Keeping Management Motivated Post-Exit

takenotes08's picture
Rank: Neanderthal | 3,016

Hey all,

I was able to acquire a small managed service business a few months ago ~1M Revenue, 300k EBITDA almost all recurring revenue. I am looking to acquire another one in a different area ~3h flight away from where I am living now.

The deal is ~2M Revenue and ~500K EBITDA, with about 60% being recurring and 40% being project based revenue. The two owners are late 30s, early 40s and are interested in selling 100% of their business and staying on board for a few years after as employees to help transition the ownership. They want to transition out of the business as they have other ventures and I think are just bored of this industry.

Im thinking of structuring the transaction as follow:

$1.7M purchase price: $1M cash at close (senior debt), 300K after 2nd year, 200K after 3rd year and 200K worth of preferred shares in my topco, convertible into common shares at a valuation of 3-4M when at exit. The idea of the shares in topco is to make sure they still have some kind of skin in the game and to also get them to help me with some intros to other owners in the same industry/area + be references for next deals.

My question is, how do you keep the sellers motivated to keep closing and performing contract-based revenue? The recurring part, im not too worried about as they have long standing relationships with the clients and its simple not to lose the clients unless you fuck up very badly.

Would it make sense to have some kind of revenue share/bonus or commission for contract-based revenue closed while they stay on board? (Owners would like to stay onboard at least 3years and keep their current salaries of ~150K each, which is already priced into EBITDA so its fine)

Also, the LOI hasn't been presented yet so any insight on transaction structure would also be appreciated.

Thanks bros,