Q: I am in the process of selling my agency. Part of the purchase price will be an "earnout," which means that it will be based on client retention during the year after the sale. The buyer wants to have me stick around as an employee in charge of retaining clients and transitioning to the new ownership. The buyer has sent me an employment agreement that appears to be straightforward and simple: I will be an employee for a term of one year at a fixed salary. Can the buyer terminate my employment after, say, a few months? Such termination would certainly hurt the prospects of client retention and probably ensure that the purchase price would be reduced. What can I do to make sure that I can stay for the full year?
A: Under the agreement you describe, you would be an at-will employee, which means that either party can terminate at any time, for any reason, or no reason. The fact that the agreement has a one-year term does not affect the buyer's ability to get rid of you in less than one year.
All too often, sellers with earnout agreements fall into a trap of becoming an at-will employee of the buyer, allowing the latter to terminate employment well before the parties originally anticipated. Entrepreneurs who sell their businesses generally do not get along with their buyers for more than a short time, mainly due to conflicting personnel policies, so buyers often exercise their rights to terminate, leaving the seller out in the cold.
Therefore, if you want to stay for the entire year in order to help ensure that the clients stay, you need to negotiate changes to the buyer's draft of your employment agreement. Ideally, the agreement should provide that the buyer has no right to terminate you under any circumstances.
As a compromise, buyers who wish to retain the right to terminate you at any time may offer substantial severance pay. For example, the buyer might propose that, if he terminates your employment agreement in less than one year, the buyer will pay all salary that you would have earned for the rest of the one-year term.
However, where the purchase price depends on account retention, and where account retention in turns depends on your being in the picture, severance pay is poor consolation. You need an agreement limiting the buyer's right to fire you.
A good arrangement might be one where the buyer retains the right to fire you "for cause," which means a material breach of your employment agreement and other, specific grounds such as your conviction of a crime. Conversely, the buyer agrees to refrain from terminating without cause for the one-year period.
Sellers also need to cover the case where the buyer doesn't fire you but makes life miserable by assigning unacceptable duties or the like, hoping that you will quit. A good agreement will provide that the buyer may not change your position or duties without your consent.
Of course, not all sellers want to stick around after a sale as an employee or independent contractor of the buyer. Even in cases where much of the price depends on account retention, some sellers want to leave as soon as possible after the closing on the acquisition.
Mark Pestronk is a Washington-based lawyer specializing in travel law. To submit a question for Legal Briefs, email him at [email protected].