Selling a business: Responsibilities to your employees

‘People are your greatest asset’ is the mantra of many. But what responsibilities do you have when you sell?

How you deal with staff and provide for them when a company is acquired is a key consideration for owner-managers. Here, we answer some of the most frequently asked questions:
Do you have legal responsibilites to staff when you sell?

It all depends on whether it is a share or an asset sale. Where shares in a business are sold, either to an individual or another company, contracts of employment are not affected, says Charlotte Baker, of Poole & Co. Solicitors. This means you have the same responsibilities you had to them prior to the sale.

With asset sales, where tangible assets as well as the name, goodwill and client list are included, it's entirely different. In this case you are the ‘transferor' and the purchaser is the ‘transferee'. Apart from pensions, all aspects of employment automatically transfer to the transferee, including your “rights, powers, duties and liabilities under or in connection with a contract of employment,” says Tim Randles, head of employment at law firm Laytons. This is called the Transfer of Undertakings (TUPE), part of the Protection of Employment Regulations 1981.

Can staff be dismissed before, during or soon after the sale?

Under TUPE employees cannot be ‘fairly' dismissed before or after the transfer if the reason or principal reason is the transfer or connected with it. Exceptions occur only where economic, technical or organisational reasons dictate a change in the workforce, such as the duplication of HR or finance functions, for instance.

There is also an obligation to consult with employees' elected representatives about the reasons for the sale and any implications it has. You should seek legal advice from the outset to determine whether TUPE applies in your case, and what consultation is appropriate.

How and when should you communicate the sale of your business?

“It depends on the ethos of the business,” says Charles Whelan, corporate finance partner at accountancy firm Haines Watts. “My view is you should only tell them on a ‘need to know' basis and shouldn't communicate it until the sale is completed.”

His reasoning is that if the deal collapses staff will know you are courting buyers, will be unsettled and could opt to leave. On the other hand it can prove appealing if selling to a large multinational, where realising share options and career progress is possible. Rob Donaldson, head of M&A and private equity at accountancy firm Baker Tilly, adds you should always be prepared for a leak. “Have an announcement ready. Don't get caught with nothing to say.”

What do you tell them?

When the deal is complete, tell staff at the same time. Most owner-managers will want to do it personally even if they are not staying with the business. Tell them everything's for sale at the right price, says Donaldson. The closer you keep to the truth the better, but put a positive spin on why you're selling.

What do you need to tell you board or senior management?

It depends on the size of the business again, but you will need to inform your financial controller and probably senior salesperson too. They are likely to have to play a role during due diligence, preparing the required information. You can ask them to sign confidentiality agreements. Directors will all need to know as they will sign the forms to close the sale, says Whelan. The buyer will want to know they have a senior management team in place and will often want to talk to them.

Can exceptional bonuses be offered?

Owner-managers often offer a reward or reserve equity, says Whelan. “I advise it if I think they need to keep someone motivated and on board. Clients often feel a lot of loyalty to staff anyway.” For an FD, say, you can make this dependent on sale completion and offer a lump sum or a year's salary, depending on how instrumental they have been in the company's growth. “This can be commited to in a letter and will come from the sale proceeds,” says Whelan. “Legally that's always the case. It's illegal to pay from the company.” An official bonus scheme paid in tranches also helps tie in senior management postsale, which the buyer will appreciate.


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