Should I use golden handcuffs for key employees before a business sale?

Golden handcuffs are incentives that give an employee a financial reason to stay through a sale. Treadstone Law, an Ontario firm, describes a retention bonus as additional compensation, on top of regular pay, conditioned on staying employed through a defined date or milestone, commonly closing and sometimes a period beyond it. This page covers the question for an owner, not a recommendation.

Why buyers care about key employees

BDC says buyers assess risks from customer concentration and key employee reliance. Its due diligence guidance tells a buyer to find out whether the vendor or key employees run the business day to day, and whether those employees expect to stay. The same guidance suggests that, where there are key employees, a buyer think about how to make sure they stay on, which could include employment contracts with incentives for them to remain.

Questions to settle first

• Who is truly key: the people customers, suppliers or operations depend on?
• What must the employee do, and until when, to earn the payment?
• Who pays: you before closing, the buyer afterwards, or both?
• What happens if the employee leaves, is dismissed or the deal fails?

Timing and confidentiality

The same Treadstone article says there is no standard formula for sizing a retention bonus, which is negotiated according to the employee’s importance and what the parties will fund. Offering one can also reveal that a sale may be coming, so BDC’s advice on planning how and when to communicate with employees applies. Decide the order of announcement before you approach anyone.

Get the agreement right

Employment law differs by province, and a bonus tied to staying may interact with employment standards, tax and the purchase agreement. Ask your lawyer to draft it and your accountant to review the tax treatment. If the buyer will fund part of it, raise that in negotiation rather than assuming it. See also what happens to employees when you sell.