Buying a Business – What Happens to the Existing Employees?

When purchasing an existing business, you will need to consider whether you want to retain its current employees. The decision to take on existing employees is dependent upon the type of sale it is, being either a share sale or an asset sale.  

Share/Equity Sale

A share sale is a change of company ownership. The buyer agrees to purchase the underlying ownership interests in the company in which the business operates. While the ownership of the company changes, the business is still owned by the company. This means that the employees are not directly affected and remain employed  by the same employer during the sale process.

The buyer takes the shares/equity in the company subject to all employee entitlements and potential liabilities, however the cost of these entitlements may be negotiated into the purchase price of the business.

It is crucial during a share sale that buyer investigates whether current employees are being paid the correct wages under an enterprise agreement or award as the company is responsible for ensuring employees are paid fairly. If the buyer does not check this, it potentially leaves them liable.

Asset Sale

An asset sale differs from a share sale as the buyer is purchasing the assets of the existing business rather than the company itself. Assets for purchase may include plant & equipment, client and supplier lists, trademarks and the business name. These assets are then transferred to the buyer. In this case, employees are not included automatically in the purchase and if the buyer wants to retain those employees, they will need to make a new offer of employment to keep them on.

The buyer typically has three options:

• not offer the existing employee employment with the new business;

• offer employment and recognise the employee’s prior service in the business; and 

• offer employment to the existing employee without recognising their prior service in the business.

Not Offering Employment

If the buyer does not want to retain existing employees, then the seller must terminate their employment as a redundancy when the business is transferred.

The buyer is free from obligations to those employees as the seller of the business is responsible for paying their redundancy payments. However, an employee who rejects an offer of employment may not be entitled to redundancy payments where the new offer has similar terms and conditions to their current role and there would have been a transfer of employment had they accepted the offer.

Offering Employment and Recognising Prior Service  

Where an employee is offered and accepts a position in the new business, the buyer must recognise their prior service with the previous employer with regards to their entitlements, such as sick leave, carer’s leave, long service leave, flexible working arrangement requests and parental leave.

The buyer is not necessarily obligated to recognise the employee’s prior service with respect to redundancy, annual leave, unfair dismissal or notice of termination.  In this case it is the seller’s responsibility to pay out these entitlements, however there are specific requirements that must be met and legal advice should be sought prior to entering into a sale contract. The legal position will be heavily affected by the terms of the sale contract.

Subject to the terms of the sale contract, the parties may agree on adjustments to the purchase price at settlement based on the accrued employee entitlements. For example, the parties might agree that the purchase price is reduced based on the value of the accrued sick leave of the employees. This recognises the fact that the buyer is taking on a potential future liability.

After settlement, the new employer is responsible to employees kept on for all accrued entitlements not taken or paid out at the date of termination with the old employer.

Operating with Existing Staff

When working with existing staff you may be tempted to impose your own management style and business beliefs. However, this can prove to be a challenge as often employees already have their own processes and systems in place. Instead of imposing purely your own methods, it may be best to combine the existing system with new ideas.

It is important to keep existing employees happy as they are the direct link between the customers and the business. Strive to openly communicate with employees and build relationships with them as they affectively run the business and are vital to its success.

If you are considering buying a business with existing employees, have a chat with our team who specialise in such contracts. We can make sure you are compliant and protected.

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