The HR costs of buying a business

When purchasing a business, it pays in the short and the long term to do proper due diligence on the workforce. ANDREW DOUGLAS explains how.

By Andrew Douglas

When purchasing a business, it pays in the short and the long term to do proper due diligence on the workforce.

Buying out a competitor (if approved by the ACCC) has real benefits. It allows a greater market share, economies of scale benefits and asset sale/employee rationalisation. But at what cost?

Award-based employees are transmitted to the purchaser and have continuity of employment. That is unless you refuse to take them on or offer them a job which is less than they had before. Then they are redundant and entitled to severance pay. Have you factored this into the transaction?

Non-award employees have their contract terminated upon sale of a business. However their employee agreement and policies may mean that if they were to be offered a lesser job in the new entity, they may have entitlement to severance pay.

Remember, redundancy benefits only exist if they are provided for in the contract of employment with non-award employees. It is possible to draft a contract of employment to expressly exclude any redundancy entitlements in the event of a transmission of business. And you can draft letters of offer that gives continuity of service to keep good staff.

Has the past employer paid its employees less than the award? This can be a common event with things like leave loading. If you are buying the employing entity, you may become personally liable for the total breaches over the previous six year period.

What due diligence have you done? What purchase vehicle are you using? What indemnities with supporting guarantees have you put in the purchase contract?

Are you aware of the attendance rate of employees?

Yes, the workers compensation premium doesn’t transmit – but the high risk employees do. Do you realise that new employees on an industrial instrument before purchase will remain on that instrument for up to a year or when the instrument is terminated (not easy under the act) or when replaced by a new instrument? Have you planned the cash flow on this?

It is critical to undertake workplace due diligence and prepare appropriate letters of offer to carry over good employees. All the issues raised above can be considered, the risks prevented by the appropriate purchase vehicle and agreement/offer drafting, and the costs calculated – but only if you do a proper workplace due diligence.

Depending on the size of your business, you probably have skilled employees that can do all the groundwork for you in the due diligence, so you probably won’t need much legal help.

Buying a business is all about improving your market, growth in profit, attraction of better employees, cost efficiency, asset and employee efficiency and business development.

Before you buy a business, use this tick list:

• Do a due diligence of the workplace.
• Identify risk for workers compensation, and therefore the future.
• Determine who you want and don’t want and what the cost is to the transaction – then prepare proper offers for the employees you want.
• Check for past breaches of agreement, awards or other industrial instruments.
• Make sure your legal vehicle and documentation protect you.

Remember every new enterprise is a time to rethink what you have got and where you are going. Take the opportunity and invest in protecting it.

Andrew Douglas is the founder, principal lawyer and managing director of Douglas Workplace & Litigation Lawyers. Andrew is an experienced commercial litigation and workplace lawyer, who acts both as a solicitor and advocate.

Read more on redundancies and workplace agreements