Management Agreements During Business Acquisitions

When a business is being acquired, there is often a time period between signing the deal and closing the transaction. During this interim period, buyers and sellers sometimes make arrangements for the buyer to gradually begin taking over some aspects of the day-to-day operations. This type of informal arrangement is especially common in the acquisition of a small business. This kind of information arrangement can easily result in liability issues and disputes between the parties, however, and often is a very bad idea.

Until an acquisition transaction closes, the anticipated seller still owns the business. The selling party remains legally responsible for operations, employees, contracts, and any potential liabilities – and this remains true even if the anticipated buyer has informally started to step into a management role. The desire for a smooth transition can sometimes be accommodated, while reducing the risks of an information arrangement, by putting in place a well-drafted Management Agreement that clearly defines each party’s rights and obligations.

The specific provisions to be included in your Management Agreement will vary depending on the nature of the business and the structure of the transaction – but here are some starting points to guide that discussion.

1. Decision-Making Control and Decision-Making

In small businesses, such as family-run restaurants, liquor stores, and medical practices, the line between ownership and operations is often blurred during this interim period.

A well-drafted Management Agreement should clearly define:

• Who is responsible for daily operations;
• What decisions the buyer can make independently; and
• What decisions still require seller approval.

Even if the buyer is stepping in to “run the business,” the seller will still want (and likely need) to retain final say on major issues until closing of the transaction is completed.

2. Seller Transition Role and Compensation

In many small business transactions, the seller is not just exiting the business, but may be actively training the buyer on the day-to-day operations.

A well-drafted Management Agreement should document:

• Whether and to what extent the seller will remain involved during the transition;
• The scope of training or consulting (e.g., vendor relationships, licensing, patient/customer management);
• Whether the seller will be compensated (salary, consulting fee, or management fee); and
• The expected time commitment.

Without clear terms, disputes often arise over whether the seller is “helping out” or is entitled to compensation for their continued involvement.

3. Revenue, Expenses, and Inventory

During the interim period, the buyer may spend significant time operating the business, and in some cases, may even improve business performance before closing.

The strong Management Agreement should address:

• Who is entitled to the business’s income during the interim period (typically the seller);
• Who is responsible for operating expenses;
• Who is responsible for purchasing and maintaining inventory; and
• How cash flow is to be handled.

These provisions should be explicit to avoid any dispute between the parties.

4. Duration and Termination

Not all transitions are the same. Some businesses require a longer ramp-up period, particularly where licensing, relationships, or specialized knowledge are involved. To manage expectations for both parties, the Management Agreement should consider:

• When the agreement begins (typically upon signing) and when it ends (typically at closing);

• Whether compensation terms should reflect any extended involvement; and
• What happens if the transaction does not close, including unwinding operational control and payment for services rendered.

Most parties enter into a business sale with good intentions – but during a pre-closing transition period, even well-intentioned arrangements can go sideways. The bottom line is that ownership has not yet transferred before closing, but day-to-day control has already begun to shift. A well-drafted Management Agreement helps bridge that gap. It protects both parties, ensures that everyone is aligned on roles and expectations, and helps the parties address potential issues before they arise, including what happens if the deal does not conclude as planned.

If you are in the process of acquiring or selling a business, the experienced business law attorneys at Lewicky, O’Connor, Hunt & Meiser are available to guide you through each step of the transaction—from initial structuring through closing and transition.