HOW TO AVOID EMPLOYEE SURPRISES WHEN YOU PURCHASE A BUSINESS
Your success will ultimately hinge on human capital, Howard Levitt writes.
Since the majority of most Canadian companies’ expenses relate to wages, it is surprising how little consideration is given to employees when companies are acquired. Market penetration, patents, the business’s “sex appeal,” barriers to entry and more, are all generally given much higher priority. But the reality is that most companies’ major assets can walk — and they will, if they are not motivated. And then, the rest becomes illusory and academic.
Your prospective human capital will ultimately determine whether your business succeeds; failure to consider this from the outset causes many a business failure.
So, what should employers consider when acquiring a company?
Here are some of the factors our office routinely considers and advises on when a client purchases a business:
EMPLOYEE MOTIVATION
Do the employees enjoy the job and the culture? What is the turnover? What is the absenteeism? Have there been any employee satisfaction surveys and, if so, are you in a position to deal with the negatives? If there have been no such surveys, arrange them as a condition of purchase.
REMUNERATION
Are you paying too much relative to market for the positions in question. If so, it will be more difficult to be profitable. And reducing salaries can be constructive dismissal.
Or are you paying too little? If so, you can expect to lose people unless you increase their remuneration. And, if you do that, will the business be sufficiently profitable? Do you know what the market comparators are for the positions you have?
In addition to wages, are you paying the incentives that are customary in that industry for employees at each level?
Are bonuses guaranteed or truly discretionary (noting that most bonuses deemed “discretionary” have been paid so consistently that the courts find that they no longer are. Have you calculated those bonuses into your analysis of the cost of operating the business?
COLLECTIVE AGREEMENTS
Are there unions in place? That reduces the value of a company by itself as result of the nonwage costs of administering a union shop and the inflexibility it creates in your operations.
If you are unionized, how significant is that portion of the workforce and what would be the impact of a strike?
Analyze the collective agreements to ascertain how much flexibility they provide your operations. What union are you dealing with? Is it a more business-oriented one that understands that your productivity creates more jobs for their members? Or is it more ideological? What is its strike record? When analyzing this, you should analyze the record of that union local, which might act very differently than the same union in other areas.
EMPLOYMENT CONTRACTS
If you have a large group with long service, who are highly paid employees and they do not have employment contracts that limit their severance entitlements, your ability to downsize or terminate the poor performers will be substantially constrained. Assuming it is an asset sale, rather than a share sale, you can refuse to take on some of these employees.
But, if that is your position, the vendor will have to pay out the wrongful dismissal damages and doubtless would want a lot more for the business.
Many employers don’t make necessary personnel moves because the cost of doing so, in the absence of employment contracts, is prohibitively expensive.
If there are employment contracts in place, will they continue to apply upon your purchase. For that matter, given changes in the law, be sure to have them reviewed as to whether they are enforceable in the first instance.
NON-COMPETITION COVENANTS
Particularly as a new owner, you are unlikely to command the loyalty of the key personnel. Consider how vulnerable you are to their departure. Do they have non-competition clauses in place?
Or, with respect to employees with close connections to the business’ customers, non-solicitation clauses? You could make those a condition of taking on those employees. But they may refuse to sign and sue the vendor for wrongful dismissal, arguing that you are not offering a comparable job.
If there are non-competition clauses or non-solicitation clauses in place, are they enforceable? Given judicial decisions in the area, most that I see are not.
STOCK OPTIONS
Are there stock options in place at prices that, if exercised, will damage the companies’ share price? Find out if you will be in a position where many of your key employees might be waiting until the date that they can exercise their stock options and then leave.
STAFF OR INDEPENDENT CONTRACTORS
If the business is using independent contractors, are they genuine independent contractors or simply employees who invoice? Most ostensible “independent contractors” are employees at law. If that is the situation, to what extent might your business be liable for back taxes, penalties, overtime payments going back two years, minimum wage payments, WSIB payments, etc., which the existing owner has not even contemplated? Does either label serve the business’ needs?
LEGAL COMPLIANCE
In Ontario particularly, the Wynne government has passed for 2018 such draconian employment legislation that it could well be that the business you are purchasing is obliviously noncompliant. If so, what penalties could you be facing ?
To some extent, you might place indemnities in your agreement of purchase and sale but that will reduce the sale price and cannot capture most of the items above.
If you are not asking these questions with your lawyer upon purchasing a business, you might find some very unwelcome surprises.