payment.
- Non-Operational Training: Focus on training the buyer in non-operational aspects of the business, such as accounting or HR processes, which typically entail lower risks. Ideally, conduct this training off-site, away from employees and customers. Avoid allowing the buyer to interact with employees during training. Additionally, provide the buyer with supplementary training materials like books, manuals, courses, or training offered by trade associations. The buyer can also begin familiarizing themselves with any business-related software.
- Non-Compete, Non-Disclosure, and Non-Solicitation Agreements: Have your attorney prepare robust non-compete, non-disclosure, and non-solicitation agreements for the buyer to sign before training commences. Verify the legality of a non-compete agreement in your state. The non-solicitation agreement should prevent the buyer from soliciting customers and employees.
- Check the Buyer’s Credit and References: Before initiating training, conduct a thorough check of the buyer’s credit and references. The buyer should have a flawless credit history, and all provided references should check out.
- Background Check: Consider hiring a local private investigator to conduct a background check on the buyer before training begins. Additionally, obtain identification (such as a driver’s license) from the buyer before considering early training.
While these strategies can help reduce risks when training a buyer before closing, it’s still generally not recommended. Avoid giving the buyer the opportunity to develop buyer’s remorse. Throughout the sales process, the buyer should acquire sufficient information about the business to make a confident commitment to the closing.
The training agreement holds significant importance in the business sale process. The training period you provide to the buyer plays a crucial role in ensuring the new owner’s success. When outlining the terms and conditions of the training agreement, it’s essential to carefully consider the type of training that will benefit the buyer and the level of commitment you can realistically provide. Establishing clear and manageable terms is paramount to effectively meet the objectives and goals of the training period.