People are vital to all businesses and many businesses simply wouldn’t exist without certain key people. When a business owner sells a company, having these key employees continue in their roles can be critical for the buyer and justifying what they’ve paid. Alternatively, if these key employees leave, the value of the business deteriorates and in some cases very quickly. Even worse, if these key employees go to a competitor, this can only accelerate the decline.
Strategically thinking through how to transition the employment of certain key employees is an essential part of the business sale process. On the other side of the transaction, buyers need to assess the seller’s key employee transition plan, identify risks, and try to mitigate them.
From a legal standpoint, two tools can help achieve this. One is to financially incentivize key employees to continue their performance and stay with the company after a sale. This is done through a variety of agreements such as executive bonus agreements, restricted stock, stock options, phantom stock, and stock appreciation rights. Another tool is agreements that restrict what employees can do upon leaving the company and what they can take with them. These include confidentiality agreements as well as prohibitions on competing and soliciting customers.
As a seller develops its key employees and the leadership team of a company that will be later sold or as a buyer evaluates this team in the due diligence stage of a transaction, reviewing and understanding these types of agreements is vital. If I could be of any help with this process, feel free to contact me.
