Less than a year after selling the company he had spent 24 years building, Keith Jacob could leave.

His employment agreement with the buyer ran five years, but the agreement was one-sided. Keith had the ability to walk away whenever he wanted. He stayed because his former employees were struggling, and he felt responsible for what happened to them.

The problem was culture.

Keith had spent nearly a quarter century building St. Louis Staffing. He had grown the company, acquired other businesses along the way, survived the Great Recession, and eventually reached the point where he was ready to sell. The buyer kept him on through the transition and gave him an earn-out, which is common enough in private-company transactions. Earn-outs appear in roughly a quarter to a third of private-company deals, with a median duration of about two years.

But when we talked, it wasn’t the deal terms he was hung up on.

“I established a 24-year culture,” he told me. “Their culture wasn’t anything like my culture.”

Then he said something I think every owner preparing to sell should hear: his team was struggling, and he didn’t want to leave them high and dry.

 

You’re selling more than the financial asset

Most sellers spend years thinking about the financial side of an exit.

What’s the multiple? What’s EBITDA? How much cash do I get at close? How much gets rolled? Is there an earn-out? How long am I staying? What happens to the working capital?

I understand why. I’ve bought companies, sold companies, brokered transactions and sat inside more than 100 deals. The economics consume enormous amounts of attention because they’re explicit. They’re sitting in the LOI and purchase agreement with numbers attached to them.

Culture rarely gets that treatment.

Yet in a small business, culture can be embedded in the asset every bit as deeply as the customer relationships and operating procedures.

 

 

Keith had already experienced this from the buyer’s side years earlier. When he acquired an IT staffing company in Kansas City, the seller he replaced had been extremely nurturing and constantly available to the contractors working for her. Keith described her as a “high S” on the DISC scale. She took care of everybody. Keith initially tried managing the company from 250 miles away without immediately installing a general manager.

He later called that decision detrimental.

The interesting part is that nothing on the balance sheet tells you the owner answers the phone immediately when an employee needs something. The P&L doesn’t tell you whether employees are accustomed to autonomy or constant reassurance. You won’t find “the owner knows everybody’s family” in a Quality of Earnings report.

Those behaviors still produce economic consequences after the deal closes.

That’s why I’ve become increasingly interested in culture as something you actually underwrite.

 

Source: Bain & Company

 

The seller has a diligence problem, too

Due diligence is usually described as something the buyer does to the seller.

I think sellers who care about their employees, their legacy, and their own post-close experience need to reverse the lens.

Keith agreed to stay with his acquirer for up to five years. Think about what that means operationally. You spend 24 years as the person at the top of an organization, then the transaction closes and suddenly you’re an employee inside someone else’s company.

The org chart changes overnight. Your authority changes. The way decisions get made can change. Your former employees still look at you as the person who built the place, while the legal authority to make decisions now sits somewhere else.

And if you have an earn-out, your financial outcome may depend on what happens inside that new structure.

That combination is more complicated than “seller transition.”

Keith told me he planned to create as much change as he could inside the acquiring organization because he wanted his team secure before he left. He was simultaneously a former owner, current employee, earn-out recipient, and advocate for people who still viewed him as their leader.

You can negotiate every one of those financial relationships in a purchase agreement.

You can’t contract your way into cultural compatibility.

Research on lower-middle-market employee retention also shows why the identity of the buyer matters. CT Acquisitions analyzed 76 active lower-middle-market buyers and found materially different retention patterns depending on the acquisition strategy. Capability-focused strategic buyers tended to retain 85% to 95% of employees, while strategic buyers pursuing cost reductions retained 70% to 85% in year one and 50% to 70% by year three.

The underlying point matches what I see in transactions: two buyers can pay the same price for the same company and have completely different plans for the people inside it.

That should matter to a seller before close.

 

Diligence the company you’re joining

I generally prefer relatively clean seller transitions when I’m buying smaller companies. I want to download what I need from the seller, establish ownership and let everybody begin operating under the new reality. In an SBA-sized acquisition, I’ll often think in terms of a transition measured in months rather than years.

There are plenty of deals where a longer transition makes sense. Keith’s experience shows why the seller needs to diligence that arrangement with the same seriousness the buyer brings to the financials.

 

 

If I were selling and staying, I’d want to understand some very practical things before signing:

• How does this buyer make decisions when the acquired company disagrees with headquarters?
• Which parts of our culture are they deliberately trying to preserve?
• What has happened to employees at their previous acquisitions?
• Who controls hiring, compensation, benefits and terminations after close?
• What authority will I actually retain during my transition?
• What operating assumptions sit underneath my earn-out?
• What does the buyer mean when they say, “Nothing is going to change”?

That last question matters more than it sounds.

In small-company acquisitions, the seller often carries an enormous amount of institutional authority. Employees may have spent 10 or 20 years learning how that owner behaves. Customers have too. A buyer can acquire the contracts, equipment, brand and workforce on Friday afternoon and discover Monday morning that some of the company’s most important operating systems were relationships nobody had written down.

Keith had seen that problem as a buyer.

Years later, he experienced it from the other chair.

That’s what makes his story stick with me. When owners think about finding the “right buyer,” price tends to dominate the definition of right. If you’re taking your money and leaving at close, maybe that’s enough.

If you’re staying, if your earn-out depends on what happens next, or if you care what happens to the people who spent years helping you build the company, you’re making another decision at the same time.

You’re choosing the company you and your employees are about to join.

That deserves its own due diligence.

It’s also the kind of risk we spend a lot of time unpacking with buyers inside Acquisition Lab, because some of the most consequential parts of an acquisition never appear in the model.