The buyer is requiring us to keep our key leadership team intact post-close, but they want us to fund their retention bonuses out of our sale proceeds. How do we structure these retention agreements and EBITDA add-backs so they do not erode our valuation?

Question

Tyler Smith · Accepted Answer

It is common for buyers to want key leaders to stay after the sale, but forcing you to pay for their post-close retention out of your transaction proceeds is an unfair reduction of your purchase price. You must push back on this structure.

First, argue that key employee retention directly benefits the buyer's post-close performance. Therefore, the cost of keeping those employees should be borne by the buyer as part of their ongoing operational expenses.

If the buyer insists on a pre-close retention bonus pool, negotiate to have these payments treated as transaction expenses that are excluded from your EBITDA calculations. This prevents the buyer from using these temporary costs to lower your historical earnings and multiple.

Structure the retention agreements so that payments are contingent on both time and performance milestones. For example, a leader might receive half of their bonus after twelve months and the remainder after twenty-four months, provided they meet their agreed-upon performance goals.

Tie these retention milestones directly to their seats on the Accountability Chart. This ensures the leaders remain focused on driving results during the critical transition period.

By positioning retention as a shared investment in the future of the company, you protect your sale proceeds while ensuring your leadership team is properly incentivized to support the new owners.