Buying a business with existing staff

Coming in to an existing business as an owner can be challenging. The reward is hopefully starting out with a business that has a successful history and established practices. These practices and processes allow you to avoid the headache of building a business up from scratch. Instead, you can focus on the finding solutions to any existing problems and building up from an existing platform.

It will be tempting to base your negotiations with the vendor of the business around the worth of the business’ service and takings and its physical assets. However, the existing employees of the business should be a central part of these negotiations. Without considering them, you risk facing quite severe problems in the near future of your purchase.

When thinking about existing staff, it is best to separate the topic into pre-sale and post-sale. Pre-sale considerations revolve around the legal concerns you need to make regarding staff and how this affects the price of the business. Post-sale considerations revolve around how to manage and deal with existing staff as a new manager and business owner.

Pre-sale

If you want some light reading, check out the Fair Work Act 2009. It would be easier to read the Lord Of The Rings Trilogy in a day then decipher that legislation, so here is what you need to know when buying a business with existing staff.

When buying a business, you have three options with existing staff:

  1. Not offer employment.
  2. Offer employment without acknowledging their previous service to the business (their accrued leave for example).
  3. Offer employment and acknowledge their previous service.

So, ready for the fun stuff? Here are the benefits/drawbacks of each option:

  1. If you choose not to offer employment to existing staff, this leaves them with accrued leave that they entitled to, as well as other entitlements relating to their redundancy package. Lucky for you, the purchaser, these financial commitments are not something you are responsible for, but are something you need to be aware of. While the vendor is responsible for paying their staff, the purchase price of the business will reflect this and your intentions with existing staff will most likely come into the conversations/negotiations you have with the vendor so they can ascertain how much they need from the sale of the business to cover these costs.
  2. If you do offer them employment but don’t acknowledge their previous service, the vendor may again be responsible for paying them leave they have accrued. In most states, legislation requires that even with these payments made, staff leave and entitlements will carry on into the new contract/agreement made with you the buyer and you will be responsible for paying the difference from what they are entitled to by law and what they have already been paid by the vendor. Important: if you are an associated entity with the vendor and are buying the business, you cannot buy without acknowledging existing staff service.
  3. The most common agreement is that if you offer existing staff employment, you also take on their previous service to the company. This is because it gets you off on the right foot with staff, makes the transition as smoother, allows for a lower purchase price and leave can be taken shortly after completion of sale. This option requires a bit of negotiation with the vendor as they will want to minimise compensation they make to the buyer to make up for these foreseeable costs, while the buyer will want to maximise the compensation they receive for having to pay this leave.

Note: if an employee rejects your offer for employment, and as long as that offer is seen as no less favourable than their previous arrangement, they will not be entitled to redundancy pay. They will still be entitled to leave payments from the vendor.

Post-sale

During the pre-sale period it is up to you to assess previous employee and HR logs/records. This will help you get a larger view of the health of the company, beyond its takings. On top of this, look at any previous and current compensation claims made by staff. You do not want to caught out employing someone who may not be physically capable of carrying out their role and you may face legal action if you then terminate their employment because of this.

Once you are in the door of your business and you are working with existing staff, remember that they have processes and systems in place already. This can be a benefit and a challenge at the same time. Avoid imposing your management and business beliefs too heavily on the staff but instead look for ways to bring them together with existing systems.

The most important thing you need to remember during and after purchase of a business is that it comes first. The old adage of the ‘staff making the company’ leaves you in a position where you may take risks to keep people happy while sacrificing the health of the business. It is more true that your customers and the service they receive from you is the company. With this in mind, you can make decisions about staff with a clear head. If you do need to let people go, do it honestly and quickly. People will respond better to the truth if it is delivered quickly during the transition process of the business.

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