Should I give Seller a Sales-Based Employment Agreement Post-Close?

August 18, 2021

by a searcher from University of Illinois at Urbana-Champaign in Dallas, TX, USA

Hi all - I am working with a seller who would like to remain within the business post-sale in solely a Sales capacity. The business relies on revenue from an initial installation and then recurring service revenue, so a heavy piece of his role going forward will be to maintain current accounts and retarget a robust contact list.

I am curious whether anyone has experience structuring these types of employment agreements to keep the seller motivated and reward them for upside and their learnings. I am charting realistic revenue/earnings scenarios and the resulting different base:commission ratios, while also ensuring sufficient cash flow for investment into the business. I am also looking at a tiered commission structure. They are not open to a 100% commission agreement at this time.

Open to thoughts and appreciate your time.

Scott

Reply by an intermediary
from Washington University in St. Louis in Chicago, IL, USA

I am more often a sell-side advisor - in that capacity, I always look to make sure that any post-close comp aligns to what they will realistically be responsible for and can influence. In that light - if what the seller really wants to do is sales, then makes sense to align the responsibilities and comp of the agreement around sales figures and targets. I would consider adding some sort of a margin target - again, if i were advising the seller I would tell them to be cautious because they will no longer control the cost of delivering the product/service - but you don't want to end up with great revenue on which you lose money. I can imagine there is a middle ground there. The other advantage to comp weighted to variable - if they do well, you both benefit, but if their attention is not focused post-close, your downside is limited.

Reply by a searcher
from Michigan Technological University in Green Bay, WI, USA

If the seller is looking at long term that will eliminate SBA funding - that's an absolute maximum 12 month limit. That being said, even one of my bankers told me there's ways around that if that's what's required. We have structured a salary plus commission because training was involved and a commission only in another circumstance. So many of these come down to the relationship built with the seller, what the seller wants and what the buyer wants and how to make it work out. If you have scenarios, why not share them with him and see what can be worked out?

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