Before you take your business to market for sale, there are a number of things you should do to “get your house in order” in particular, to ensure you have secured your good will. Employees form a large part of the goodwill being transferred to the purchaser of a business, primarily because employees have a unique understanding of the operations of the business at ground level and most have the connections with customers and clients which the Purchaser would like to maintain.
When a business is sold, employees are either transferred to the Purchaser, or their employment comes to an end. It is a matter for the Purchaser of the business to elect whether they will recognise the prior service of an employee or not. Ultimately, whether an employee accepts a new contract of employment with the Purchaser (with or without recognised prior service) is the employee’s choice however, there are a number of steps you can take to assist this process prior to entering into a contract with a purchaser:
- Employment Agreements: whilst not a strict legal requirement, it is a good idea to enter into written contracts of employment with your employees. Written employment agreements are beneficial because they clearly set out the terms of the employment arrangement ensuring there is no ambiguity between the parties and allow you to set out, in no uncertain terms, your expectations. This is appealing to many Purchasers of a business because it allows a purchaser to easily understand the nature of the employment relationship and facilitate continuity of employment with respect to the terms and conditions or make specific changes.
However, it is important to remember, an employment contract cannot provide for less than the legal minimum set out in the National Employment Standards (NES) and any applicable award, enterprise agreements or other registered agreement.
- Applicable Awards: a modern award sets out the pay rates and various terms and conditions of employment for a particular industry or occupation. These conditions are in addition to the minimum standards of employment set out in the National Employment Standards and include things such as:
- rates of pay (ordinarily set out by skill level);
- overtime and penalty rates;
- hours of work and rostering;
- industry allowances; and
- leave allowances/entitlements.
All of these things are important for a prospective purchaser to know when assessing the value of a business, determining whether to offer employment to your employees and on what terms and/or to recognise prior service.
Most importantly you, as an employer have a legal obligation to comply with any applicable Modern Award. This is particularly relevant with respect to rates of pay, industry specific redundancy provisions and termination of employment and notice periods. Failure to comply with a Modern Award can result in substantial penalties for the employer as well as possible liabilities to the employee (for example payment of back pay for underpayment). Being across the applicable modern award from the outset ensures any oversights in compliance are not uncovered by a purchaser causing delays in the sale.
- Long Term Casuals: a casual employee is one employed with no firm advance commitment of continuing work. That is, an employee engaged to preform work on an irregular, occasional or non-systematic basis. “Long Term Causals” are casual employees who have been engaged by the same employer for a period of 12 months for an employer within excess of 15 employees. A long-term casual who meets other specified criteria set out in the Fair Work Act (including having worked regular hours for a period of 6 months), may be entitled to seek casual conversion. Casual conversion is the right to elect to have their contract of employment converted to full-time or part time employment if the employment is to continue beyond the conversion process.
If your casual employment arrangements are not genuine irregular casual employment arrangements, you make need to offer the option of conversion to that employee. In some circumstances, a purchaser, particularly one recognising prior service, will need to know if this has occurred and the employee’s response.
- Leave Accrual: as a seller you need to ensure your systems are fully up do date with respect to the leave accrual of each employee for annual leave, person (sick/carer’s) leave and long service leave. These figures need to be provided to a Purchaser as part of a business sale contract and it is therefore a good idea to have these figures clear and available ready to go. Further, where you have high leave balances, you may wish to encourage employees to take their accrued leave entitlements (where possible). Reducing leave balance reduces the liability taken on by a Purchaser recognising prior service. From a seller’s perspective, it is beneficial for a Purchaser to recognise prior service because it reduces the amount you need to pay your employees out at settlement and further, often assists in an employee’s willingness to transfer to the Purchaser.
Organising these things prior to taking the business to market assists the sale because it ensures all your employee data and information is organised, accurate and up to date. It ensures both your employees, and the Purchaser understands the nature of the current arrangements and facilitates a smooth transition. Further, employees who feel respected and valued are more likely to assist in the sale and transition to the Purchaser which helps that purchaser take on the goodwill. From the perspective of the purchase price, this can assist in valuing the business.
If you require assistance with preparing written employment agreements, determining the applicable award or navigating employee entitlements, Adams & Partners Employment Law Team can help you. Contact us on (02) 4721 6200.
Written by Amelia Hatton.