M&A Monday: Don’t Overlook Seller’s Management and Employees

When deals go bad after closing, it is often related to employee issues. Here is how to deal with them during the acquisition process. Last week, a Buyer mentioned off-hand that there were a couple of key employees. He said, they are all on handshake agreements, but have been there for a while. I said, hold on, let's discuss. I have seen more than a few deals where after closing, employees claim they were promised a bonus, salary increase, or other benefit. Sometimes this is legitimate, sometimes just extortion. This causes friction at a time when the business is most precarious. Here is what needs to be considered during the acquisition process to avoid post-closing employee issues – 1. Do not assume anything. Buyers often assume that if an employee has been there for a while, they will stay after closing at the same compensation terms. Do not assume. Employees often see the sale as a payday for them and a chance to renegotiate terms and increase comp. When they do not get taken care of by the seller they will be upset. The buyer wants the opposite - to reduce overhead and expenses. 2. Offer Letters as a Closing Condition. You must have a closing condition that key employees will be given offer letters at closing confirming their employment terms and bonuses (offer letters with key employees should always be a closing condition in the purchase agreement and should include a clear restatement of compensation, bonuses, non-compete/non-solicit/non-disparagement, in accordance with state-law). No deal should be closed without sitting down with key employees and level setting. 3. Make it Seller's Joint-Responsibility. Sellers often shrug off the responsibility of employee retention. A buyer should try to put align incentives with seller so seller assists in this process. You can do this through a covenant and indemnification (and claim damages if an employee leaves), or, at a minimum, involving the seller in offer letter conversations. 4. Make sure employees receive adequate closing comp. I advise clients to allocate part of the purchase price to long-time employees (often to be paid a year or two after closing). Other times, we allocate part of the purchase price to a management incentive pool. There are some other creative ideas to retain employees, but the key is to not overlook this issue. Address it straight on so there are no surprises after closing.