The transition of existing employees in a business acquisition depends if your business is an asset sale or stock sale. This is one more reason why knowing early on how to structure a business acquisition. In this post, we will discuss how to transfer employees and how to retain key employees.
Employee Transition In An Asset Sale
When transitioning employees in an asset sale, the employees need to be terminated by the selling entity and re-hired by the purchasing entity. Due to the fact that a buyer is only buying the assets of the target company, the employees do not automatically transfer to the buyer. This also means that the potential wage claims or other employee rights remain the liability of the target company. With that said, payroll taxes can still transfer to the buyer because taxes attach to a company’s assets. For this reason, it is important buyers to include bulk sales notices to the applicable departments of revenue and obtaining tax clearances as part of their due diligence to ensure that the seller is up to date on their payroll taxes to avoid the assets being affected.
However, if the target company has contracts with employees that entail employment terms, and the parties are negotiating an asset sale, they should take great care to review those agreements to not be in breach of the employment agreements, or potentially renegotiate termination and rehiring terms to allow the transfer of such employee to the purchaser without any party being in breach of the employment agreement.
Employee Transition In A Stock Sale
Ensuring Key Employees Stay With the Business
Ensuring retention for key employees when purchasing a company is a huge concern for many purchasers. When the success, and value, of a company often relies on a particular “rain maker” or employee that otherwise keeps the company running well, the purchaser needs to carefully strategize how to keep those employees after the transition.
In order for purchasers to retain key employees, the purchaser should first review any contracts with said key employees. If the employee is obligated to remain with the employer for a certain time, then the purchaser can use the remaining time with the key employee to gain their trust. If the key employee does not have a contract, and is therefore an at-will employee, then the purchaser must understand there is no legal requirement for an employee to remain with an employer. In this case, employers and purchasers often incentivize these key employees with bonuses to remain with the company.