Transaction Academy · Module 13
Employment, Consulting & Restrictive Covenant Agreements.
The purchase agreement is rarely the only contract signed at closing. Learn how buyers and sellers use employment, consulting, transition services, and restrictive covenant agreements to protect value and facilitate a successful transition.
Overview
The purchase agreement is rarely the only contract signed at closing. In many acquisitions, additional agreements are necessary to facilitate the transition of the business, retain key personnel, protect confidential information, and preserve the value of the transaction.
Depending on the structure of the deal, the buyer may wish to retain the seller as an employee or consultant, hire key members of management, or require certain individuals to refrain from competing with the business after closing.
These agreements help ensure continuity of operations while protecting the goodwill and other intangible assets the buyer has acquired.
This module provides an overview of the most common employment-related agreements executed in connection with mergers and acquisitions.
Lesson 1
Why Additional Agreements Are Necessary
Buying a business does not automatically guarantee that key people will remain involved after closing.
In many transactions, the buyer is purchasing not only tangible assets but also:
- Customer relationships
- Institutional knowledge
- Management expertise
- Vendor relationships
- Operational processes
- Goodwill
Additional agreements help preserve these valuable business assets during the transition.
Lesson 2
Employment Agreements
An Employment Agreement governs the ongoing employment relationship between the buyer (or acquired company) and an employee after closing.
Employment agreements are commonly used for:
- Founders
- Executives
- Key managers
- Highly specialized employees
- Licensed professionals
Typical provisions include:
- Position and responsibilities
- Compensation
- Bonuses
- Benefits
- Term of employment
- Grounds for termination
- Confidentiality obligations
- Restrictive covenants
- Ownership of work product
Not every employee receives an employment agreement. Many businesses continue to employ personnel on an at-will basis where permitted by applicable law.
Lesson 3
Consulting Agreements
Sometimes the seller does not wish to remain an employee but is willing to assist with the transition. In those situations, the parties may enter into a Consulting Agreement.
Consulting arrangements often provide for:
- Transition assistance
- Customer introductions
- Employee training
- Operational support
- Strategic advice
- Knowledge transfer
The agreement generally specifies:
- Scope of services
- Compensation
- Duration
- Independent contractor status
- Confidentiality obligations
- Ownership of work product
- Termination rights
These agreements can help ensure an orderly transition without creating a long-term employment relationship.
Lesson 4
Transition Services Agreements (TSAs)
In some transactions, particularly larger or more complex deals, the seller may continue providing operational support after closing through a Transition Services Agreement (TSA).
Examples of transition services include:
- Accounting
- Payroll
- Human resources
- Information technology
- Administrative support
- Customer service
- Supply chain assistance
- Office facilities
The TSA identifies:
- Services provided
- Service levels
- Fees
- Duration
- Termination procedures
Transition Services Agreements are especially common when the buyer needs additional time to integrate the acquired business into its existing operations.
Lesson 5
Non-Competition Agreements
One of the buyer's greatest concerns is that the seller could establish a competing business immediately after closing.
A Non-Competition Agreement seeks to reduce this risk by restricting certain competitive activities for a negotiated period and within an agreed geographic area.
Typical provisions address:
- Restricted business activities
- Geographic scope
- Duration
- Permitted activities
- Exceptions
- Remedies for breach
The enforceability of non-competition agreements depends on applicable law, which varies by jurisdiction.
Lesson 6
Non-Solicitation Agreements
Even if the seller does not compete directly, the seller could potentially recruit employees or solicit customers.
Non-Solicitation provisions are designed to protect against these risks.
Common restrictions include:
- Employee Non-Solicitation — Prohibits recruiting or hiring specified employees.
- Customer Non-Solicitation — Restricts efforts to solicit certain customers or clients.
- Vendor Non-Solicitation — May restrict interference with key supplier relationships.
Like non-competition agreements, enforceability depends on applicable law.
Lesson 7
Confidentiality Agreements
Confidential information is often one of a business's most valuable assets. Confidentiality provisions help protect information such as:
- Customer lists
- Pricing information
- Financial information
- Trade secrets
- Business strategies
- Marketing plans
- Proprietary processes
- Software and technology
Many acquisition agreements contain confidentiality provisions, but separate confidentiality agreements may also be used depending on the transaction.
Lesson 8
Intellectual Property and Work Product
When employees or consultants continue working after closing, the parties should clearly establish ownership of intellectual property created during the engagement.
These provisions often address:
- Ownership of inventions
- Software
- Copyrights
- Designs
- Marketing materials
- Confidential information
- Improvements to existing technology
Clearly defining ownership helps avoid future disputes regarding valuable business assets.
Lesson 9
Compensation Structures
Employment and consulting arrangements may include a variety of compensation structures.
Examples include:
- Salary
- Hourly compensation
- Signing bonuses
- Annual bonuses
- Commission-based compensation
- Equity incentives
- Phantom equity
- Profit-sharing
- Retention bonuses
The appropriate compensation structure depends on the goals of the parties and the nature of the post-closing relationship.
Lesson 10
Integrating These Agreements into the Transaction
These agreements rarely exist in isolation.
Instead, they are often negotiated alongside the primary acquisition agreement.
For example:
- A founder may sell the business, sign a three-year Employment Agreement, and agree to a Non-Competition Agreement.
- A retiring owner may sell the business, serve as a consultant for six months, and execute confidentiality and non-solicitation agreements.
- A key executive may receive a retention bonus and an updated Employment Agreement as a condition of closing.
Coordinating these agreements helps facilitate a smoother transition and protect the value of the acquisition.
Lesson 11
Practical Example
- Assume the owner of a successful physical therapy practice sells the business but remains involved for one year after closing.
- The transaction may include an Asset Purchase Agreement, an Employment Agreement naming the seller as Clinical Director, a two-year Consulting Agreement for business development, a Non-Competition Agreement, a Non-Solicitation Agreement, and confidentiality provisions.
- Together, these agreements help preserve relationships with patients, referral sources, and employees while providing continuity during the transition.
Key Takeaways
What to remember from this module.
- Business acquisitions frequently involve multiple agreements beyond the primary purchase agreement.
- Employment Agreements help retain key personnel after closing.
- Consulting Agreements and Transition Services Agreements facilitate operational continuity and knowledge transfer.
- Restrictive covenants—including non-competition, non-solicitation, and confidentiality provisions—help protect the value of the acquired business.
- Clearly drafted post-closing agreements can reduce disputes and support a successful transition for both buyers and sellers.
What's Next
Module 14 — Escrow Agreements
Learn how escrow agreements allocate post-closing risk in M&A transactions, including escrow agents, release schedules, claim procedures, and key negotiation points.
Educational Disclaimer
The information contained in this module is provided solely for educational and informational purposes. It is intended to provide a general overview of employment, consulting, transition services, and restrictive covenant agreements commonly used in mergers and acquisitions and does not constitute legal, tax, accounting, investment, or financial advice. Reading this material or using the Transaction Academy does not create an attorney-client relationship with GV LAW PLLC. Every transaction is unique, and buyers and sellers should consult qualified professional advisors regarding their specific circumstances.