What happens to your employees when you sell the business
The legal answer turns on how the business is sold, and the human one on when the staff hear the news and from whom. Both are settled earlier than most owners expect.
In a share sale employees keep their employer, because the corporation stays the same. In an asset sale the buyer becomes the employer, and provincial employment standards generally treat service as continuous for staff the buyer keeps. Key people hear shortly before closing and everyone else on the day, with the buyer in the room. Customers hear afterwards.
The question owners ask second
After what the business is worth, the next question most owners ask is what happens to the people. It has a legal answer and a human one, and the two are decided at different points in the sale. Where the staff themselves are the buyer, through an employee ownership trust, the company stays their employer.
The legal answer depends on the structure
In a share sale the buyer takes over the corporation, and the corporation is the employer. Every employee keeps the same employer, so each contract carries on unchanged, with seniority and vacation entitlements intact. The difference between a share sale and an asset sale matters to the staff as much as it does to your tax. A licensed child care centre sold as shares keeps its licence for the same reason.
In an asset sale the buyer’s corporation becomes the employer, and each employee is leaving one employer and joining another. In practice, provincial employment standards across Canada generally treat service as continuous when a business is sold and the buyer keeps the staff, so seniority for statutory purposes carries over. The details vary by province, and the buyer’s lawyer will document it with offers of employment on the same or better terms. In Quebec, article 2097 of the Civil Code makes the contract of employment bind the employer’s successor, as selling a business in Quebec sets out.
A federally regulated business, such as an interprovincial trucking firm, falls under federal law instead. Section 189 of the Canada Labour Code deems employment continuous with one employer through a sale or merger, for the purposes of annual vacations.
In an asset sale, an employee the buyer leaves behind is one the seller has terminated, and the seller owes what is due on termination. That cost is usually negotiated into the price, which is one reason buyers ask early who is staying.
What buyers want from your staff
Buyers are buying the people as much as the customers. A business whose foreman and top salesperson are staying is worth more than one where they might leave, and a buyer will ask, during due diligence, who the key people are and what keeps them.
- Every employee should have a written agreement with clear terms, since a handshake arrangement is a liability the buyer will price.
- Name the key people and give each one a reason to stay, such as a retention bonus paid at closing or a role in the new structure, raised with them at the right time.
- Anyone paid as a contractor who works as an employee is a tax exposure the buyer will find and want fixed or priced. The CRA decides whether a worker is an employee or self employed on the working relationship as a whole.
- Payroll and source deductions should be up to date, with the remittance history to prove it.
When to tell them
Tell them late. A sale that leaks to staff before a buyer is in place costs the business its best people, who start looking elsewhere, and the buyer will see that in the numbers. Selling a business privately sets out the whole sequence, and the part about staff is this:
| Who | When | How |
|---|---|---|
| One or two key people | Shortly before closing, sometimes during diligence if the buyer must meet them | Privately, with a retention arrangement tied to the closing |
| Everyone else | On the day, or the day before | In one meeting you lead, with the buyer in the room |
| Customers and suppliers | After closing | By you and the buyer together |
Having the buyer in the room matters. Staff told by a departing owner hear an ending, while staff who meet the person now signing their pay hear a beginning. Their questions go straight to the person who can answer them.
What to say
Tell the truth briefly, then give the specifics. Staff want to know who the buyer is and whether their jobs continue on the same terms, if that is the case. Most also ask what changes on Monday, usually very little, and whom to go to with questions.
Staff can absorb a great deal of change when they hear the facts from someone they trust. Left to guess, they absorb very little.
Your own role afterwards
Most deals include a transition period in which you stay on, paid, for a few months. Part of that is customers. A larger part than owners expect is staff, who need to see you working for the new owner before they will do the same.
Leaving the day after closing is among the mistakes owners make when selling, because it sends the staff a message about the buyer, intended or otherwise.
The family question
Buyers look at family members on the payroll with particular care. A spouse who does the books is an employee the buyer needs to replace. A son who draws a salary while absent from the business is an add back, meaning his pay returns to the earnings a buyer values, and someone the buyer will leave off its own payroll.
Settle both cases before the sale, so the buyer hears about them from you before diligence finds them.
Employment law in Canada is mostly provincial, and this piece describes the general position. What any employee is owed on a sale depends on their province and their contract, among other circumstances, and is a question for an employment lawyer before the letter of intent.
Questions owners ask
- Do employees keep their jobs when a business is sold?
- In a share sale they keep them automatically, because the employer stays the same. In an asset sale the buyer offers employment to the staff it is keeping, usually on the same terms, and service generally carries over for statutory purposes. The seller has terminated anyone the buyer leaves out, and owes them what is due on termination.
- When should I tell my employees I am selling?
- Tell key people shortly before closing, or during diligence if the buyer must meet them, with a retention arrangement tied to the closing. Tell everyone else together on the day or the day before, with the buyer present. An early leak costs the business its best people before a buyer is in place.
- Does the buyer have to keep my employees?
- In an asset sale the buyer chooses whom to keep, and most buyers keep most staff because the staff are part of what they are buying. Who stays is usually settled in negotiation, and the cost of terminating the rest is priced into the deal. In a share sale every employee stays with the same corporation at closing.