Sold! What happens to employees when a business is sold?

26 February 2015

As a business owner you’ll want to maximise value in your business when you sell it. One way of enhancing value is to manage your employees carefully during the process. If the sale involves selling shares, employment may remain largely unchanged. But, when the assets of a business are sold, employees are likely to be losing their current jobs (although probably gaining new ones with the new owner). This delicate situation needs to be well managed.

Unless the employee falls within a special category (some employees in cleaning, food catering, caretaking, laundry, or orderly services), there is no general right for an employee to automatically continue employment with the new owner of a business.

If you are thinking about selling your business, check the contents of the employment agreements you have with employees. Written employment agreements are a legal requirement, and must contain a provision that sets out what will happen if a business is being sold. You must follow the process set out.

Usually, this process will involve:

  • Talking to your employees about the sale or possible sale as soon as is reasonably possible;
  • Discussing with the new employer (the buyer) whether your employees will be offered employment with them and on what terms;
  • Telling your employees that it is their choice to transfer or not if they are offered employment, but that their employment with you will end because of redundancy. The redundancy provisions contained in your employment agreements will apply, including any compensation provisions.
  • The seller of the business will take responsibility for the payment of wages and salaries, PAYE, holiday and other leave entitlements up until the date of settlement, unless another arrangement is agreed with the buyer.

    Communicating with your employees is key, so they don’t feel uncertain or vulnerable and leave. While an employer cannot be expected to tell their staff everything that’s happening, there needs to be enough communication so staff are aware of the proposal and their options, rather than letting the rumour mill take over.

    Buyers of a business are not usually obliged to hire existing employees but existing employees may bring significant value to a business by way of confidential information, intellectual property and general know how. A buyer can protect their investment in the business by making their purchase conditional on key staff accepting employment with them, and then restricting those employees from later working for clients or competitors within a certain geographical area for a period of time.

    The purchaser doesn’t have to offer employment on the same terms and conditions to any employees it wishes to hire, but any different offer needs to be carefully crafted to attract the employees it wants to keep. Service is not treated as continuous (unless this is agreed with the seller), so employees will commence work without any leave entitlements. Co-operation between the business seller and buyer will maximise value for both parties by protecting valuable employees through the sale process.

    Having well drafted employment agreements and complying with them will make the sale process easier, and help you maximise the value you have in your business at sale. Checking your potential rights and obligations as a prospective employer of existing employees is a key part of the due diligence process when you are buying a business.

Sam Hood is part of our Private Client team at Norris Ward McKinnon.