Training Period Common in Business Sales
As a part of the vast majority of small business sales, the seller will agree to train the buyer (for free) after the closing for a set period of time. The seller may train the buyer on any and all aspects of a business including the management of employees, where to order supplies, and how best to interact with key customers. This training period is critical for many buyers in understanding how best to operate a business on a day to day basis. A standard business listing for sale will indicate to prospective buyers the amount of free training offered by the seller. The usual free training period is two to four weeks, with larger and more complex businesses requiring a longer training period. Generally, the training period focuses on operational knowledge, key relationships, and systems expertise so the buyer may seamlessly take over the business.
Training Period Key Component of Goodwill
The goodwill of a business is its intrinsic ability to attract and retain customers. In accounting terms, goodwill is an intangible asset that represents the value of an acquired business which is above and beyond its net tangible value (such as its physical assets). When the seller’s role in the business plays a significant part in attracting and retaining customers, then it is part of the goodwill of the business. As such, the seller’s role needs to be properly transferred and transitioned to the buyer (or to an employee who will stay with the business after the sale) in order for all of the goodwill to be fully conveyed. Even if the business owner is largely absentee, a free training period by the owner or by an appointed agent is still standard to ensure that all of the goodwill transfers after the sale.
Training Period Negotiable
- The terms and scope of the free training period are negotiable and should be described in the purchase agreement between the buyer and the seller.
- Details to be negotiated include the length of the training period, the actual number of training hours, as well as any other limitations or special provisions.
- The buyer typically desires to have as long and thorough a training period as possible in order to minimize disruption to the business by keeping the seller at the business after the sale.
- If the seller is physically present in the business along with the new buyer after the sale, then employees and customers will be more assured that the business will remain operating as usual.
- Further, a long and thorough training period affords the buyer more time to soak in all of the seller’s knowledge and ‘tricks of the trade’ so that the buyer may in turn run the business more effectively.
- In contrast, the seller typically desires to minimize the training period so that they may move on with their life.
- Many sellers, however, agree to accept some seller-financing and therefore have a strong incentive to ensure that the buyer is properly trained after the sale.
- The key to negotiating the training period is for the buyer and seller to have direct dialogue so that each side understands the motivations and needs of the other party.
- Particularly for a large and complex business, the buyer will need time to be trained in many different aspects of the business.
- The training may also involve site visits to customers or suppliers.
- Most business owners eventually understand the need for the buyer to be properly trained after the sale, and agree on a reasonable scope and duration of a free training period.
Paid Training or Employment Agreement
After the agreed upon free training occurs, many buyers desire to retain the seller as a paid employee or consultant. This usually occurs in service-related businesses where the seller’s expertise, experience, and personal connections are critical. The seller of a home healthcare company, for example, may be asked to stay as a paid ‘special advisory consultant’ or ‘marketer’ long after the free training period in order to maintain and cultivate patient referral sources. The employment agreement itself may or may not be a part of the purchase agreement at closing. It is often wise for both parties to wait at least 30 days after the sale and then gauge the buyer’s learning curve and aptitude for understanding the business. That way the need for the seller’s continued role in the business may be better assessed.
Non-Compete Agreement
A non-compete agreement in the context of business sales generally prohibits the seller from competing against the business they are selling for a specified length of time and geographic scope. It is important to note that a non-compete agreement, while protecting the buyer’s interests and the goodwill of the business, does not compel the seller to train the buyer. During the training period, however, a strong non-compete agreement allows the buyer to have a sense of security that the seller is not planning to someday compete against the same business. This makes the training period more comfortable and collegial for both parties.
Most business owners understand the need to sufficiently train their successor so they will have the requisite knowledge and understanding of the business to operate it successfully. Transferring the goodwill of a business is key to maximizing the purchase price. Unless the business owner has specific skill-sets or individual licenses (possessed by a physical therapist owning a physical therapy business for example), the seller’s role in attracting and retaining customers is a transferable component of goodwill. A free training period affords the buyer the opportunity to properly take over the business and retain its goodwill
Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.