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Selling a Business – Avoiding an own goal in due diligence – Part 3

By Peter Kroeger

Any troubling employee issues?

In the last blog I dealt with the question of Intellectual Property.

Another hard lot of questions you will have to answer will be to do with your Employees.

You have maintained good employee records and everyone has signed an Employment Contracts, you have written a Staff handbook, and you feel that nothing much can go wrong.  One of the questions you will be asked is to provide full details of:

Outstanding and anticipated claims by past or present employees or officers for re-engagement or compensation or with reference to discrimination or victimisation or otherwise.

This is the point at which you realise you have a problem.  It is truly amazing how often this happens. Some of the examples I have seen that have held up a deal until they were resolved are:

  • Employee on long term sick leave for stress; your employee benefit sick leave insurance policy has kicked in and the person is getting paid something every month and as far as you know – someone in your office is in regular (enough) touch – has no real intention of returning to work. But you are holding their post open, and you know that the reason they went on sick leave is that they were just not cutting it at work. The employee finds out that the company might be changing hands and files a claim for victimisation which lead up to the d-stress diagnosis.
  • Employee is going through a gender transformation, and as generous as you may think you have been through the process, the employee feels victimised by his/her work colleagues, leaves with a complaint and then finds another job; but the complaint still has to be closed off

The key point is to note that, invariably, the Acquirer is being advised by investigating accountants and lawyers and they are painting a vision of the potential liabilities that could arise in these cases.  So they want to change the agreed deal to take account of this risk either by seeking an indemnity or by holding back some of the purchase price for a year or two or until the position is satisfactorily resolved.

In the meantime, you are between a “rock and hard place”.  Your options are not easy; you can walk away from the deal, or you can accept the change to the deal or to the structure of the deal, or you can try and negotiate that to be less advantageous, or you can try and reach a formal settlement agreement with the employee or ex-employee in a form which will satisfy the acquirer’s advisors.

The lesson is, long before you start a sale process, do look at all your past employees and clear up any complaints that are unresolved.  You will have much more chance of obtaining any changes where there is no time pressure to get obtain these.

I will deal with more such sticky issues in future blogs.

For further support with selling your business, please feel free to get in touch with Peter Kroeger.

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