Key employment considerations when preparing to sell your business

What are the key employment law considerations when preparing to sell your business?

Your workforce is an integral part of your business and when preparing for a sale of the organisation, ensuring that you review the employment aspects required before or early on in the transaction will prevent unnecessary delays later down the line.

This article explores the ways in which business owners can prepare to sell their business, with particular focus on the common employment issues which can arise and the practical preparatory steps which may be taken in advance.

Why is it important that accurate information is supplied as part of a business sale process?

It is particularly crucial to the seller that the information and documents supplied to the buyer in the transaction process are accurate and complete as the seller relies upon this information to disclose against the warranties, thereby limiting their liability.

Any disclosure issues may also determine how liability is ultimately apportioned between the parties and with both afforded the opportunity to identify issues arising from the disclosure and negotiating how to allocate risk in the transaction documentation.

What employee information is required as part of a business sale process?

The seller is generally required to collate and disclose substantial information and documentation about its staff and the terms on which they are employed as part of the ‘due diligence’ process.

Despite the legal obligations on the seller varying depending upon whether it is an asset sale or share sale, the nature and scale of the information requested by the buyer will be largely similar. By way of example this will typically include:

• The key terms of employment for employees and, where applicable, those retained on a self-employed basis.
• An understanding of the organisational structure together with specific details of any issues (e.g. disciplinary/ performance issues) which could result in potential claims.
• Copies of key documentation such as contracts, handbooks and pension arrangements.
• Records relating to holiday, sickness and maternity etc absence.

What are the common pitfalls in the employment aspects of a business sale?

A common but eminently avoidable issue which can lead to delay and additional costs involves staff issues not being identified and (if relevant) addressed, in good time prior to completion.

The due diligence process can often flag up issues which the seller was not necessarily aware of, but which may cause delays to the process or impact the overall financial package of the sale depending on the nature of the issue.

In some cases the buyer may even insist that the seller fixes the issue prior to completion, which can cause still further delays or risk disruption amongst the seller’s staff.

On other occasions the issue is not that the employer does not have the necessary information or records in its possession but rather the way in which it is stored or filed makes it difficult to produce it in a manner which is clear, organised and/or complete.

If so this can lead to delay, frustration and further enquiries from the buyer about the arrangements of the seller’s staff during the due diligence process.

One particularly common problem area is in respect of the calculation of holiday and how this is paid. This is traditionally a complex and evolving area of employment law, which is sometimes misunderstood by businesses.

Whilst there are some exemptions for certain disclosures under legislation (such as providing Employee Liability Information in an asset sale under the TUPE Regulations), the seller also needs to be mindful of confidentiality obligations and data protection in respect of any employee data disclosed to the prospective buyer or third parties.

If there is a data breach, this can have various implications including the buyer potentially requesting a specific indemnity in the transaction documents in respect of this potential breach.

What should you be doing to prepare for the sale of your business?

In order to ensure a smooth sale and due diligence process, it is best practice to complete the following steps as soon as possible when you are considering selling your business:

• Seek legal advice at an early stage as a legal specialist can help you identify what paperwork needs to be updated; identify any issues, and provide you with assistance throughout the process.
• Complete an audit of your employee/ staff information (including any immigration documentation).
• Update and complete any records, including where there have been any issues with employees, dismissals or general changes to terms and conditions (such as pay increases/ changes to contracts etc).
• Ensure all documentation is easily accessible and organised to prevent any delays.
• Review existing employment contracts/ handbook / policies to ensure they are up to date, in line with current legislation and that where applicable you have signed copies of all documentation.
• Identify any recent disciplinary/ grievances/ performance issues amongst the staff or which may cause issues down the line;
• If relevant, ensure all regulatory documentation is up to date.
• Liaise with your accountants/payroll provider to collate financial information relating to employees (such as in respect of PAYE/National Insurance contributions) or holiday pay records.
• Evaluate and understand how holiday is calculated and paid.
• Be mindful of any data protection issues when disclosing such information as part of the due diligence process.

Key points to remember before a business sale

Preparing your business for sale is a complex process and employment matters are a key area that can significantly affect both the timing and success of the transaction.

Taking the time to audit staff records, review contracts and policies and ensure employment documentation is both up to date and easy to access can make a significant difference. Addressing known issues early, such as holiday pay calculations, performance concerns or outdated terms, will help to reduce the risk of last-minute complications.

Ultimately, being well-prepared from an employment perspective demonstrates good governance, builds buyer confidence and helps ensure a smoother and more efficient sale process.

How Morr & Co can help?

If you have any questions or would like any further information on the content of this article, please do not hesitate to contact our Employment team on 0333 038 9100  or email info@morrlaw.com and a member of our expert team will get back to you.

Disclaimer
Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.