Help, I’m selling a business: Employee entitlements

When selling your business, one of the key negotiation points that are often overlooked are employees, and what this might cost you down the track at settlement time.

When selling your business, one of the key negotiation points that are often overlooked are employees, and what this might cost you down the track at settlement time.  Failing to understand your legal position and negotiating accordingly can be a costly mistake, and it is important to secure your position clearly as early as possible.

The options for dealing with employees in a business sale:

Following the execution of your formal Contract, you will provide employment information to the Purchaser for each employee, and then the Purchaser has the following three options for dealing with each of your employees:

  1. Not to offer them employment;
  2. To offer employment, but without recognition of their prior service (not available to a Purchaser that is an associated entity of the Vendor); or
  3. To offer employment, with recognition of their prior service.

Pay-out of employee entitlements:

For discontinued employees or for any entitlements that are required to be paid out, 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 that have vested.

However, in respect of any continuing employees, although the Purchaser may require you to pay out some entitlements, 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.

Adjustment for recognised employee entitlements

Transferring employees with recognition of their prior service is probably the most common method adopted by parties to a business sale transaction.

There are numerous approaches that can be used as a basis for adjusting employee entitlements, and there is no 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, and avoid agreeing to make an adjustment or payment to the Purchaser at settlement for “100% of all transferring employee entitlements, including Annual Leave, Personal Leave and Long Service Leave”.

You should speak to your solicitor, accountant and Business Broker at the time of negotiating employee entitlements and arrangements with the Purchaser to ensure your position is negotiated effectively and fairly.

Are you thinking about selling your business? Contact Aaron Chan for a discussion today.

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