By: Aubree Manley
When a business is sold and changes ownership, it is rarely as simple as signing the paperwork and handing over the keys. Transition agreements, often called Consulting Agreements, help guide the new owner through those early stages of ownership, facilitating a smooth transition. These agreements come into play post-closing, helping the buyer integrate into the business with the seller’s guidance. This blog outlines key considerations within these transition/consulting agreements, such as term duration, hours expected, compensation structures, possible bonuses, and the specifics of non-compete clauses, which apply to sellers despite the recent push from regulatory bodies like the FTC to limit non-compete agreements.
- Term of the Agreement
The term, or duration, of a transition agreement, is a fundamental element typically ranging from three to twelve months, although it can extend longer if the business is more complex. Shorter terms are common for smaller businesses where the learning curve is minimal, and the buyer can usually become self-sufficient, even after only 30 days of guidance. In contrast, larger businesses or those with complex operational procedures may require a year or more of continued seller involvement to ensure the buyer fully understands the company’s practices, systems, and client relationships.
In many cases, the term may include provisions for extension if both parties agree that additional support from the seller is necessary, although such extensions may require renegotiation of terms. The goal of the term is to align the duration of support from the seller with the buyer’s learning curve, helping to ensure the business remains stable through the ownership transition.
- Hours Expected from the Seller
The seller’s time commitment can vary greatly depending on the buyer’s needs and the operational demands of the business. Typically, transition agreements specify an average of 20-40 hours per week for the seller’s involvement, especially in the initial stages. However, the expectation is that the hours will gradually decrease as the buyer gains confidence, understanding, and control over the business.
This gradual decrease in hours lets the buyer take on more responsibilities in stages, making the transition less overwhelming. For the seller, it’s a structured way to gradually let go, helping the business establish new routines and rhythms under fresh leadership.
- Compensation for the Seller’s Support
In exchange for their time and expertise, the seller is usually compensated on an hourly or fixed monthly basis. Hourly rates can range from $100 to $500, depending on the seller’s industry expertise, the complexity of the transition, and the size of the business. A fixed-rate offers a predictable expense for the buyer and ensures consistent income for the seller.
Some transition agreements might include performance-based incentives. These bonuses can be tied to specific milestones, such as helping the business hit revenue targets, retaining key clients, or achieving operational goals. Performance incentives can be mutually beneficial, keeping the seller motivated and helping the buyer see immediate returns on their investment.
To further incentivize the seller, some buyers may include a signing bonus as part of the transition agreement. This bonus, usually issued upon completion of the initial sale and signing of the Consulting Agreement, provides the seller with immediate compensation as a reward for their cooperation and commitment to the post-sale transition. Signing bonuses can vary in amount but are generally based on a percentage of the sale price or a fixed figure agreed upon during the negotiations.
- Non-Compete Clauses
Non-compete agreements are standard in transition agreements to prevent the seller from immediately starting or joining a competing business. Such clauses protect the buyer’s investment by limiting the seller’s ability to use proprietary knowledge or established relationships to undermine the newly transferred business. Given the buyer’s financial and operational commitment, non-compete clauses provide security that the value they have acquired won’t be compromised by direct competition from the seller.
Although non-competes in employment contracts have recently been targeted by the Federal Trade Commission (FTC), non-compete clauses in business sales are generally allowed. That’s because these clauses protect the buyer’s financial investment and help preserve the business’s value rather than restricting someone’s ability to work.
The terms of non-competes in transition agreements vary but often restrict the seller from engaging in competitive activities for one to three years within a specific geographical area. These terms help protect client relationships, trade secrets, and brand goodwill—the core assets that the buyer paid for in the acquisition. In some cases, the seller may negotiate for a shorter duration or smaller restricted area if they can demonstrate that their future business activities will not threaten the buyer’s investment.
Summary
Transition agreements play an essential role in the continuity and success of a business post-sale. By setting terms for the transition duration, weekly hours, and clear compensation, transition agreements provide a structured approach for the seller to share essential knowledge while helping the buyer feel prepared to take over. Signing bonuses and performance incentives can further motivate sellers to stay engaged and productive. Meanwhile, non-compete clauses give the buyer peace of mind that their investment will remain secure from competition. Understanding and negotiating these terms effectively can lay the groundwork for a smooth transition.
Venn Law Group can help you understand the answers and advise you about your options. We can also help you make any needed changes. Contact us today to learn more.
Aubree Manley is an attorney at Venn Law Group who works in corporate law and commercial real estate, including mergers and acquisitions, business agreements, business formation, leasing and financing, franchising, contract drafting and negotiating, and succession planning. In addition to her law degree, Aubree has a background in accounting and finance.
Aubree Manley is an attorney at Venn Law Group who works in corporate law and commercial real estate, including mergers and acquisitions, business agreements, business formation, leasing and financing, franchising, contract drafting and negotiating, and succession planning. In addition to her law degree, Aubree has a background in accounting and finance.