What Is a Post-Sale Consulting Contract?
Retains Your Services after the Sale
A post-sale consulting contract is an agreement made between you and a buyer that retains your services in the company for a mutually agreed-upon period after the sale. Business consultants urge buyers to prevent owners from walking away without any responsibility to them or the business. The number of hours per week or per month and the length of the agreement depend on the nature and complexity of the business.
Provides a Continuing Income Stream
As the owner of a successful business, you are one of its most valuable assets. Your post-sale involvement can enhance the value of the business and contribute to the buyer's prospects for success. A post-sale consulting contract allows you to provide your expertise to the new owner in exchange for a continuing income stream.
Restrictions on the Contract
An astute buyer will put the agreement in writing, either as a stand-alone contract or as part of the sales contract. The buyer may request that a portion of the down payment be placed in escrow, with payment contingent upon your completion of the contract.
Payments can be structured in installments rather than in one lump sum, contingent upon your adherence to the contract. The buyer can also structure a deal so that you retain some stock. This provides you with an incentive to stay involved and gives you a stake in the company's success.
Short-Term Payments Minimize Risk
It may be in your interest to structure payments over the shortest term possible to reduce the risk of not receiving future payments.
When Can It Be Used?
To Retain Your Services after the Sale
A post-sale consulting contract can be used to retain your expertise for a mutually agreed-upon period after the sale.
To Provide a Continuing Income Stream after the Sale
It allows you to continue to be compensated for your expertise while turning the business over to the new owner.
To Offer an Attractive Deal to the Buyer
It also allows you to offer a deal that is favorable to the buyer. By paying a portion of the purchase price as a post-sale consulting contract, the buyer can minimize the amount of goodwill that is recognized on the balance sheet. Because goodwill is amortized over 40 years, it represents a long-term drag on earnings. Lenders and investors perceive a sizable amount of goodwill unfavorably because it adds no tangible value to the balance sheet.
Provides a Continuing Income Stream after the Sale
A post-sale consulting contract provides you with continuing income from the business after its sale.
Long-Term Payments May Allow You to Negotiate a Higher Price for the Business
By allowing the buyer to compensate you through a long-term payment plan with the funding drawn from the company's earnings over time, you may be able to negotiate a higher overall purchase price for the business.
Allows You to Offer an Attractive Deal to the Buyer
It also allows you to offer a deal that is favorable to the buyer. It minimizes the amount that is recognized as goodwill on the balance sheet while allowing the buyer to write off the cost as a tax-deductible business expense. Because goodwill is amortized over 40 years, it represents a long-term drag on earnings. Also, lenders and investors perceive a sizable amount of goodwill unfavorably because it adds no tangible value to the balance sheet.
Payments May Be Restricted
A buyer may request that a portion of the down payment be placed in escrow, with payment contingent upon your completion of the contract. If payments are structured in installments rather than in one lump sum, this increases your risk of not collecting them.
Payments Are Taxable As Personal Income
Payments you receive under a post-sale consulting contract are taxable as personal income rather than as capital gain. Personal income is taxed at a higher rate in most cases. Consult with your attorney to determine how to ensure that you will be considered, for tax and liability purposes, a consultant and not an employee.
Could Jeopardize Capital Gain Treatment on Stock Redemption
If, as part of the sale, you are redeeming stock in a closely held company, your continued involvement in the company through a post-sale consulting contract could jeopardize the favorable capital gain tax treatment you receive on the stock redemption.
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