Why Aren’t Employment Agreements Standard in Trad Search Deals?

November 25, 2024

by a professional from The University of Chicago - Booth School of Business in Chicago, IL, USA

We've been hearing from searchers and operators about a troubling trend: many don’t have an employment agreement in place when they close their acquisition. Is this as widespread as it seems?

Here’s why this matters: Without an employment agreement, searcher CEOs are left vulnerable. It becomes nearly impossible to address issues like wrongful termination, clarify severance, or formalize expectations. We've spoken to multiple searchers who were terminated (possibly wrongfully) and struggled to explore legal options due to this gap.

What’s more concerning? Some search fund law firms seem aware of this practice but allow it to continue, prioritizing deal closure over the CEO’s long-term protection.

Searchers who have raised this issue at closing often hear dismissive responses like:

“We trust you.” “We’ll sort it out later.”
But trust alone doesn’t hold up when conflicts arise.

Have you experienced this yourself? If you secured an employment agreement, how did you manage it? Why isn’t this a standard part of search fund deals? This is a critical issue for searchers, investors, and the broader community. Let’s talk about how we can change the narrative and set better precedents moving forward.

Reply by a searcher
from Stanford University in Charlottesville, VA, USA

Although this advice does not necessarily indicate my specific situation, anecdotally, I have seen that "market" contracts do not include a standard employment agreement in the way we think about it. The LLC agreement used when an acquisition is made outlines how a board may remove you as CEO, what that means for unvested equity, etc. One on hand, this can mean you, as a searcher, do not have a non-compete, non-solicitation, etc., in place. On the other hand, it also means you likely have no severance agreement. I agree with @kevin that this is a troubling trend, and it seems like a part of the search fund complex that could use additional evolution. Personally, I would much rather see more formalized agreements from the start and take them a step further to clarify a lot more about how stakeholders should behave when changes occur.

I, too, am curious why this isn't included in more contracts. While I have theories, I'd also like to know what search fund attorneys think.

Reply by an intermediary
from The University of Chicago in Chicago, IL, USA

I do not understand.
If you are self-funded searcher with no outside investor, you are the owner. No need for employment agreement if you are the CEO. If you are hiring a CEO, the choice is yours,
If you have other investors in the equity capital stack, I presume your % ownership is disproportionately more than the % of your $ equity. You are probably the largest equity owner. Are you talking about employment agreement from the other investors?
Are you talking about employment agreement for hired CEO?

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