Ceding ownership control does not necessarily mean walking away; it means transitioning to the right level of involvement.
Even after the most successful sale outcome, ceding control of your business can be difficult. Like many business owners, you may struggle with letting go of your life’s work and deciding where next to devote your time and talent.
However, giving up control of your business as an owner does not necessarily mean you can’t stay involved. In fact, many business owners continue to meaningfully contribute to their company post-sale through serving in a variety of roles. The right option for you depends on a number of factors, including:
How much time you want to devote to remaining active in your company after you sell it
How much you want to continue financially benefiting from the business
The buyer’s need for you to help with the transition of ownership or continue to drive the business’s performance
There are four primary roles that allow you to remain involved in your business after you sell it: employee, board member, consultant or shareholder. Each alternative varies in terms of time commitment, level of control over business decisions and financial benefits.
It is common for business owners to continue to work for their business after they have sold it, typically based on the terms of an employment agreement that they sign as part of the sale transaction. Employment agreements often include a specified term and detail the type and timing of compensation you will receive. Keep in mind that although your title and responsibilities may remain the same, you are now working for a new owner, who may have new expectations and a different management style to which you will need to adapt.
Time Commitment: Responsible for day-to-day business operations
Control: Management-level oversight and influence over the company
Financial Benefits: Compensation based on terms of employment contract (e.g., salary and bonus, including stock options)
Board of Directors
Some business owners choose, or are asked by the buyer, to sit on the board of directors of their business after it is sold, or on the buyer’s board of directors. A board seat allows you to have ongoing oversight without being responsible for day-to-day operations and allows the buyer to continue benefiting from your experience and knowledge long after the sale.
Time Commitment: Attend quarterly and ad hoc board meetings
Control: Vote on major corporate decisions and appoint senior management
Financial Benefits: Fees for attending board meetings
Rather than work for the business as an employee, some business owners choose to provide ongoing advice to the business post-sale as a consultant. Business owners often set up a limited liability company (LLC) and negotiate a consulting agreement with the buyer for the LLC to provide certain consulting services to the business for a specified term and fee. Consulting arrangements tend to require less hands-on responsibility over the day-to-day operations of the business and give you more freedom to dictate the terms of your working relationship.
Time Commitment: Evaluate the business and periodically provide advice on key issues
Control: No control over business operations (i.e., the buyer can choose whether to follow your advice or not)
Financial Benefits: Consulting fees based on terms of consulting agreement
Retain Shares in the Business
In a private business sale, often the business owner will agree to “roll over” a portion of his or her shares of the business, meaning the business owner retains a portion of the shares that he or she owns after the business is sold. If the business is sold to a financial buyer, such as a private equity firm, retaining shares may provide the business owner with additional sale proceeds if the business continues to grow and the private equity firm ultimately sells the business at a higher valuation down the road.
Time Commitment: Attend annual shareholder meetings
Control: Vote on matters requiring shareholder approval (for example, electing directors, major corporate transactions)
Financial Benefits: Shareholder dividends, and proceeds in the event the business is sold or undertakes an initial public offering
Finding the right level of involvement
It is important to know that the roles you might play in your business after it is sold are not mutually exclusive. A business owner might, for example, agree to retain shares of the business he or she sold, serve on the board of directors and also continue working in the business as an employee. If you are considering selling your business, discussing the following questions with your family and advisors will give you a better understanding of your options and a better seat at the negotiating table with buyers:
Would you prefer to stay involved after selling your business?
If so, what do you value about remaining involved in your business, financially and personally?
How much time would you be willing to devote to your business after it is sold?
How dependent will you be on income from your business after it is sold?
How dependent might a buyer be on keeping you involved in the business after it is sold?
If you need help making these decisions or are interested in how other business owners have successfully navigated this transition, consider talking to one of our advisors. Thoughtfully planning your post-sale involvement – before even beginning the sale process – can provide considerable peace of mind long after the sale closes.