When selling your business, one of the most important considerations is what will happen to your employees when the new owner takes over the business. What happens to your employees depends on several factors, including whether you sell the business via a share or asset sale. This article will explain what happens to your employees in an asset sale scenario.
When you are ready to sell your business and begin the next chapter, it is important to understand the moving parts that will impact a successful sale.
This How to Sell Your Business Guide covers all the essential topics you need to know about selling your business.
What is an Asset Sale?
If you agree to sell your business’ underlying assets to a third-party buyer, you are engaging in an asset sale. Some examples of assets that you might consider selling include:
- equipment;
- stock; and
- intellectual property such as trade marks and customer goodwill.
An asset sale is usually a situation where the business sells its goodwill to the purchaser by transferring the name of the business to the purchaser. In this case, the purchaser may leave behind some or all of the business’s employees.
What Happens if the Purchaser Does Not Offer Continuing Employment?
If the purchaser has chosen not to offer employment to existing employees, the employees will have their employment terminated after the sale. Consequently, their roles will become redundant.
As the seller of the business, this means that you must pay out all of your employees’ entitlements, including:
- outstanding wages;
- untaken accrued annual leave;
- termination notice pay;
- long service leave entitlements (if applicable); and
- redundancy pay (if applicable).
Transferring Employees to the New Business
In an asset sale, the purchaser may transfer the employees to the new operating entity. In this case, as the seller of the business, you will need to:
- provide the purchaser with updated employee records, contracts of employment and their owed entitlements;
- determine whether the employees’ employment by your company (the vendor) will either be terminated before the asset sale with those employees being offered completely new employment with the purchaser, or whether the purchaser will recognise the time in which the employee worked for the vendor when accounting for their length of service (this will have ramifications for the associated benefits which attach to the length of employment);
- potentially provide your employees with a notice ending employment because of redundancy and pay out their entitlements; and
- work out with the purchaser what obligations you will be responsible for as the vendor and what obligations will transfer to the purchaser.
If the purchaser is taking on employees who will be undertaking the same or similar duties, the purchaser is required to recognise prior service. Therefore, when preparing the sale adjustments before settlement, you will need to negotiate an adjustment to the purchase price to account for some or all of the employees’ untaken accrued personal leave, annual leave and long service leave.
Key Takeaways
If you are selling your business, the question of whether your employees continue their employment with the purchaser after the sale will be subject to the sale terms you negotiate. Ultimately, this will depend on the type of sale. For example, if you are selling your business by selling the company’s shares, the purchaser must take on all existing employees. However, if you sell your business through an asset sale, the purchaser is free to decide not to take on existing employees. In such a case, you, as the vendor, will become responsible for making redundancy payments to your terminated employees.
If you have questions about what happens to your employees during an asset sale, our experienced business sale lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
You will not need to worry about breaching Australian privacy law if your business has an annual turnover of less than $3,000,000. If you do not meet this threshold, you should not disclose an employee’s personal information without their consent. You can disclose private information if the employee is de-identified or if you are providing aggregate information about employee entitlements.
Where an employee of yours rejects an offer of employment from the purchaser, you generally will not be required to make a redundancy payment. However, the employment offer by the purchaser must be on similar terms and conditions as the employee’s previous employment.
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