Seller’s Operations: Personnel
August 28, 2007
If the business you’re planning on buying doesn’t have any employees or if you plan on firing everyone who now works in the business, you don’t have any immediate personnel considerations. But if you’ll be retaining some or all of your seller’s employees, there are a number of things you should do. If you’re planning on buying a successful business, it’s a good assumption that one of the factors contributing to its success is a stable and motivated workforce. Your goal should be a smooth transition, with the valuable employees staying with you and staying motivated.
Start out by having the seller draw an organizational chart for you. It may be the first time the seller actually has had to think about who gives orders to whom and who takes them; the process may be an education for the seller as well as yourself. Make sure the seller fills in the names of all the employees and their job titles. Then have the seller describe to you, in complete detail, every employee’s duties and who is responsible for the supervision of whom. If it’s a small business, there may be only two levels of command: chiefs and Indians. In a larger business there may be one or more intermediate layers of management. But even in a small business it’s important for you to know what every employee is supposed to do. When word gets out that the business has been sold, it will cause a certain amount of discomfort for all the employees, no matter how indispensable they think they are. Each employee will worry about whether his or her turf is protected. Any special rights, privileged duties, or status symbols your seller has granted must be maintained-or changed at your peril. Either way, you must know what they are. Examples abound. Your seller may have granted one employee the job of making the weekly run to the bank. It’s a job that requires no special skill, but the person who does it considers it a badge of privilege. Certain administrative employees may have been granted privileges that plant employees don’t enjoy (the most common being escape from the time clock). Remove those little perquisites and you have a hostile staff on your hands.
Next, find out who answers to whom. It may not be obvious from a look at the organizational chart that one employee who has the same job title and duties as another employee is really that employee’s boss! In fact, an employee with special skills or seniority may in reality be the boss of a number of employees. This is a relationship you may or may not want to change, but it helps to know it exists.
You may find that not everyone who works in the business is on the payroll. Everett Houston’s two sons may help out on Saturdays stacking lumber; his spouse, Shelley, may work in the office. They’re not likely to work for you after you buy the business unless you pay them. To the extent you’ll have to hire and pay people to perform tasks now done by family members, your operating expenses will be that much higher and your profits that much lower. Remember when computing the increased payroll costs to include the increased Social Security taxes and fringe benefits you’ll have to pay.
You may also find some relatives who are on the payroll but whose employment may be a form of private charity. If Uncle Joe’s “position” and salary can be eliminated with no loss to the business’s operations, the business will become that much more profitable when Uncle Joe is shown the door.
After you’ve learned who everybody is, what they do, and to whom they report, find out what each employee earns in the way of salary and fringe benefits. Don’t forget that you’ll probably have to grant Christmas bonuses if your seller has established a policy of granting them. Even more important, get a complete picture of the seller’s policy (if any) on raises. If the seller has granted across-the-board or individual raises on a regular basis, find out when the next round is due. Learning this will not only help smooth the transition, but will enable you to estimate your
operating costs for the coming year. If the workforce has been stable, find out what the percentage increases in salary have been over the past few years. Most important, if any employee has been promised a raise, get the details. If you don’t live up to this promise, you’ll have a very dissatisfied employee on your hands. Fringe benefits don’t always show up in paychecks; the Christmas party, the annual picnic, the birthday gift, as well as the company’s policies regarding sick leave, vacation, and overtime, may be just as important in maintaining employee morale. Don’t jeopardize it.
If you’re lucky, the seller may have already drawn up a personnel manual or company policy manual you can read. Find out how much of it is good guidance and how much is out of date.
Find out if any employees are planning on leaving. Lower-level employees who are planning to quit may not trouble you; the departure of a key employee or employees may harm the business. It’s possible a key employee (a manager, an engineer, etc.) has a written employment agreement. Read it! You may find some very startling information. For example, you may find that key employees have stock options granting them the right to receive a certain percentage of the company’s stock if they stay on for a specified period of time. If this is the case, you’re going to wind up with minority shareholders-co-owners!-on your hands. On rare occasions, key employees have been successful in getting provisions into their employment agreements that give them the right to veto any proposed sale of the business. At the very least, the existence of a written employment agreement will mean you can’t fire the employee, should you want to, until the agreement expires, or you may be liable for a hefty severance award.
Closely related to the problem of employment agreements is the lurking trap of deferred compensation agreements. Here’s how this works: Let’s say that years ago Everett Houston had a partner, Edgar White, who has since moved to Florida. Instead of taking a large salary, which would have pushed him into a higher tax bracket, White signed an agreement with Houston Sash & Door that obligates the company to pay him a certain amount
every year as deferred compensation. If you buy Houston Sash & Door, you’ll have to pay not only Houston, but also White, whom you’ve never met and aren’t particularly interested in meeting.
Then there’s the issue of labor unions. If all or some of the seller’s employees are members of a union that has succeeded in signing a collective bargaining agreement for its members, the agreement will be right there in black and white for you to read. Even if none of the employees are union members, don’t stop asking questions. Just because the employees are not members of a union doesn’t mean a union hasn’t tried, or is now trying, to unionize the workforce. Its efforts may have gone so far as an election to certify the union. What’s worse, the seller may have committed an unfair labor practice in defeating the union. If this is the case, you may be stuck with back-pay awards to disgruntled employees.
How do you guard against employment agreements, deferred compensation agreements, and labor troubles jumping out of the woodwork after you buy the business? You’ve probably guessed the answer by now. The purchase agreement your lawyer prepares should require the seller to spell out all these lurking problems, but once again, it’s no substitute for your careful investigation.
Comments
Got something to say?
