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Entrepreneurs: This May Be The Second Most Important Document In Your Acquisition

Entrepreneurs: This May Be The Second Most Important Document In Your Acquisition

John Warrillow is the founder of five companies, and the bestselling author of  Built To Sell: Creating A Business That Can Thrive Without You, which was recognized by both Fortune and Inc magazines as one of the best books of 2011, and his new book, The Automatic Customer: Creating A Subscription Business In Any Industry. A regular contributor to and The Globe and Mail, Warrillow was called one of the “Top Ten Business-To-Business Marketers” by B2B Marketing. Assessing businesses for over 15 years, he shares his expertise in areas ranging from entrepreneurship, sellability, and the benefits of subscription-based marketing to build–and sustain–success. In this article for Forbes, John writes about the importance of an employment agreement, once you sell your business:

When was the last time you signed an employment agreement?

If you’re an entrepreneur, chances are that it has been a while. However, when you sell your business, you’ll likely have to consider the employment terms you are prepared to agree to with the acquirer of your company.

You may not want a job with your acquirer but you’ll likely have to agree to stay on as an employee of the company that buys yours in order to help with the transition. Done right, your employment contract can be a key part of your remuneration from selling your business, so it’s worth spending some time on.

Eric Sit’s Biggest Regret In The Sale Of CyberWAVE

Eric Sit wishes he had thought more deeply about his employment contract when he sold his company CyberWAVE, a custom software developer. Sit sold to his largest customer, Detection Technologies, in April 2013. As Sit told me when I interviewed him for Built to Sell Radio, he trusted Detection’s founder, Brian Taylor, and agreed to accept Detection shares in return for CyberWAVE. He also signed his employment contract without much fuss.

Six months after they acquired CyberWAVE, Detection was acquired by Element Partners, a private equity group. Element insisted employees sign new agreements as a condition of their investment. In Sit’s case, he signed an agreement with a shortened term, which included cash for the shares Sit held in Detection, just to get the deal done. In agreeing to a shorter term, Sit had substantially reduced the value of his employment contract.

Soon after Element closed the transaction, Sit was laid off.

Employment Contract Vs. Earn-out

Your employment contract and an earn-out are typically different agreements even though many first-time sellers confuse the two. Your employment contract covers your rights and responsibilities as an employee under the new owner. This will likely include things like your salary, vacation time and the conditions under which they can let you go (i.e. severance obligations).

An earn-out is typically structured as a goal you need to reach as the head of a division of the acquiring company to maximize your proceeds of the sale. At The Value Builder System, our 12-step process is designed to limit the proportion of your deal at risk in an earn-out, but even successful graduates of our program will still have to risk a percentage of their sale proceeds in this way.

Typically tied to your division’s profits or revenue, your ability to hit your earn-out will likely be greatly improved if you are still employed by the buyer but they are usually not linked directly. In other words, while you could be let go from your employer, that doesn’t necessarily mean you forfeit your rights to an earn-out payment. In theory, a new manager could come in to run your division after you are fired, hit the earn-out numbers, and—depending on how your agreements are worded—you may still be entitled to your earn-out payment.

Likewise, you could miss your earn-out goals and continue to be employed by the company after the goal period.

All of these scenarios should be contemplated by your lawyer (I’m not one) and papered to protect you in so far as is possible. When you sell your company, it’s tempting to invest all of your energy into drafting the share purchase agreement, but the second most important document you get from a potential acquirer may just be your employment contract for the period after the sale goes through.

John Warrillow/Forbes/July, 2017