It is very common for a seller to stay on as a consultant for some period of time, even after he or she has sold the book of relationships. As we have discussed in previous articles, this can be emotionally difficult for both the Seller and the Buyer for several reasons. The Seller has always been in control of his or her relationships with the clients, as well as making decisions about everything from financial planning and investment decisions, and even choices made regarding employee matters, The Seller must come to grips with the fact that if he or she stays on, those decisions will all be made by the new owner of the relationships. For the Buyer, he or she has to find a way to work with another strong personality in the office, while trying to convince clients, and possibly staff, to see him or her as the new and future leader.

There is no doubt that the Transition of accounts to the new Buyer has a much better chance of being successful if the former owner stays on to enthusiastically endorse the new owner as his or her chosen “successor.” Under favorable circumstances, this situation can be the difference between a successful Transition in the 95% plus range and a conversion that is significantly less fruitful. It is all about developing trust with the transitioning clients; the face to face endorsement is a critical element.

In order to influence a successful hand-off of accounts, Buyer and Seller should enter into a negotiated Consulting Agreement. This document is separate, and in addition to the Definitive Agreement that is signed at the Closing of the sale. The Consulting Agreement, (CA), should likewise be signed at the Closing and take effect on the date of the signing of the Definitive Agreement.

It should be noted that if the Buyer is borrowing funds under a Small Business Administration, (SBA), loan, there are a number of conditions laid out pertaining to the role of the Seller, post-sale. The CA is a good way to codify the Seller’s role and avoid questions that can affect the status of an SBA loan.

The CA outlines the conditions under which the Seller will continue to work. Provisions of the CA include:

· Services that will be provided by the Seller.

· Non-Compete covenants

· The Term or time period of the CA

· Compensation- this is separate from any money paid on the book or interest on an installment loan. It is comp on services provided. This is usually a split of revenue.

· Conditions of Termination of the CA.

· Non-Solicitation covenants

· Performance and cooperation to work with the Buyer. This usually covers such things as access to client files, access to staff assistance, office space, rules to follow, etc.

· Designation as an independent party or “Independent Contractor.” This is important as it defines the relationship. The CA does not generally create any kind of employer-employee relationship; it does not allow the Seller to have any authority either.

· Confidentiality covenants

· Governing Law, i.e. the state and county that governs legal issues.

· What happens if the Seller dies or becomes disabled during the time period of the CA? In other words, who get his or her comp and for how long?

· Dates and Signatures as to when the CA is agreed upon

· Health Insurance- this one is tricky. Many states, (IA and NE, to name two), no longer have insurance companies that will write individual health insurance. If your Seller is less than 65 years old, living in one of the affected states, he or she will have to decide what to do about insurance. The Seller could theoretically keep his LLC, but sell the assets, or there could be some accommodation in a Consulting Agreement. I am not advocating a solution here as much as mentioning that it is an issue that could come up.

It is a balancing act of sorts. Buyer and Seller have to address the issues without making the CA so rigid that decisions cannot be made as needed.

This series of articles attempts to help First-Time Buyers avoid pitfalls inherent in the process of advisory firm acquisition. Watch for new articles each week.

Casey M Corrie, President

Moisson Partners, Inc.

Mergers. Acquisitions, Consulting, for the Advisory Community