M&A: Retention of promoters or founders post acquisition

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In an M&A transaction, it is common to retain promoters or founders who are instrumental to the success of a target company after the acquisition.

The SPA typically provides for employment agreements or service contracts to be entered into between the target company and the promoters or founders on terms satisfactory to the purchaser.

As the valuation of the target company is based partly on its potential or prospects, which in turn may depend on the involvement of the promoters or founders after the acquisition, the terms of the employment agreements or service contracts should be considered in tandem with the payment structure for the acquisition.

To ensure the promoters or founders remain committed to the success of the target company post acquisition, some of the common methods include:

– Have an earn out structure as part of the consideration

– Payment of purchase price in tranches

– Retention of the promoters or founders as key employees with performance based incentives upon achieving milestones.

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#mergersandacquisitions

This post was first posted on Linkedin on 8 January 2023.

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