The period when business ownership transfers to the buyer is an often overlooked yet important phase of the sales transaction.
In worst-case scenarios, the buyer can fail due to inadequate training, and the business can close down, resulting in significant financial damages. In best-case scenarios, the transition will go smoothly and help ensure the new owner is successful.
It goes without saying that the second scenario is the preferred scenario. Here’s how that stage is set…
Table of Contents
- Why is the Training Period Important when Buying or Selling a Business?
- Meet and Design a Transition Plan
- Suggested Agenda for the Sit Down
- The Written Training Plan
- How Long Should the Training Period Last?
- Additional Tips for Ensuring a Smooth Transition
- Should I Start Training the Buyer Before Closing?
Why is the Training Period Important when Buying or Selling a Business?
A training period is a valuable tool for buyers to become successful in their new business, so they can learn the business properly. Most business deals involve seller financing, and when this is the case, it’s important for the buyer to succeed to help ensure that the buyer doesn’t default on payments down the road.
The training period helps provide a smoother transition for the buyer’s venture as the new business owner. While a buyer may be enthusiastic at the prospect of their new business, they may not have the skills needed to run it.
The seller likely has a good idea of how to run the business from an operational standpoint. The training period offers much in this regard, and it can be a fruitful time for the buyer to learn the “tricks of the trade,” as well as some of the things that have made the business successful.
Of course, every buyer or new owner of a business wants to make it their own, and in time, they should. But, a short education of the business’s basic elements can only help the business to be a successful enterprise.
Meet and Design a Transition Plan
The parties should meet before the closing to outline the specifics of the training and transition period. This allows the parties to discuss the transition process in detail to ensure a smooth, orderly turnover.
Communication is paramount, and it’s critical that the parties discuss their expectations so there are no surprises down the road. We have heard stories in which a buyer continued to work at their job after the closing, expecting the seller to continue operating the business during the training period. Meeting with the Seller can prevent confusion such as this.
Suggested Agenda for the Sit Down
Who will run the business while the training is in progress? The day after the closing, the buyer may not have the knowledge, skills, and experience to immediately begin operating the business. The parties should discuss who is responsible for running the business during the training period to ensure a smooth hand-off.
Commitment to the transition process. The buyer should communicate to the seller that they are fully committed to begin operating the business from the first day. The buyer should fully wrap up their other obligations before the transition so they can dedicate their full attention to the business immediately upon closing. The buyer should be prepared to take advantage of the seller’s knowledge and should clear their plate of as many responsibilities as possible before the transition process begins.
Training agenda. The buyer won’t know what the training should consist of because the buyer is not familiar with the business. The buyer will need to sit down with the seller to create a training agenda.
People involved in the training. Discuss who will execute the training. Employees can often assist with the process.
Help beyond the formal training period. The buyer should also discuss the seller’s availability if any questions arise after the training period concludes. We recommend structuring this assistance on an hourly consulting basis, at times that are convenient for the seller. The training agreement prepared by Morgan & Westfield as part of our Closing Package includes standard language that addresses this.
The Written Training Plan
The seller should begin creating a draft of the training plan during the due diligence period. The buyer can ask the seller questions regarding operations of the business during due diligence, and the seller may collect these questions to form the basis of the training agenda.
The training agreement should be designed to provide the buyer with the essential knowledge and skills to manage the business. Some wisdom can be passed on to the buyer to help them, especially where marketing and managing suppliers, vendors, clients, and customers are concerned. While the employees can often train the buyer on the technical elements of the business, the seller must usually train the buyer in the managerial tasks. The training period is also a good time for the buyer to build relationships with key employees in the business.
Often, once this introductory period has passed, much of the training can be handled through email and phone conversations. The important thing is to establish the amount of time the buyer can expect to receive help, outlining limitations and expectations.
Each purchase agreement is as different as the next, and the training agreement is no exception. The specifications in each training agreement will be unique, as each business is unique. Each buyer comes into a business with a varied skillset and experience level, which will also factor into the particulars of the training agreement.
The important thing is to train the buyer and groom them for success, as both sides benefit from doing so.
A well-thought-out list of any critical items or issues that should be covered during the training period will lead to a more effective transition and maximize the use of the time that was agreed to in the training agreement. It will also help to identify how long the training period needs to be.
We suggest putting in writing the following:
- A list of all topics to include in the training period: Customer service, office work, accounting and bookkeeping, legal, employees — including hiring, onboarding, and training
- An agenda for procedures, tools, skills, etc. that the buyer must be trained in
- A timeline for the process as a whole, as well as timelines for each step in the process
- Priorities for each item on the agenda
- How the training will be performed: In writing, in person, etc. You can video record highly technical or detailed processes that the buyer can reference later.
The training agenda should be as clear and defined as possible. Mark each item as complete when it’s finished. Keep this spreadsheet in your records in case you run into problems down the road. The buyer should keep all training materials that the seller provides to assist during the transition period.
How Long Should the Training Period Last?
The time dedicated to the training period is dependent on the type of business and on the buyer’s needs.
If the business is a simple operation, several weeks of training time may suffice, but a more sophisticated operation may require several months, or even years, of training.
It’s common to include a set training period in the purchase price and for the seller to offer an ongoing consulting agreement on an hourly basis if the buyer needs help beyond the formal training period. Often, once an introductory period has passed, much of the training can be handled through email and phone conversations.
Additional Tips for Ensuring a Smooth Transition
Training Only. These agreements are for training and consulting, not for the seller to work in the business. The buyer will quickly alienate the seller if the buyer asks them to perform rote tasks in the business, as opposed to training and knowledge-sharing.
Specific Agreement. The definitive purchase agreement (DPA) should contain a clause specifying a “training agreement” between the seller and the buyer. It should be highly specific regarding the length of the training, including specifying how many hours and on what terms the training will be provided. Not doing so can lead to post-sale disagreements, and buyers sometimes sue sellers for failure to properly train them.
Document Completion of the Training. Upon completion of the training period, it’s important to have the buyer acknowledge in writing that the training period has been completed so there are no disputes. Failing to follow up on this crucial step opens the door for the buyer to default on payments by claiming that you failed to train them properly. The post-sale relationship with the buyer, insofar as the training period is concerned, is an important one. The training agreement included in our training package includes a clause for the buyer to sign upon completion of the training.
Should I Start Training the Buyer Before Closing?
I am in the process of selling my business and the buyer asked if I can start training him before the closing. Do you recommend this? What are the risks associated with training the buyer before closing on the sale of my company?
No, we do not recommend training the buyer before the closing.
It’s simple — buyer’s remorse. In an overwhelming majority of cases with which we’re familiar, when the seller began training the buyer before the closing, the buyer developed buyer’s remorse and canceled the transaction. In many cases, it’s due to fear.
Why does this happen?
Running a business is difficult. If a buyer can get an opportunity to dip their toes in the water before they are fully committed to the transaction, many will change their minds when the reality of running the business sets in.
Selling a business involves risk. Buying a business involves risk. At each stage of the transaction, the parties must make concrete commitments to move forward with the sale. By asking to begin training early, the buyer is attempting to avoid making the final leap. What the buyer is really asking is if they can operate your business on a trial basis before closing the sale.
How can you handle this situation with the buyer?
Explain to the buyer that training them early presents several risks. It’s likely your employees and customers will find out about the sale. If they do, and the buyer decides not to close, you may suffer financial damages — lost employees, lost customers, etc. Additionally, you must share sensitive information with the buyer during the training period, information that should be shared only after the buyer is fully committed.
The buyer may also view this as an opportunity to continue due diligence, which can lead to negotiations for a lower price if they discover additional problems with the business during the training period. In other cases, the buyer would like to gain a head start on the business so they can be up and running on the day of closing.
One important warning: In approximately 90% of the cases when the seller and buyer express their mutual consent to begin training early and we begin preparing the appropriate mechanisms to protect the seller, the parties later change their minds and decide it isn’t worth the trouble. If the buyer expresses an interest in beginning training early, stamp out the idea before it has time to grow.
If you do decide to train the buyer early, here are the mechanisms that can be used to mitigate your risk:
- Different Closing vs. Change-of-Possession Dates. The day of closing does not have to be the same date as the “change of possession” (COP). In other words, the transaction can close on January 1, while the COP can occur at a later date (e.g., January 31).
- Non-Refundable Training Fee. Charge the buyer a non-refundable fee for early training. If the closing has not taken place before training has begun, the training fee will be credited to the purchase price at closing. Expect to pay an attorney to draft language that is strong enough to ensure the fee is truly non-refundable. You can expect to be sued if the buyer discovers material defects with the business that were not disclosed during due diligence. Begin training only after you have received the payment.
- Non-Operational Training. Train the buyer on non-operational elements of the business, such as accounting or HR processes, which are typically lower-risk. Ideally, this training should all be conducted off-site, away from employees and customers. Do not allow the buyer to interact with employees during the training. You can also supply the buyer with additional training materials, such as books, manuals, courses, or other training provided by trade associations. Finally, the buyer can begin learning any software that is used in the business.
- Non-Compete, Non-Disclosure and Non-Solicitation Agreements. Have your attorney prepare strong non-compete, non-disclosure, and non-solicitation agreements for the buyer to sign before the training begins. First, be sure to confirm that a non-compete agreement is not illegal in your state. The non-solicitation agreement should preclude the buyer from soliciting customers and employees.
- Check the Buyer’s Credit and References. Check the buyer’s credit and references before beginning the training. The buyer should have impeccable credit, and all their references should check out.
- Pay a P.I. to Perform a Background Check. Hire a local private investigator to perform a background check on the buyer before the training starts. You should also obtain identification (driver’s license, etc.) from the buyer before considering early training.
So, while there are several ways to reduce your risk if you decide to train a buyer before the closing, we still do not recommend doing this. Don’t give the buyer the chance to develop buyer’s remorse. Throughout the sales process, the buyer should gain enough information about the business that they can commit to the closing.
The training agreement is an important aspect of the business sale. The training period you offer the buyer can be an integral part of the new owner’s success. Before stipulating the terms and conditions of the training agreement, give thought to what type of training is beneficial to the buyer, as well as the type of commitment you can reasonably offer. Clear and manageable terms are important so that the needs and goals of the training period can be met.