Key Employee Retention Agreements: Keeping Staff Through an Ontario Business Sale

A business sale can take months to get from a signed letter of intent to closing — and during that stretch, your most valuable employees are often the ones most likely to start looking elsewhere. Losing a key manager, salesperson, or technician partway through a deal can spook a buyer or even threaten the transaction itself.

A key employee retention agreement is one of the main tools sellers, and sometimes buyers, use to keep critical people in place through the transition.

This article looks at why key employees become a flight risk during a sale, what a retention agreement typically covers, and how to time it.

Why Key Employees Are a Flight Risk During a Sale

Word of a pending sale — even when kept confidential — tends to create uncertainty. Employees worry about job security, reporting changes, and whether a new owner will want them at all. The employees you most need to keep, the ones with client relationships, institutional knowledge, or specialized skills, are often the ones with the easiest time finding another job if they get nervous.

What a Retention Agreement Typically Covers

• The retention period — the window during which the employee agrees to stay, often tied to the closing date or a period afterward.
• The incentive — commonly a retention bonus, though the specific size and structure is entirely deal-specific.
• Continued duties — a description of the role the employee is expected to keep performing during the transition, including cooperation with due diligence or the buyer’s integration planning.
• Confidentiality obligations — given that the employee is likely aware of the pending sale before it’s public.
• Conditions for payment — typically continued employment through a defined date, and no misconduct or performance issues in the interim.
• What happens if the deal falls through — a well-drafted agreement addresses this scenario explicitly rather than leaving it ambiguous.

Structuring the Incentive

There’s no standard formula for sizing a retention incentive — it depends on the employee’s role, how replaceable they are, the length of the deal timeline, and what the buyer and seller are willing to fund. This is a negotiated business decision, not a legal formula, and any specific figure needs to be worked out for your transaction rather than benchmarked against someone else’s deal.

Timing: When to Roll These Out

1. At or shortly after signing a letter of intent — once the deal has enough momentum that retaining key people becomes a real priority, but still under strict confidentiality.
2. During due diligence — buyers sometimes specifically ask that certain employees be locked in before they’ll proceed, since losing a key person mid-diligence can change the deal’s value.
3. At signing of the definitive purchase agreement — terms are typically finalized and formally documented by this stage.
4. Through closing and into the integration period — some retention arrangements extend a defined period past closing, particularly where the buyer wants continuity during the transition.

Legal Considerations for Buyers and Sellers

• [ ] Decide who is funding the retention payment — seller, buyer, or split — and reflect it in the purchase price mechanics.
• [ ] Make sure the retention agreement doesn’t conflict with any new employment contract the buyer separately offers.
• [ ] Address confidentiality carefully — the employee likely knows about the sale before the rest of the workforce does.
• [ ] Build in a clear mechanism for what happens if the transaction doesn’t close.
• [ ] Coordinate with your accountant on how the payment will be treated.

Frequently asked questions