Post-Closing and Transition Issues (Part 6 of 6 - Buying and Selling Small Businesses)
(For those just joining us, this is the sixth in a six-part series on how to buy or sell your business. Please see the prior blog posts for more context.)
Once the buyer has made it through the asset purchase agreement closing, their work is just beginning. They now have a new business to run, or at least integrate into current operations. The Closing signals the official transition of responsibility for continuing the business operations, in addition to the benefit of receiving the proceeds of the operations.
There are four major categories of post-closing transition issues that are vital to consider in any deal. All of these issues should be addressed in the asset purchase agreement.
1. Post-Closing Consulting By Seller. I have seen some business transitions go poorly when the prior owner is not engaged or is not acting in good faith. The buyer of a business cannot be expected to pick up the slack if they were relying on the seller to train them. A thoughtfully drafted asset purchase agreement will provide incentives for the prior owner to assist the buyer/new owner for a period of time after the Closing, while the new owner is learning the business.
It is important to spell out with specificity exactly the level of training that is expected so that the parties do not run into a dispute. For example, a “thirty day post-closing consulting period” is not clear enough to be helpful. The seller may think he is on call to answer questions and the buyer may thinks the seller is going to work at the shop forty hours per week. These misunderstandings can be resolved by spelling out the details of the arrangement, including on-site attendance expectations, in advance.
2. Payment Processor Transition. When a deal is done through an asset purchase agreement an entirely new legal entity must be plugged in to run the business operations of the entity without interrupting the business operations. This means that there are some scenarios where payments will go to the seller after the closing for sales that should have gone to the buyer. This is most often the case when the seller has not properly set up their own processing account on the first day of operations. It has become more common in the restaurant industry with delayed payments by third party delivery providers, such that a deal closes on a Wednesday and the seller is paid for all sales from Monday-Sunday by the third party merchant.
3. Utilities Transition. The buyer needs the seller to help transition electricity, water, gas, cable, internet, and other accounts. There may be savings available from the seller being grandfathered in to an old rate. For that reason, it is usually best to transition an account instead of setting up a new one.
4. Social Media/Online Reviews Transition. One of the key components of the good will that is purchased as part of an ongoing business acquisition are the social media and online review accounts. The buyer will want to access the accounts and update the passwords at closing. Updating the passwords may require the authorization and assistance of the seller. Both social media accounts and online review accounts, like Google My Business and Yelp, are key customer facing touchpoints for businesses.