The buyer hires the seller’s owner to be its vice president of sales, under a 5-year employment agreement, with the buyer’s right to terminate for cause. The agreement also gave the buyer the right to fire the seller’s owner at any time, at the sole and absolute discretion of the buyer.
M&A Stories
May 10, 2023
Introduction
Buyers often hire the owners of businesses they acquire to work for them, but it doesn’t always work out. When employment is terminated, costly litigation can follow, and the terms and conditions of the employment agreement can play a crucial role in the outcome.
The deal
In this case, the buyer agreed to purchase the seller’s assets for $185,000, and the seller’s owner agreed to work for the buyer as Vice President of Sales under a five-year employment agreement. The agreement gave the buyer the right to terminate the seller’s owner for cause and at any time at the sole and absolute discretion of the buyer.
Unfortunately, the employment arrangement did not work out. The buyer was dissatisfied with the seller owner’s work performance, including his lackluster sales, failure to follow company procedures, and reports of him being “visibly intoxicated” at a company event. Furthermore, the seller owner’s sales remained significantly lower than forecasted.
Almost four years into the agreement, the seller’s owner was terminated when the buyer discovered that the owner was negotiating a business deal with a major competitor. The seller’s owner sued the buyer, claiming that he was excused from his non-competition covenant with the buyer because the buyer had breached the employment agreement by firing him without cause.
The lawsuit
The trial court held that the buyer did not breach the employment agreement because it was justified in terminating the seller’s owner for cause, citing poor performance and bad behavior. The seller’s owner challenged this decision in an appeal, but the appellate court agreed with the trial court.
See Frank v. IPAK, Inc., No. 22-P-685, Superior Court of New Jersey, Appellate Division (Submitted October 12, 2021. Decided April 25, 2023)
Comment
This litigation was costly and time-consuming. If the employment agreement had clearly stated that the seller’s owner was an at-will employee, the buyer would have been able to terminate the owner without cause, and the litigation could have been avoided. The inclusion of a termination for cause provision in the agreement was a mistake because it took away the buyer’s right to terminate without cause.
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
Email: jmccauley@mk-law.com
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Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles
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