Selling Your Business? Address Certain Employment Issues Before the Sale

December 17, 2019

Selling your business can be a rewarding experience. You’ve worked hard for many years to build relationships, develop and fine-tune your products and services, and consistently deliver value to your customers. Now it’s time to reap the benefits by obtaining the highest possible valuation for your business when you take it to the M&A market.

To ensure a high valuation, you’ll need to address certain employment issues before marketing your business for sale. This article outlines some of those issues. Potential buyers will be doing thorough due diligence of your business and your internal practices. Taking the measure of your practices and addressing any issues beforehand will help you ensure that a potential buyer doesn’t back out of the deal prior to the closing.

Keep the Sale Quiet

When you’ve finally made the decision that you’re going to sell your business, you may wonder whether, in the interest of transparency, you should let your employees know about your plans. While that may seem like the wise and decent thing to do considering their years of dedication and devotion to your company, you may actually cause more harm than good at a time when internal culture, morale, and regularity is critical.

Spreading the word that the business is going to be sold may needlessly cause alarm among your workforce, especially if it’s likely that the buyer will be hiring all of your employees after the sale. A mass departure caused by premature alarm may erode the company’s value and scare away potential buyers. For those reasons, it’s wise to keep your plans quiet until the sale is a sure thing. At that point, you’ll be able to let your employees know the relevant details and how the sale will affect their employment.

Make a List of Your Employees

If your employees are going to stay with the business after it’s sold, the buyer is going to need to know who all the employees are and relevant details for each of them. You should create an organizational chart that shows the hierarchy of employees within each division. In addition, the buyer will need to know employees’ salary and wage information, the amount of time they have been with the company, whether certain workers are classified as independent contractors, which employees are subject to employment agreements, and whether any employees are bound to non-compete agreements.

Any buyer will want to evaluate that vital information during its due diligence process. Having it prepared in advance will help streamline the due diligence and get you to the closing table quicker.

Lock Down Key Employees

The buyer will be purchasing your business as a going concern. The company’s goodwill and the people who have knowledge and experience of the company’s protocols, market, and relationships are critical components of that going concern. Therefore, your buyer is going to want assurance that key employees who know how to grease the wheels and make the machine hum will be associated with the business for the long haul. At minimum, your buyer will want a sufficient amount of time from key employees during the transition period to mentor and teach new managers and other employees about the business.

To ensure as smooth a transition as possible, a business owner looking to sell his company will want key employees to be bound to assignable non-compete agreements. Locking key employees into noncompetes will help you make sure they will stay with the company after the sale closes or will at least mitigate any damage and risk to the buyer by ensuring that confidential business information is kept confidential and that key employees cannot directly compete with the company for a reasonable period of time after the closing.

Update Your Employment Manual

When is the last time you updated your employment manual? Have internal company practices or external factors like laws and regulations changed since the last update, making your handbook obsolete? Does your company even have an employment manual? This is your opportunity to let potential buyers know that your employment practices and procedures and your internal protocols are tightly governed by a well-written employment manual.

Not only will your handbook be an instruction manual on certain business operations for potential buyers, but it will also be an indicator of what your company’s culture is like. Having a poorly drafted or organized manual may give the impression that your company is disorganized and lacks structure. Alternatively, a well-put-together handbook will show that your company is fine-tuned and runs like a well-oiled machine and takes its internal protocols seriously.

Ensure There Are No Lingering Wage and Hour Violations

Whether you’re selling your business in an asset sale or a stock sale, you’ll want to make sure any potential legal claims, audits, or violations involving wage and hour law are resolved before the sale.

Under an asset sale, you will generally retain any liabilities after the closing. You’ll want those liabilities re-solved in advance so there are no lingering issues after you sell the business. Alternatively, under a stock sale, any liabilities that exist as of the closing date will most likely stay with the company after the closing, which will have an impact on the sale’s bottom line and potentially create post-closing indemnification obligations.

Right the Ship

Preparing your business for sale is your opportunity to do some metaphorical spring cleaning and clear any proverbial skeletons out of the closet. Any company practices or employees that would ultimately have a detrimental effect on the business’s value or would deter potential buyers from purchasing the company should be removed.

For instance, do you know whether your HR policies are uniformly applied to all employees? If Bob from Accounting is allowed to roll over unused vacation days into the next year while Joe from HR isn’t, then you should begin modifying your vacation policy to apply equally to all employees. Do any employees or other factors have a toxic effect on your company culture? If so, now is the time to remove those impediments to ensure a potential buyer isn’t scared away by low employee morale.

Mass Layoff Notifications

Ideally, the entity that buys your business will retain all of your current employees. However, the buyer may be purchasing the business for its intellectual property or physical assets and may not need the employees. If that’s the case, you’ll need to ensure you’re complying with the Wisconsin Business Closing and Mass Layoff Law (WBCML Law) and the Worker Adjustment and Retraining Notification Act (WARN Act).

Each of those laws is intended to provide workers sufficient notice of an impending termination of their employment to help them prepare for their transition between jobs. Each applies only under certain circumstances and generally only if the company employs more than a certain number of people. In addition, the notice content and recipient requirements vary for each law, and there are exceptions to the notice requirements depending on the circumstances.

Failure to adhere to the requirements of the WBCML Law or the WARN Act can result in significant liability. As a result, you’ll want to consult with an experienced employment law attorney who can advise you on whether you’re required to provide notice under either the WBCML Law or the WARN Act and guide you through the proper procedures for doing so.

Notice of termination

Even if your company isn’t required to provide notice of a mass layoff under the WBCML Law or the WARN Act and even if the buyer will be hiring all of your employees after the sale, you’ll still need to notify employees that their employment with your company is ending. They will want to know if the terms of their employment after the closing will continue under the new owner. The key is to avoid a situation in which they still look to you as their employer.

Prepare a simple termination notice that thanks your workforce for their dedication to the company and their hard work over the years. The notice should let them know that you will no longer employ them after the business is sold and any continued employment will be with the new owner.

Bottom Line

Selling your business is an opportunity to show potential buyers that the price tag you’ve attached to it is justified by its current value and its future potential. Taking certain steps before you market your business will help you ensure that you deliver the promised value as well as protect you from liability or indemnification obligations after the closing.

This article, slightly modified to note recent updates, was featured in the November issue of the Wisconsin Employment Law Letter, which is co-edited by Axley Brynelson Attorneys Saul Glazer and Michael Modl and published by BLR®—Business & Legal Resources. Reproduced here with the permission of BLR®—Business & Legal Resources.

For more information about "Selling Your Business? Address Certain Employment Issues Before the Sale," contact Conor Leedom at cleedom@axley.com or 262.409.2286.