Selling and Closing
In this post, we’ll explore a few key employment law considerations for business owners considering the sale or closure of their business. This will be followed by Part II, in which we will examine some of the employment-related legal issues that should be reviewed when purchasing a business.
This post focuses on businesses with non-unionized workforces. Unionized workplaces have their own distinct issues that must be addressed when buying or selling a business and a lawyer should be consulted regarding those as well.
Selling Your Business
Selling your business can be a great way to reap a reward for all the blood, sweat, and tears you put into its growth and development. For many business owners, the sale of their business is also a critical component of their retirement plan. Unfortunately, many fail to consider the very substantial statutory and common law entitlements that their employees may have if terminated when the business is sold. A previously enticing sale price may no longer make a lot of sense if you will owe months or years of pay to some or all of your employees on closing.
So what can a business owner do? Consult with an employment lawyer as early in the process as possible! You’ll still want a corporate lawyer to close the deal, but employers who fail to consult with an employment lawyer on the sale of a business do so at their own peril.
While offers do get made unexpectedly, many business owners start considering a sale months or years before they actively begin pursuing a deal. The second you begin seriously considering the sale of your business is the best time to engage an employment lawyer to review your possible liabilities and strategies for minimizing them. Contractual terms can be implemented to reduce termination entitlements, but those contracts require that employees receive proper consideration in exchange for there to be any chance of them being enforceable. Getting ahead of the issue and developing a strategy with your employment lawyer is the best way to limit your termination liabilities and can result in massive cost savings on a sale. A well-maintained effort to limit your employment liabilities can also be a strong selling point, since a prospective purchaser will benefit from less risk, regardless of whether the business is sold via an asset or share purchase.
It’s becoming increasingly common for purchasers, especially those with greater leverage in the deal, to push for the vendor to share termination entitlements for inherited employees if they’re terminated within one or two years from the date of the sale of the business. This can result in substantial termination obligations that the vendor has little control over, and it is highly important that any such terms be reviewed with your employment lawyer before closing your deal.
Closing Your Business
Sometimes the sale of a business is simply not an option. Regardless of how successful an organization may be, there are industries in which new startups tend to be favoured over the buyout of an existing small business. An owner who intends to wind up their business needs to carefully review their potential employment law liabilities – especially if there are substantial assets in the business. Again, the most important thing a business owner can do in this situation is to consult with an employment lawyer early in the process. Aside from the contractual strategies that can be implemented, an owner closing a business may also consider the option of providing advance written notice of termination to their employees. While long notice periods carry their own sorts of risk, a small business owner might eliminate much or all of the statutory termination and common law notice they might have otherwise owed by providing early written notice of termination.
Owners are often quite nervous that providing termination notice too early may result in the loss of key employees whose assistance will be required to help properly wind up the organization. What can be done to keep their morale up and entice them to stay to the end date? In these situations, a notice of termination that includes a severance incentive for staying and providing service until the termination date is a good option. The employee gets rewarded for providing loyal service, and the employer’s overall cost of the severance offer will be a lot less than the post-termination payments they may have otherwise owed if no advance notice had been provided.
It is critical in these situations to ensure that the notice provided complies with the statutory obligations in your province. Your employment lawyer can assist you in making sure terminations are implemented correctly. Employers must also be careful to ensure that the notice provided is in writing. Simply telling an employee that their employment will end sometime around a year from now won’t do anything to eliminate post-termination obligations and can only create further risk.
Stay tuned for Part II, which will focus on some of the greater risks associated with the purchase of a business, including successor employer issues.
If you are considering selling or closing your business and would like to consult with an employment lawyer, get in touch!