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The Nitty-Gritty of a Business Purchase and Sale: Due Diligence – Part IX

By October 23, 2018 July 6th, 2020 No Comments

This blog series explores the steps involved in buying and selling a business, which tend to be much more complex than many business owners realize. In prior blog posts, I explained how due diligence comes into play, the nature of due diligence requests related to the structure of the business entity that is selling its assets and to financial information, due diligence as it relates to the seller’s customers and contracts, the importance of making inquiries in regard to insurance, and due diligence requests involving real and personal property and intellectual property. In this post, my final post on due diligence, I will discuss due diligence requests related to employees.

A key component of a business’s value is its employees. In most purchase and sale transactions, the purchaser will seek to ensure the retention of key employees in order to ease the transition to new ownership. In all likelihood, a savvy purchaser who is represented by counsel will make numerous due diligence requests about the business’s employees. To start, the purchaser will ask for the basics – the names of the employees and their start dates, positions currently held, salary history, current salary, vacation accruals, and their exempt or non-exempt status. The purchaser will request copies of all employment contracts and independent contractor agreements. What about workers compensation? The purchaser will undoubtedly want to know whether any claims have been made and the applicable costs. In terms of employees who are not U.S. citizens, the seller should be prepared to provide information concerning their U.S. visas including the type of visa held and the expiration date.  The purchaser will likely request a copy of any employee manuals and also any additional worker health and safety policies. The seller should expect to provide information concerning all employee benefits such as medical plans, life insurance, and retirement plans.

A purchaser who is represented by counsel will likely be especially thorough in requesting information concerning any federal, state or local investigations of any potential laws or regulations governing the employees. Also, have there ever been any lawsuits or threats of employment litigation? The details and documentation regarding these incidents will undoubtedly be requested and then carefully examined by the purchaser.  The purchaser wants to evaluate any potential liabilities related to the employees, so that it either can finalize the transaction on a fully informed basis or, alternatively, walk away from the transaction if the liabilities seem too great to assume. Finally, if the employees belong to a union, the purchaser will request copies of all labor and collective bargaining agreements, as well as arbitration grievances and decisions. Have there been any strikes? If so, how was the matter resolved?

A well-informed seller will likely, for months prior to placing the business on the market, prepare responses to the typical due diligence requests referred to in all my blog posts in this series. That way, when the anticipated request is actually made, the seller can quickly and thoroughly respond in order to satisfy the purchaser’s concerns and thereby increase the likelihood of a successful conclusion to the purchase and sale process.

Photo Credit: Hillyne Jonkerman on Pixabay

This post is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting with an attorney.

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