One of the most complex and difficult areas to deal with on a business asset sale is the transition and/or termination of the seller’s existing employees. When business assets are sold, instead of corporate shares, the employees do not automatically pass to the buyer. At the Letter-of-Intent stage, the parties often overlook adequate negotiation in respect of employee transition issues. These issues are often only lightly addressed on the LOI. This may be because it is a complex area involving detailed considerations and the parties do not want to get ‘into the weeds’, so to speak, when negotiation the broad strokes of a business transaction. In our experience, this is sometimes the case even with businesses having a large employee pool and well-developed senior staffing and when the seller’s experienced employee profile is in fact a major ‘asset’ in the deal.
Depending the seller’s employee profile, employee transition/termination issues can represent a very significant liability on the seller and an obligation to the buyer. Parties sometimes neglect to consider the inherent accrued liabilities associated with employees for such things as termination costs, severance, bonus entitlements, vacation pay and other accrued benefits. This is an area about which good and detailed legal advice is appropriate at the listing and early negotiation stages on a business sale; perhaps even when a sale or acquisition is first under consideration. The issues of whether the buyer wishes to assume the seller’s employees; and, if so, who among the employees they want to keep or let go; the cost and liability associated with employee termination and how to factor that cost into asset valuation; the buyer’s downsizing plans, if applicable; replacing the seller’s senior staff with buyer’s chosen team; and so on, should all be considered early on in the process to avoid disputes and delays at the time of negotiating the formal Asset Purchase Agreement and closing conditions.
In getting ready for closing, the coordinated procedures and documentation to transition and/or terminate employees, along with the transfer, assumption, or indemnities in respect of the associated liabilities, obligations and benefits present challenges on the completion of an asset sale. Both buyers and sellers are better off if these issues have been considered in detail at the earliest stages of an offering or transaction so that the parties knows the options available and can assess their expectations for the deal. If you wish to speak with us about these issues, please feel free to reach out to Simon Valleau or Andrew Chudnovsky.
