When selling your business, you will probably negotiate hard on things like the price, the plant and equipment being sold, and the settlement and handover period. What you may not have thought about is what will happen to the employees of the business, and what this might cost you down the track. This can be a serious mistake, impacting not only your hip pocket, but the effective transition of the business into new hands.
Different ways to sell a business
The main thing to keep in mind with employees is that their entitlements attach to whoever employs them. In the case of an ‘entity sale’, this will be the company or trust that conducts the business, both before and after the sale.
If you have agreed to sell the entity in which you operate the business, the employees (and their entitlements) will automatically go to the purchaser with the entity. For example, if you are transferring all the shares in your company to the purchaser, the company remains their employer before and after the sale. The purchaser will inherit all of the employees by virtue of the change in underlying ownership of the company, and will thereafter be responsible for their entitlements – whether they accrued before or after the sale.
However, many business sales are structured as an ‘asset sale’, rather than an entity sale. Under this scenario, the business is sold by the entity that operates it, and the purchaser may leave behind some or all of the employees of the business. Unless some positive action is taken, you as the vendor will retain the employees and/or responsibility for their entitlements.
This is where things start to get tricky.
What are the options for dealing with employees in a business sale?
If the assets of a business are being sold (rather than the business entity), the purchaser has 3 options for dealing with each employee:
- Not to offer them employment;
- To offer employment, but without recognition of their prior service (not available to a purchaser that is an associated entity of the vendor); or
- To offer employment, and with recognition of their prior service.
There are different outcomes for you as the vendor depending on what option the purchaser selects. You will also need to bear in mind that the purchaser may use a combination of the above options among your staff, as it may wish to transfer some employees, and not others.
The employee outcomes – both financial and logistical – for you as the vendor must be considered and negotiated before signing on the dotted line, or you may end up with less than you bargained for.
Purchaser’s option 1: Not offer employment
If a purchaser decides to not offer an employee new employment, the employee will remain with their original employer (you or your entity). However, once the business is sold, the employee’s role with their original employer will become redundant, as there is no business for the employee to work in. This means that the employee will be terminated by way of redundancy on the completion of the business sale.
This termination triggers all the ordinary entitlements that an employee has in cases of genuine redundancy. You will be required to pay out all the employee’s entitlements, both at law and under their employment contract, including accrued annual leave, termination notice pay, redundancy pay and any pro-rata long service leave entitlements (if they have vested).
As you can see, terminating employees due to a business sale can potentially be an expensive outcome for you as the vendor. Accordingly, you need to budget for these employee terminations in negotiating your business sale terms (including the purchase price) and in allocating your sale proceeds.
Purchaser’s option 2: Offer employment, but without recognition of prior service
A purchaser who is dealing with you at arm’s length (i.e. not a related party) can choose not to recognise an employee’s prior service with you as the vendor. This means the purchaser can elect to offer your employees employment with their purchasing entity, but without recognising continuity of service for certain purposes.
In this scenario, a termination of the employee is deemed to arise at completion of the business sale, and thereafter the employee commences new employment with the employer. This can be an attractive proposition for the purchaser, as they get the benefit of an employee who has experience and proven performance in the business, while having the upside of resetting the clock in terms of certain employee entitlements and the “minimum employment period” (i.e. probation period).
As such, you as the vendor must pay out all of the employee’s accrued entitlements on completion of the business sale. You must also provide termination notice (or pay in lieu) and redundancy pay to the employee, as the transfer of the business has affected their job by severing their continuity of service. Redundancy pay is only required to be paid if the vendor would ordinarily be required to pay it, meaning that if the vendor is a small business employer redundancy pay is not applicable.
However, while the purchaser gets to press reset on some things, they must still recognise accrued entitlements relating to personal/carer’s leave and parental leave and the right to request flexible working arrangements. Any service a transferring employee had with the vendor will count as service with the purchaser for these purposes. This may require some adjustment between the parties as part of the business sale because the purchaser is required to assume liability for these entitlements which the employee may use in the future.
Similarly, most States’ legislation relating to long service leave will provide that the employee’s service with the vendor carries over to the purchaser (as the new employer) for the purposes of calculating long service leave entitlements. If the vendor pays out accrued pro-rated long service leave entitlements to the employee at completion, it does not ‘stop the clock’ but instead gets counted towards their total entitlement. This means when they serve long enough with their new employer (the purchaser) that their total service length qualifies them for long service leave, they are entitled to receive the difference between their entitlement at law and what they have already been paid by their old employer (the vendor). Again, there may need to be some adjustment between the parties to account for this.
If this option is adopted, the terms and conditions of the employee’s employment with the purchaser will still be covered by any ‘transferable instrument’, which is any enterprise agreement, workplace determination, other registered agreement or award that applied to their employment with you as the vendor. This means that the employee’s overarching terms and conditions of employment are protected, despite the transfer of the business.
This option is often considered to be cleaner and neater by parties to a transaction, because it clearly denotes the end of one employment relationship and the beginning of another. However, the disadvantage for the vendor is that it triggers an obligation to pay entitlements that they would not otherwise have. It also removes the opportunity for the vendor to try to negotiate a favourable adjustment of employee entitlements (i.e. usually 70%) as part of the overall business sale terms.
This option is not available to a purchaser that is an associated entity of the vendor, or has a deemed connection with the vendor under the Fair Work Act. In the case of an associated or connected purchaser, the ‘transfer of business’ provisions in the Act are triggered and ensure the purchaser must recognise the prior service of the transferring employees.
Purchaser’s option 3: Offer employment with recognition of prior service
Transferring employees with recognition of their prior service is probably the most common method adopted by parties to a business sale transaction. This is likely because of a lack of clear understanding about their other options. Under this option, the employees of the business suffer minimum interruption to their employment terms. The purchaser may prefer this option because it may result in a lower purchase price (as adjusted for entitlements), means that employees can take planned leave shortly after completion, and gets the employment relationship with the purchaser off on the right foot.
If the purchaser offers ongoing employment with recognition of prior service to the employee, what they are effectively offering is that they will take up where the vendor left off. This means they become responsible for all the accrued entitlements of the employee that have not been taken or paid out to date. Because of this, the purchaser will want some compensation from the vendor for the purchaser assuming their employee entitlement liabilities. The question then arises: what adjustment should be made to compensate the purchaser?
There are myriad approaches that can be adopted for adjusting employee entitlements, and there is not right or wrong way – it is simply a matter of what can be negotiated. As the vendor, you will want to limit the adjustment as much as possible. However, you will need to recognise that this option will save you considerable cash cost in paying out employee entitlements on completion. On the other hand, the purchaser will be looking to maximise the adjustment, so as to be compensated upfront for the future use of the accrued entitlements by employees.
Commonly, the actual accrued entitlements up to the date of completion are adjusted in full. These are the entitlements that, if the employee was to be terminated on the day of completion, the vendor would have to pay to them. This includes accrued and unpaid wages/salary, leave entitlements and superannuation guarantee amounts.
This just leaves the question of how to deal with personal/carer’s leave entitlements, and long service leave entitlements. These entitlements are more difficult to adjust, because the employee may never access the entitlements. If they are adjusted, the purchaser may get a windfall, depending on what happens in the future. On the other hand, if the parties adjust for less than the full value of these entitlements, the vendor may get a windfall if all of the entitlements are taken.
Obviously, the preference for you as the vendor would be to make no adjustment at all, and leave these entitlements as a cost for the purchaser to assume. You may be surprised by what the purchaser is willing to take on in this regard – many purchasers see these potential entitlements as a business purchase expense, and part of the cost of ‘buying’ loyal, long-standing employees.
If these ‘uncertain’ entitlements are to be adjusted, the parties will often negotiate a fixed percentage adjustment – somewhere between 20% and 70% – of the monetary value of the accrued personal/carer’s leave entitlement and long service leave entitlement as at completion. Alternatively, the parties could agree an overarching lump sum adjustment amount to cover all of these entitlements, or could adjust by calculating the monetary value of those entitlements pro-rated to completion.
Very rarely, particularly in some larger transactions, the vendor and purchaser may agree that the purchaser will take responsibility for the primary obligation, and seek reimbursement from the vendor as and when the accrued leave is taken post completion. Of course, this relies on the vendor being around and having the capacity to reimburse for a period of time following completion.
What if an employee does not want to accept the purchaser’s job offer?
An issue that has come up in the past – and has been the subject of several court decisions – is what happens if the purchaser makes an offer of employment to an existing employee, which is rejected by the employee.
Provided that the offer is on terms and conditions similar (and no less favourable) to their current employment terms, and recognises continuity of service, an employee who does not accept the offer will not be entitled to redundancy pay. However, the employee will still be entitled to receive payment of their accrued entitlements and payment for any termination notice period from their existing employer (the vendor).
Records of transferring employees
Under the Fair Work Regulations, a vendor must provide to a purchaser the employee record relating to each transferring employee at completion. If the transferring employee becomes an employee of the purchaser post completion, the purchaser must ask the vendor to provide a copy of the employee record concerning the transferring employee.
The purchaser must then keep the employee records as if they had been made by the purchaser at the time at which they were made by the vendor (as the old employer), which means that they must be stored for at least 7 years.
Forgetting to address the issue of employees and employee entitlements when selling your business can cost you precious pennies. How a purchaser chooses to deal with your employees post completion can have an impact on your legal and financial responsibilities as an employer.
Early discussions with the purchaser about how they wish to deal with employees, and who will look after the employee entitlements, can save you time and money (and headaches) in the long run. At a minimum, you should ensure that you leave sufficient time to give employees termination notice, and for the purchaser to negotiate employment offers with transferring employees. The earlier the issue is put on the table, the stronger your position is to negotiate a favourable outcome for you and your employees.
If you are selling or purchasing a business and would like some help, please contact us on 1300 654 590.
Get yourself prepared
The best way to kick-off the process is to get some knowledge about what’s involved in selling your business – what’s the process going to be like, what do you need to look out for – the pitfalls.
We have prepared the following materials to get you started on the right track:
The key steps to successfully selling your business. This is a great article to get you started and put you in the best mindset for a successful sale.
VideoPost: How to Buy or Sell a Business – ‘a tour de force’. This is an hour-long recorded seminar presented by Andrew on the nuts and blots of the process of selling your business. This is a must-see resource for anyone thinking seriously about selling their business.
Are you really ready to sell your business? This article goes through a short ‘hit list’ of things you need to have in place prior to putting your business on the market.
Will I ever realise the true value in my business? This is a note written by Andrew Andreyev, the founder of Andreyev Lawyers, about his own experience in growing a business.
5 things you need to know about vendor finance. Sometimes you need to held the buyer of your business fund the purchase by providing them with a loan.
When you’re read to get serious about realising the value within your business, call us on 1300 654 590 and speak directly with one of our Great Lawyers.