One of the most important considerations when selling a business is what will happen to the employees when the new owner takes over the business. This will depend on several factors, including whether you sell the business via a share or asset sale. This article explains what happens to your employees in an asset sale.

Definition of an Asset Sale

An asset sale is when a business sells its underlying assets to another business. Equipment, trade marks and customer goodwill are examples of assets. 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 employees of the business. The sale of business agreement should specifically state the purchaser’s decision.

What Happens if the Purchaser Does Not Offer Continuing Employment

If a purchaser chooses not to offer employment to existing employees, these employees’ employment is terminated after the sale. Their role becomes redundant.

This means that you as the seller of the business must pay out all of these employees’ entitlements, including:

  • outstanding wages;
  • accrued but untaken 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 also choose to transfer the employees to the new operating entity. In this case, you as the seller of the business 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 prior to 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 length of service);
  • potentially provide your employees with a notice ending employment because of a 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 be transferred 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 adjustments of the sale before settlement, the price may be adjusted to account for some or all of the employees’ accrued but untaken personal leave, annual leave and long service leave.

Key Takeaways

If you sell your business, your employees may or may not receive continuing employment with the purchaser. It will depend on the type of sale. If you are selling your business by way of a sale of the shares of the company, the purchaser must take on all existing employees. However, if you are selling your business by way of 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 terminated employees.

If you need advice on what will happen to your employees in an asset sale, call LegalVision’s sale of business lawyers on 1300 544 755 or fill out the form on this page.

Adi Kedar
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