Mailly Law October 2019

October 2019

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Successful Executive Retention Agreements Elements and Common Bonus Structures

When a corporate buyer acquires another company, they usually want to retain the founder or CEO of the seller. The buyer enters into an executive retention agreement with the founder or CEO, and the retained executive commits to be available for a certain amount of time each month, typically between 5–10 hours. These hours are often spent ensuring the transition isn’t affecting the quality of service for the clients — attending lunches with key clients, for example. These lunches are also great opportunities for the retained executive to introduce the client to the new CEO. Often, the former CEO or retained executive will stay on to build a bridge between the old and new guard of the company and assist key clients with potential problems regarding the new regime.

Sometimes the buyer wishes to incentivize the seller’s cooperation, not only with a monthly payment but also with an ownership interest, either through stock options or a stock grant. The seller naturally becomes keenly interested in the success of the buyer. The maintenance of client relationships benefits both the buyer and the seller of a company. This is particularly so if the selling price includes an earnout provision. The buyer is buying a revenue stream, and the greater the revenue, the greater the price. If sales are less than they were projected during the negotiations of the deal, the earnout will be considerably less than if sales exceeded the projection.

or founder wants to stay involved during the earnout period, which can take several years.

In such a case, the CEO or founder enters into a more traditional executive compensation agreement, which specifies salary, bonus, stock options or restricted stock, and, if the executive is involuntarily separated from the company, severance payments. “The maintenance of client relationships benefits both the buyer and the seller of a company.” When a buyer is looking to acquire a business in the same industry, they are probably looking for market share and an increase in revenue. In this case, the seller is going to have more negotiating power with the buyer. During buying negotiations, however, steps are taken to ensure key employees have the incentive to stay onboard, which we will talk about in our next newsletter!

In many situations where the earnout is a substantial portion of the sales price, the CEO

-Guy Mailly | 1

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