Employment Law for Founders Before Exiting

The Critical Role of Timing in Business Sales

The successful sale of a company is often heavily influenced by timing. For numerous business owners, it represents the culmination of their work, the point at which they realize the financial benefits of their dedication. As negotiations intensify and both parties strive for completion, the process can accelerate rapidly.

It’s during this crucial phase that uncovering unforeseen business issues can be particularly damaging for the seller.

Common Employment-Related Deal Breakers

Frequently, these issues center around employment matters. A lack of attention to these details can substantially affect the sale – potentially halting it altogether, decreasing the final price, modifying the agreed-upon terms, or shrinking the number of interested buyers.

Thankfully, proactive planning and legal counsel can usually resolve these concerns well before the sale process begins. Ensuring your employment practices are sound is vital long before you contemplate an exit strategy.

Three Key Areas of Employment Concern

The following outlines three primary categories of employment issues that can impede or postpone a sale. These considerations largely apply to asset sales, though specifics may differ in a stock sale scenario.

• Employee Agreements: Review all existing employment contracts, non-compete agreements, and severance arrangements.
• Compliance Issues: Ensure adherence to all applicable labor laws, including wage and hour regulations, anti-discrimination policies, and proper classification of employees versus independent contractors.
• Benefit Plans: Assess the status of employee benefit plans, such as health insurance, retirement plans, and paid time off policies.

Addressing these areas proactively will help streamline the sale process and maximize the value of your business.

A thorough review of these employment-related factors is a crucial step in preparing for a successful business transaction.

Ensuring Business Compliance

A primary concern for businesses considering a sale is adherence to employment law. Establishing robust employment policies and procedures is crucial, and these must be thoroughly documented and actively implemented well in advance of any potential transaction.

Particular attention should be given to wage and hour regulations. This encompasses accurate timekeeping and payroll systems, correct classification of workers as either employees or independent contractors, and adherence to rules regarding meal and rest breaks.

Furthermore, comprehensive policies addressing PTO, and proper handling of payouts upon employee termination are essential.

It is equally vital to have appropriate policies in place to prevent discrimination, harassment, and retaliation, with a specific focus on disability-related matters.

Discovering potential violations of legislation like the Americans with Disabilities Act during the final stages of a sale can be detrimental.

A comprehensive review of existing practices is recommended. This includes updating employee discipline and termination procedures.

Businesses operating in multiple states must verify compliance with the laws of each jurisdiction.

Deficiencies in compliance, the absence of policies, or flawed practices can lead to significant legal liabilities or necessitate costly revisions and employee retraining, ultimately diminishing the business's value.

Key Areas of Compliance

• Timekeeping and payroll accuracy
• Proper worker classification (employee vs. contractor)
• Exempt vs. non-exempt status determination
• Adherence to meal and rest period regulations
• Comprehensive PTO policies
• Correct termination payout procedures
• Robust anti-discrimination and anti-harassment policies
• Compliance with disability laws

Proactive attention to these areas will streamline the sale process and protect the business’s valuation.

Potential Liabilities: Employment-Related Claims

A significant risk during an exit strategy involves potential liability stemming from employment-related claims, encompassing both existing and anticipated issues. Proactive compliance measures, including robust policies and practices, are crucial for minimizing these risks.

Prioritizing the resolution of any outstanding claims should be a primary focus before engaging with potential buyers. The history of past claims, along with their outcomes, also warrants careful consideration.

This includes not only formal lawsuits and claims filed with government agencies, but also matters involving attorneys and internal complaints or grievances that could evolve into formal claims.

Impact of Employee Transition

A buyer’s level of concern regarding these claims is often directly tied to the planned transition of employees post-acquisition. Different scenarios present varying levels of risk.

For example, if employees are terminated by the selling company prior to the deal's completion and subsequently rehired by the buyer, or if the buyer initiates terminations after the sale, potential liabilities arise.

Conversely, a seamless transfer of employment from the seller to the buyer, without any interruption in status, generally presents a lower risk profile.

It’s important to understand that, regardless of the terms outlined in the transaction agreement, the principle of successor liability can still apply under the law.

Agreements in Business Sales

A crucial aspect to consider when selling a business lies in the existing agreements that are in effect. Prospective buyers will thoroughly examine all employment-related obligations to which the business is subject. This includes a detailed review of restrictive covenants.

These covenants encompass agreements like noncompetes, nonsolicitations, confidentiality agreements, nondisclosure agreements, and provisions for trade secret protection and assignment of inventions. The enforceability of noncompete and nonsolicitation agreements is heavily influenced by the laws of the relevant jurisdiction, necessitating careful legal assessment.

Key Employment Agreements

Beyond restrictive covenants, other employment agreements are vital during a sale. Particular attention should be given to any severance terms, especially those triggered by a “change in control.”

It’s important to determine whether existing compensation and benefits arrangements will continue after the sale. Furthermore, identify any additional obligations to employees – beyond standard claims – that might automatically transfer to the buyer through legal operation or existing contracts, whether oral, implied, or written.

Consider the presence of arbitration agreements or signed policy acknowledgments, as these can also impact the transaction.

Proactive Preparation is Essential

Addressing potential weaknesses proactively is paramount when preparing a business for sale. Delays can be expensive.

Engaging an employment attorney early in the process allows for the resolution of issues and thorough preparation well in advance of seeking a sale. This proactive approach can significantly enhance the realized price, streamline the transaction, and accelerate the timeline.