Mergers & Acquisitions · Key People
Reading — and Rewriting — the Employment Agreements That Come With a Business
The target's existing contracts can hide severance triggers, guaranteed bonuses and covenants that may not survive the sale. The buyer's new agreements decide whether the people who matter stay.
Two jobs in one
Inherited promises and new commitments
Employment agreement work in a deal has two halves: reviewing what the seller has already promised its people, and drafting what the buyer will promise going forward — including to the selling owner if they are staying on.
The first half is defensive. A single paragraph in an executive's contract can entitle them to a large payment if the company is sold, let them resign with severance if their title changes, or extend their notice period well beyond what the buyer expects. These obligations are costs of the deal and should be priced before signing.
The second half is about retention. The buyer is often paying for relationships and know-how carried by a small group of employees. New agreements — signed at or before closing — are how a buyer gives those people a reason to stay and protects the business if they leave.
This page is about agreements in the acquisition context. For drafting executive and key-employee agreements generally, see the firm's page on employment contracts. Broader workforce compliance — classification, wage-and-hour, NJ WARN — is covered under employment due diligence.
What to look for
Clauses in the seller's agreements that affect the deal
Offer letters and informal emails can create obligations too, so they belong in the review alongside signed contracts.
Change-of-control payments
Bonuses or severance triggered by a sale, sometimes "single trigger" (payable on the sale alone) and sometimes "double trigger" (payable only if employment also ends).
Good-reason resignation
Rights to quit and collect severance if duties, title, reporting line or location change — which a buyer's integration plan may do on day one.
Fixed terms and notice
Multi-year terms or long notice periods that make it expensive to restructure a role after closing.
Promised equity or profit shares
Phantom equity, profit interests or verbal promises of ownership that the seller must resolve before the buyer acquires the company.
Restrictive covenants
Non-competes, non-solicits and confidentiality terms — and whether they will benefit the buyer after the sale.
Assignment clauses
Whether the agreement can be assigned to a buyer at all, and on what conditions.
Structure matters
Do the contracts travel with the business?
In a share purchase or merger, the employer entity does not change, so its employment agreements generally remain in force — including the parts the buyer would rather not have. Diligence and negotiation focus on which obligations the seller will settle before closing and which the price should absorb.
In an asset purchase, employment with the seller ends and the buyer offers new employment to those it wants. Existing agreements are assigned only if the buyer chooses and the agreement allows it. This is where restrictive covenants need care: whether a non-compete or non-solicit signed with the seller can be enforced by a buyer depends on the agreement's assignment language and on New Jersey's reasonableness analysis, and is not something to assume. A buyer that needs that protection often asks key employees to sign new covenants with fresh consideration.
The buyer's side
Putting new agreements in place
Identify the critical few
Agree with the buyer which employees the business truly depends on — usually a short list of sales, technical and operational leads.
Decide the offer
Set role, compensation, any retention bonus and its vesting date, and whether equity or profit participation is part of the package.
Draft and negotiate
Prepare agreements that cover duties, termination, cause, severance, confidentiality and, where appropriate, reasonable restrictive covenants.
Sequence with the deal
Coordinate timing with the seller so conversations with staff happen when the parties are ready, and decide whether signed agreements are a closing condition.
The owner who stays
Agreements with the selling owner
Many small-business sales depend on the seller staying for a transition period. That arrangement should be a written employment or consulting agreement, separate from the purchase agreement, covering the length of the transition, the time commitment, compensation, authority and what happens if either side ends it early.
The seller's agreement often interacts with other deal terms: an earnout that depends on the business's performance under the seller's management, a seller note, and the seller's non-compete given as part of the sale. Those pieces must be drafted together so that, for example, termination of the seller's employment does not accidentally cancel an earnout or extend a covenant. Seller covenants in particular are covered on the page about non-competes in a business sale.
For buyers and sellers
Employment agreement checklist for a deal
- Collect every employment agreement, offer letter, bonus plan and retention letter, signed or not
- List all sale-triggered and termination-triggered payments and estimate their total
- Agree in the purchase agreement who pays each one
- Confirm which restrictive covenants the buyer will rely on and how they will be enforceable
- Prepare new agreements for key employees and the selling owner
- Align the timing of employee communications with the deal timeline
Each item connects to the rest of the transaction, which is managed under the firm's M&A services for business buyers and sellers.
Questions & answers
Employment agreements in a sale — common questions
Do employment contracts transfer automatically when a business is sold?
In a share sale or merger they usually stay in place because the employer is the same entity. In an asset sale they do not transfer automatically; the seller's employment relationships end, and the buyer either offers new terms or takes an assignment where the contract permits. That difference is one reason buyers review agreements before choosing the structure.
What is a change-of-control clause in an employment agreement?
It is a provision that gives the employee rights when ownership of the company changes, most often a bonus or enhanced severance. Some pay on the sale itself; others pay only if the employee is also terminated or resigns for good reason within a set period. Buyers need to find these early because they are real costs of the transaction.
Should the selling owner sign an employment or consulting agreement with the buyer?
If the seller is expected to help with the transition, yes. A written agreement sets the length, duties, pay and termination rights, and avoids disputes about what was promised. Whether it is employment or consulting depends on the level of control and time involved, and has tax and benefits consequences the parties should review with their accountants.
Can a buyer change employees' pay and terms after closing?
In an asset purchase the buyer sets terms when it makes offers, subject to employment laws. In a share purchase, existing contracts and policies continue, so changes must respect those agreements and any notice requirements. Changes that trigger good-reason or severance clauses can be costly, which is why they are mapped before closing.
Your attorney
Paul H. Appel, Esq.
Every matter at the firm is handled personally by Paul — the same attorney reads the documents, gives the advice and negotiates on your behalf.
- Education
- Columbia Law School, Juris Doctor (1967)
- Experience
- 58+ years in commercial and business law
- Focus for this matter
- Business acquisitions, sales, due diligence and closing documents
- Office
- Freehold, NJ — serving Monmouth, Middlesex & Ocean Counties
Contact
Discuss Your Business Matter With Paul
Describe what the business is dealing with — a contract on your desk, a deal in progress, a dispute or a company you are about to form. You will hear back from the attorney who handles the work.
- Phone917-748-6124
- Office11 Crestwood Drive, Freehold, NJ 07728
- ConsultationsBy phone, video or in person by appointment
Start a conversation