Locking up a key employee

October 20, 2021

by a searcher from Harvard University in Fort Lauderdale, FL, USA

Hey everyone,

I've got a deal where there is a key employee (non-owner) who we need to stay post-close. When asked, he says that he "thinks" he'll stay. What is the best way to structure the agreements so that we can i) get this employee to stay and ii) protect ourselves if he doesn't?

As far as I know, you can't have an employment agreement that compels someone to stay in a job. Is the best we can do to promise him a bonus is he stays for "x" length of time?

As far as the purchase agreement with the seller, I find it hard to believe that you could get away with a clawback if an employee leaves. Maybe the best we could do is an additional payment to the seller if the key employee stays for "x" length of time? But we'll be using an SBA loan, and I believe that the purchase payment can't have contingencies.

What do you think?

Reply by a searcher
from University of Virginia in Richmond, VA, USA

Everyone is replaceable and you need to make sure that everyone is valued as an employee but knows their personal replaceability.. What you do is get the seller to get the employee to draft out sufficient desk documentation about the key processes he manages. Then you read through that to make sure that you understand 85% or so of his job (the rest should come with experience or just by figuring it out as long as you know what should inform the decision.) That way you can do it yourself if he leaves and you can get someone else to do it and get up to speed quickly if need be also. It may be useful to promote someone else from within. You make that a requirement of the deal going through and be as thorough and petty about that as you possibly can be. Then you put that as an exhibit in your business plan to the bank and for the SBA.

Worst case scenario, even if the deal doesn't go through this will aid the sellers in making the business more marketable upon exit.

Reply by an investor
from University of Nebraska in Austin, TX, USA

You never know what can happen post close. Carve out an amount to put into escrow that gets released to seller after 12 months post close. If said employee leaves within 12 months that escrow amount adjusts down purchase price. That amount should be sufficient to get you comfortable relating to the lost revenue + hiring a replacement. Another option to consider is a 'stay' bonus that the employee enters into at close to ensure that the employee has a high chance of staying to at least garner knowledge over that period in the event they leave.

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