Uncovering Hidden Bonus Obligations Before an Acquisition Closed

The situation

Angela had spent close to two decades as an investment advisor before she and Fernanda, a technology executive with a background running engineering teams, formed a small holding company based in Caledon. Their plan was to acquire well-run, mid-sized software companies and hold them for the long term rather than flip them for a quick return. Their first target was a logistics-software business with roughly 90 employees and a purchase price that had been negotiated at around $65 million, funded through a mix of their own capital and a bank facility.

By the time our firm was engaged, the deal already had a signed letter of intent and an agreed closing date about ten weeks out. Angela and Fernanda had retained their own accountants for financial due diligence and asked us to lead the legal review, including the corporate, employment and contract diligence that sits underneath every acquisition of this size. The seller's data room was well organized on its face: financial statements, customer contracts, a capitalization table, and a folder of employment agreements for the leadership team. Nothing in the seller's disclosure schedule — the list of exceptions and liabilities a seller must formally identify under the purchase agreement — flagged anything unusual about employee compensation.

What the review found

Legal due diligence on a company of this size means reading every material contract line by line, not skimming the summaries the seller provides. When our team worked through the individual employment agreements for the target's five most senior employees, a pattern emerged that had not been called out anywhere in the data room index. Each of those agreements contained a change-of-control clause: a provision that entitles an employee to a bonus payment, sometimes tied to salary multiples and sometimes to equity value, if the company is sold and their role changes materially afterward.

These clauses are common and, when properly disclosed, are simply a cost that gets factored into the purchase price. The problem here was that they had not been disclosed as a group. Three of the five agreements were folded into the general employment agreement folder without any flag, and two — including the agreement for the most senior technology executive on the target's staff, a woman named Ines who had been with the company for over a decade and effectively ran its engineering organization — had been added to the data room only days before diligence began, dated and signed years earlier but never surfaced in the seller's earlier representations to Angela and Fernanda.

Once our team quantified the obligations, the number was material: roughly $2.4 million owed across the five agreements, with Ines's own bonus making up close to half of that total on its own given her seniority and tenure. None of this had been reflected in the target's financial statements as a liability, because the bonuses were contingent — they only became payable on a sale, and technically the sale had not yet happened. But contingent liabilities that crystallize on closing are exactly the kind of thing a purchase agreement is supposed to catch before the buyer signs, not after.

There was a second layer to the problem. Ines was not just a line item. She was, by the seller's own account and by everything Angela and Fernanda had learned in their management interviews, the person most responsible for the technical roadmap the buyers were paying for. If she left immediately after collecting a change-of-control bonus, the buyers would have paid $65 million for a company missing its most important employee.

What we did

1. Confirmed the obligations were legally enforceable before treating them as leverage. Before raising anything with the seller, our team verified that the employment agreements were validly executed, that the change-of-control triggers were clearly worded, and that Ontario employment law would support the bonuses as owed compensation rather than something that could be challenged or reduced. There was no ambiguity to exploit — the obligations were real, which meant the conversation had to be about who pays for them, not whether they existed.
2. Went back to the seller with a formal diligence query, on the record. Rather than raising the issue informally, we sent a written request requiring the seller to confirm, in an updated disclosure schedule, the full list of change-of-control or similar payments triggered by the transaction. This created a clear record that the obligations were now disclosed and that any inaccuracy in the seller's response could be pursued as a breach of the purchase agreement's representations and warranties — the seller's contractual promises about the state of the business.
3. Negotiated a purchase price adjustment rather than walking away. Angela and Fernanda still wanted the deal. Our role was to make sure they did not pay twice — once in the headline purchase price and again in bonuses the seller should have accounted for. We proposed reducing the purchase price by the value of the undisclosed obligations, funded instead through an escrow: a portion of the purchase price held back at closing and released once specific conditions are met.
4. Structured the escrow to actually fund the bonus payments. Rather than treating the price cut as pure discount, we negotiated an escrow of roughly $2.4 million, matching the disclosed obligations dollar for dollar, to be released directly to satisfy the change-of-control payments as they became due. This meant the seller's failure to disclose did not become a windfall for the buyer at the expense of employees who were legitimately owed money under agreements the seller itself had signed.
5. Negotiated a separate retention arrangement for Ines. The change-of-control bonus solved the disclosure problem but did nothing to solve the retention problem — a lump sum payable on closing gives a key employee every reason to leave immediately afterward. We worked with Angela and Fernanda to design a new go-forward agreement for Ines, layering a retention bonus of roughly $400,000 on top of her existing entitlement, payable in installments over eighteen months contingent on her staying with the business. This came directly out of the buyers' own budget, not the escrow, because it was a forward-looking investment in the person, not compensation for the seller's disclosure failure.
6. Tightened the closing conditions before signing the amendment. Because the discovery came late in the process, we insisted the amended purchase agreement include an updated, complete disclosure schedule as a condition of closing, so that any further undisclosed obligations found before the closing date would give Angela and Fernanda a contractual right to delay or walk away rather than discovering more surprises after the money had moved.

The outcome

The deal closed roughly three weeks later than originally planned, at an adjusted headline price of about $62.6 million — the original $65 million less the $2.4 million escrow funding the change-of-control bonuses — plus the separate retention package negotiated directly with Ines outside the purchase price. It was not a clean win for either side. The seller ultimately paid for its own disclosure gap through the price reduction and the friction of a delayed closing, and had to concede the escrow structure it had initially resisted. Angela and Fernanda absorbed the cost of the retention package, a real expense they had not budgeted for going in, and lost three weeks of runway before they could begin integrating the business.

What they avoided was worse: closing on the original terms and discovering, weeks or months later, that they had unknowingly agreed to fund over $2 million in bonus obligations out of their own post-closing cash flow, with no contractual basis to push any of that cost back onto the seller. They also avoided losing Ines in the first ninety days, which by their own estimate would have set the technical roadmap back by most of a year. Ines herself accepted the retention arrangement and remained with the company through the period covered by the agreement.

Angela and Fernanda now run a standing diligence checklist on every acquisition that specifically calls out change-of-control and retention-linked compensation as its own category, separate from general employment due diligence, and require sellers to certify the completeness of that disclosure in writing before a letter of intent is signed rather than after.

What you can learn from this