When a buyer examines your company during due diligence, one of the first things they’ll ask for — right after financials and key customer agreements — is your employee contracts.
Why? Because your people drive your business. Buyers want to understand how those people are engaged, compensated, and retained. They also want to ensure that after the deal closes, your workforce remains stable and compliant. Weak, inconsistent, or outdated employee agreements can create risk, spook buyers, and even derail a transaction.
At Legacy Advisors, we’ve seen deals slow down or lose value because a founder didn’t realize how much buyer confidence depends on strong, documented employment relationships.
Why Employee Contracts Matter in M&A
When buyers review your employee documentation, they’re looking for two things: continuity and compliance.
They want to confirm that your key employees are bound by clear terms and that you’ve mitigated risks related to employment disputes, compensation inconsistencies, or unassignable agreements.
In The Entrepreneur’s Exit Playbook, I talk about the concept of “transferable trust.” Buyers want to know that the trust and stability you’ve built with your team will transfer with the sale. Solid employee contracts are part of that equation.
What Buyers Want to See in Employee Agreements
A buyer’s legal and HR teams will closely review all employment-related documents, including offer letters, NDAs, and non-compete or non-solicitation agreements. Here’s what they’re evaluating:
- Written, signed agreements for all key employees.
- Clear job descriptions and defined responsibilities.
- Accurate compensation terms — including salary, bonuses, and benefits.
- Assignment clauses that allow contracts to transfer to a new owner.
- Confidentiality and IP provisions ensuring all work belongs to the company.
- Compliance with employment laws related to overtime, classification, and benefits.
- Retention or incentive structures that encourage post-sale stability.
If any of these areas are incomplete or inconsistent, buyers will flag them as red flags during diligence.
Common Mistakes Founders Make
Even well-run companies often make errors that can cause friction later. Some of the most common include:
- Relying on handshake agreements instead of written contracts.
- Missing or unsigned NDAs.
- Ambiguous bonus structures or outdated compensation language.
- Misclassifying employees as independent contractors.
- Overly restrictive or unenforceable non-competes.
- No clear assignment provisions allowing contracts to transfer upon sale.
These mistakes don’t just create legal exposure — they create uncertainty, which buyers translate directly into reduced valuation or slower deal progress.
Lessons from Experience
When I sold Pepperjam, we had a mix of full-time employees, contractors, and performance-based team members. Early in the process, our advisors encouraged us to standardize every contract — update offer letters, clean up NDAs, and ensure intellectual property assignments were in place. That effort paid off. The buyer’s legal team moved quickly, and diligence went smoothly.
On the Legacy Advisors Podcast (https://legacyadvisors.io/podcast/), Ed and I often share stories about founders who didn’t take this step soon enough. In one deal, a senior engineer’s IP agreement had never been signed. The buyer paused the transaction until ownership could be clarified — costing both time and leverage.
How to Prepare Your Employee Contracts for Sale
Here’s a checklist for getting your documentation in order before diligence begins:
1. Audit all employee files.
Verify that every team member — from executives to part-time staff — has a complete, signed agreement.
2. Review assignment clauses.
Make sure contracts explicitly allow transfer to a new owner without additional consent.
3. Update IP and confidentiality agreements.
Confirm that all proprietary work belongs to the company and not the individual.
4. Standardize compensation terms.
Ensure consistency across pay, bonuses, and benefits. Remove ambiguity wherever possible.
5. Revisit non-competes and non-solicits.
Confirm they’re enforceable under state law and appropriately tailored to protect the business.
6. Align with employment counsel.
Have your attorney review all agreements to confirm compliance and readiness for buyer scrutiny.
The Valuation Connection
Strong employee contracts protect your valuation in two ways:
- They reduce risk. Buyers know they won’t face disputes or mass turnover post-sale.
- They enhance transferability. When employee obligations and rights are clearly defined, buyers can step in with confidence.
Unclear or inconsistent agreements, on the other hand, can trigger retrades — where buyers demand price reductions or holdbacks to cover potential liabilities.
Final Thoughts
Employee contracts aren’t just legal documents — they’re a reflection of your company’s discipline, culture, and professionalism. They show buyers that your organization is stable, compliant, and well-managed.
Exits don’t happen when you feel ready — they happen when your business is ready. And readiness means your people — and their agreements — are in order.
Find the Right Partner to Help Sell Your Business
At Legacy Advisors, we help founders prepare for exit by auditing employment documentation, strengthening contracts, and ensuring compliance that buyers trust.
Visit legacyadvisors.io to connect with our team, listen to the Legacy Advisors Podcast (https://legacyadvisors.io/podcast/), and explore insights from The Entrepreneur’s Exit Playbook. Together, we’ll make sure your people — and your paperwork — are ready for a premium exit.
Frequently Asked Questions About Employee Contracts and M&A Readiness
Why do buyers care so much about employee contracts during due diligence?
Because your people are your business. Buyers want to ensure that key employees are properly engaged, legally compliant, and committed to staying post-sale. Clean, well-documented contracts reduce turnover risk, protect intellectual property, and ensure smooth operational transfer. If employee terms are unclear or inconsistent, buyers see uncertainty — and uncertainty means risk. That risk often shows up in lower offers, longer earnouts, or delayed closings. Solid employee agreements are one of the most effective ways to build buyer confidence and protect valuation.
What are the most important clauses buyers look for in employee contracts?
Buyers focus on three key areas: transferability, ownership, and compliance. Transferability ensures the contract can move to the new owner without additional consent. Ownership confirms that any intellectual property or creative work produced by the employee belongs to the company. Compliance covers wage and hour laws, benefits, and classification accuracy (employee vs. contractor). They’ll also check for confidentiality, non-solicitation, and non-compete clauses to protect against post-sale competition or client poaching. Together, these provisions demonstrate operational discipline and legal readiness.
What happens if I don’t have signed employee contracts for everyone?
Missing or incomplete contracts are red flags. Without written agreements, buyers can’t verify employment terms, IP ownership, or legal compliance. That uncertainty can lead to valuation reductions or even deal pauses until documentation is corrected. If you don’t have signed contracts for all employees, now’s the time to fix it. Create standardized templates, gather signatures, and ensure each agreement includes assignment and confidentiality clauses. Buyers reward companies that show foresight — not those that scramble to backfill paperwork under pressure.
How early should I update my employee contracts before going to market?
Ideally, at least 6–12 months before beginning the sale process. This allows you to identify gaps, fix inconsistencies, and let the updated agreements “season” before due diligence begins. If you make changes too close to the sale, employees may become suspicious or hesitant to sign. Early preparation allows you to implement updates gradually and explain them as part of normal business improvement — not a sudden pre-sale cleanup. Consistency and timing send a powerful message to buyers about professionalism and transparency.
How can Legacy Advisors help me strengthen employee documentation before a sale?
At Legacy Advisors, we work directly with founders to audit employee agreements, standardize terms, and ensure full compliance with buyer expectations. We help you identify risk areas, update IP and confidentiality provisions, and coordinate with legal counsel to prepare a clean, organized documentation set for diligence. Drawing on insights from The Entrepreneur’s Exit Playbook and discussions on the Legacy Advisors Podcast (https://legacyadvisors.io/podcast/), our team helps you eliminate red flags before buyers ever see them. The result? A smoother diligence process, faster closing, and stronger valuation.