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Protecting Your Business When Changing Hands

Posted On: September 10th, 2015 By Helen Main No Comments »

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When Businesses Change Hands: Protecting The Best Interests of your Business and Employees.

At a recent presentation about the law in relation to businesses and their employees, I was among many who were taken aback at the legal obligations to employees, regarding the selling of a business. When discussion went further, it was clear that many employers were reluctant to be open about the possibility of sale, for fear of losing employees before the deal was made. Many concurred they would prefer to keep it as quiet as possible, and from a practical viewpoint, this seems reasonable. After all, many businesses are bought and sold without any noticeable or disruptive changes taking place, and productivity may lapse as speculation and fear take over amongst staff.

But what about when things aren’t so seamless? What happens if an employee is sent packing courtesy of ‘restructuring’ which was part of the plan for the takeover that they knew nothing about? Some surprises are nice, but this isn’t one of them. I don’t think you have to be a lawyer to smell a lawsuit in the works.

With so many business owners seemingly uncertain about their obligations and uncomfortable with the idea of making their sales negotiations public, it seemed like something worth talking about.

Legal Issues/Business Interests

When we talk about the need to disclose your decision to sell to your employees, we must first try to define the point when ‘the sale of the business’ goes from being an idea, to being a proposal. This, we found, was not as straightforward as you might hope.

There’s no ‘trigger point’ or set of guidelines for when an idea officially becomes a proposal. Individual circumstances are examined for each case that is brought before the courts. This means that it is left to your discretion as to how much warning you provide your employees with, regarding any deals or potential deals being made.

The underlying message here, then, is don’t leave it until it’s too late.
If your business changes hands and certain employees are not offered new contracts, these employees will be able to take you to court for personal grievances and unjustified dismissal.

In terms of financial cost, if one single employee takes you to court for unjust dismissal or redundancy without warning, you are looking at some serious expenses. As well as potentially being ordered to pay three months’ wages to the aggrieved, you could be looking at another $5-10K for reparation for distress, on top of legal costs. If you consider the likelihood of there being more than one employee being let go when a business change hands, these costs can certainly start to add up.
Before you decide to take the risk, consider the legislation protecting your employees. According to Section 103A of the Employment Relations Act, the test of justification for any grievance case against an employer is whether the actions taken by the employer were what a fair and reasonable employer would do. So before you act, ask yourself if your course of action would measure up.

If you follow this link, you will see details of a recent New Zealand case in which a former employer was successful in her claim of unfair dismissal by Carter Holt Harvey  IT Limited. In this case,  Mrs Olsen makes a claim against a new employer which decided not to take on her services.
In the judge’s ruling of the case, it was outlined that the owner of the business must, as part of their due diligence, view any and all employment agreements. The must also ensure protections are in place for all relevant employees, should they be unable to persuade the buyer to take on all employees.

How much (or little) should you disclose?

How much you are comfortable disclosing to your employees will depend on many factors. If you run a business that is spread over several addresses, where staff are not a close knit unit and you are not a visible face in many areas, you may wish to choose minimal disclosure, simply ensuring your actions are legal and practicable. If, however, you are a smaller business, with some start up members of staff still on board, where everyone knows everyone, it may be in your best interests to be more open – after all, nothing disillusions an employer like seeing the business they have seen grow around them become the property of a new owner without so much as a chance to discuss it with the Founder.

The Bare Minimum Approach

If you decide not to disclose any information more than legally required, you are well within your rights to do so. Bearing in mind Section 103A, you can refrain from informing your employees of your plans to sell until there is a proposal – in other words, until the serious discussions begin with a chosen buyer.

Be aware that the word will almost always get out, so have a process in place to handle rumours and fear-mongering.

(Almost) Full Disclosure

If you choose to keep your employees in the loop your goal will be to leave employees feeling valued, informed and as secure as possible. While there is always a risk that individual employees will be unhappy with the situation, most employees will see your efforts as a signal that they are in safe hands, and behave accordingly.

Points to Remember

  • Not too Little, Not too Much
    While full disclosure sounds nice, avoid allowing employees to see any instability. Be it failed deals or a disagreement amongst those involved in discussion will create a sense of uncertainty amongst staff and left to fester, this will affect productivity and staff loyalty.
    Remember your employees’ interest in the sale of your business will lie predominantly in whether they will still have their job or not. If your deal is a straight change of ownership, leaving the structure and management largely the same, make this as clear as possible. If there is talk of restructuring, ensure that valued employees will be looked on favourably, and so are more likely to be retained.

 

  • Bat for Your Team
    When dealing with your buyer, make it clear that you view your employees as valuable a part of the business as the deed itself. If they are planning drastic changes, ensure the deal signed includes reasonable severance packages for those they will let go, and request permission to inform the employees as soon as possible.
    Another way to show solidarity with your employees is remaining visible. Don’t withdraw from the office as the deal progresses. Offer a transition period in which you will remain involved in the business for a set period of time after the sell where you are still predominantly in control of day to day business operation. Avoid appearing to be simply abandoning ship, and your employees are less likely to consider this option themselves.

– Maintain Productivity Levels

Employees who are anxious about the changes they anticipate happening may begin to tread water and lower their output. If you’re concerned about productivity levels declining, there’s nothing wrong with impressing upon your staff how important it is that they put their best foot forward whilst the handover is being finalised. A potential business owner is more likely to hold onto employees who consistently meet deadlines and targets, so employees should be more focused now than ever!


– Manage Rumors & Speculation

Selling a business takes time, and time provides rich ground for rumors to grow. Your employees may not understand the complexity of the sale, and as such will speculate as to why the whole process is seemingly taking so long. Make sure you are clear with them that you are proceeding carefully, and not rushing the sell, and encourage them to come to you with questions, rather than gossiping amongst themselves.

-What about your Customers?

One concern when it comes to letting employees know your business is up for sale, or is in the process of transitioning, is that they might tell your customers. If word gets out, customers may delay making orders or be hesitant to sign contracts, negatively effecting your business. Emphasise to your staff the need for discretion when dealing with clients – emphasise the importance of presenting a united and stable front to keep customer confidence. It may help to explain that you will be contacting all clients at the appropriate time, to prevent individual employees from taking matters into their own hands.

As with your staff, there is always a risk that someone will talk, and once speculation starts, it can be hard to stem the flow outside of the office. One way to deal with this would to set up private meetings with key clients and use this time to reassure them that consistency is as important to your business as it is them. Provide them with contacts for key managers who are continuing on with the business. Ultimately, you should do all you can to leave them confident that they are in safe hands despite the changes that will be taking place.

 

In short, whilst selling a business can be a time of major changes, there are steps you can take to minimise how much the handover will rock the boat. While you don’t have to be an open book for all your employees and clients, providing everyone with key pieces of information will instill confidence in those who rely on your business.

Credit to: Alison Maelzer Special Counsel BA, LLB – Hesketh Henry for the legal advice in this blog

 

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HELEN MAIN

HELEN MAIN

CONTENT WRITER FOR HAYSTACK.JOBS

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