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In the sale of a business, sometimes the previous owners (the “ex-owner”) are asked by the purchasers to stay with the company for a fixed time period to help transition existing clients or customers to the new ownership. In this case, such ex-owners are usually required to enter into an executive employment agreement with the new company. However, problems may arise when the purchase price for the business is directly tied to the retention of the company’s customer/clients (also referred to as an earnout). This is because if the ex-owner’s employment agreement with the company is terminated, the retention of the customers/clients may also drop, which in turn would negatively affect the purchase price. For this reason, it is very important for ex-owners in a similar situation to negotiate strict termination clauses into their executive employment agreement.
As an ex-owner, is your employment secure?
- Ex-owners should consider requesting a clause which states that their executive employment agreement may not be terminated by the company unless the ex-owner materially breaches the executive employment agreement.