The Exit Ready Series · Post R.18
View the full series →Documentation That Doesn't Exist
Every undocumented bonus Ed handed out in a December envelope became, at exit, an implied obligation the buyer had to price.
Every December, Ed hands out bonuses. Envelopes. Handshakes. A check drawn on Meridian's operating account, coded to miscellaneous compensation by the bookkeeper, because that is where bonuses have always been coded.
The amounts vary. Senior techs get $2K to $5K. Dispatchers get $1K. The ops manager got $15K last year and $8K the year before. The sales account manager got $12K after landing a renewal Ed thought was lost.
None of it is written down. No bonus plan document. No board authorization. No memo in anyone's file describing the rationale, the calculation, or whether the payment was one-time or recurring.
Ed does not think of these as contractual obligations. He thinks of them as generosity.
His employees think of them as comp.
The implied contract
Deborah's Human Capital review includes a standard request: three years of W-2 data, bonus documentation, and commission plan documents.
Ed's attorney sends what Meridian has. It takes one email. There is no bonus plan. There is no written commission plan. There are no signed memos authorizing the salary adjustments Ed made between 2021 and 2024.
Deborah has seen this before. A business where compensation decisions live in the founder's head, executed by handshake, papered barely or not at all. Frank's retention bonus in No Non-Competes was the clearest signal — a significant cash payment to a key employee with no documentation, no authorization, no paper trail. It was not the only one.
The legal risk is not the missing paperwork. The legal risk is what the missing paperwork created.
When an employer pays bonuses with regularity and without documentation stating otherwise, those payments can be construed as implied contractual obligations. An employee who received $8K in December 2023 and $15K in December 2024 has a reasonable expectation of a bonus in December 2025. Not because Ed promised one. Because Ed established a pattern and never documented that the pattern was discretionary.
The buyer inherits that pattern. Every undocumented bonus becomes a compensation expectation the buyer must either honor or fight.
Three risks stacked
Deborah's memo frames the exposure across three dimensions.
Liability. In some jurisdictions, regular undocumented bonuses create enforceable implied contract terms. An employee who sues for a missed bonus after an ownership change has a case — because nothing on paper says the bonus was discretionary.
Retention. The buyer restructures comp post-close. Employees who expected December bonuses do not receive them. The workforce that was stable under Ed's ownership becomes unstable under new ownership — in the first year, when stability matters most.
Unquantifiable exposure. Without documentation, Deborah cannot distinguish between truly one-time payments and de facto recurring obligations. She cannot size the liability. She cannot model retention risk against specific amounts. The buyer prices what it cannot measure conservatively — which always means Ed pays more.
One page per bonus. Five minutes to write. Ed never wrote any of them.
What Ready Looks Like
Create a bonus plan document. Define eligibility, calculation methodology, approval authority, and the explicit statement that all discretionary bonuses are non-contractual and subject to annual review. Have every bonus recipient sign an acknowledgment.
Document every payment above $5K. A one-page memo: date, amount, recipient, rationale, and whether the payment is one-time or recurring. Signed by the authorizing officer. Filed in the employee's HR record.
Formalize variable compensation. Commission plans, incentive structures, and any arrangement where comp varies by performance — written, with effective dates and formulas. Verbal agreements are not agreements the buyer can evaluate.
For Meridian, none of these were true.
Ed's attorney calls with Deborah's findings on a Tuesday afternoon.
"The HR review came back. Undocumented bonuses across your senior team. No bonus plan. No memos. Verbal commission arrangement with your sales manager. She's treating them as implied obligations."
Ed is quiet. "They're Christmas bonuses. I've been doing it for twenty years."
"That's the problem, Ed. Twenty years of bonuses with no documentation saying they're discretionary. Deborah's position is that your employees have a reasonable expectation of continued payment. The buyer inherits that expectation or deals with the fallout."
Ed thinks about every December envelope. Every handshake. Every check coded to miscellaneous compensation. He was being generous. The documentation he never created turned his generosity into the buyer's liability.
What this cost Ed: $175K.
Deborah's review identified undocumented compensation decisions across Meridian — annual bonuses with no plan document, a verbal commission arrangement, salary adjustments with no authorization memos. The buyer's deal team priced the implied contractual exposure: the cost of honoring obligations Ed's pattern created, the retention risk of breaking them, and the legal exposure of a workforce with reasonable expectations and no documentation to the contrary.
Don't be Ed.