Tips on the Legal Structure for Seller Transition Services

Many M&A buyers, especially Searchers and Independent Sponsors, care a lot about the Sellers transitioning the business after an acquisition. With good reason. Sellers are always more involved than appears. The primary thing I hear from Buyers after closing: wow, the seller was really holding the business together. So, one of the major risks of an M&A deal is the Seller seeing millions of dollars hit their bank account and disappearing. Legally, Buyers require seller transition services through (1) a consulting agreement or (2) an employment agreement. However, in my agreements, I always insist that the transition services be listed in the purchase agreement as a covenant (in addition to further assurances). This way it seamlessly becomes an indemnifiable covenant, and we can use all the power of the purchase agreement indemnification section to enforce the transition services and, if available, offset against a note, earnout, escrow, or rollover. Covenants should not be subject to caps, baskets, or survival limitations While I know you can include a consulting agreement in the indemnification section as an ancillary document, it is more complex and leaves room for holes a good litigator can exploit. In practice, the way this should work is a covenant in the purchase agreement that Seller is required to work 10 hours a week to transition clients, suppliers, etc. If Seller does not do this, Buyer brings an indemnification claim for the losses (i.e., lost customer) and offsets against the escrow, note, or other post-closing consideration. One last bonus point, always make transition services at the discretion of the buyer. If you find you do not need the seller anymore and it is impacting the new work environment, a buyer has to be able to send the seller off into the sunset. I have seen many agreements that put the transition services in a consulting agreement, which is at-will with no enforcement mechanism. It is critical to do this right.