It’s exciting looking at a new business venture. Buying a business can mean anything from taking over a shop or restaurant – to setting up a management buy out (MBO – where the senior team take over the ownership of the business) – or corporate takeover by one business of another.

Often there is a myriad of things to consider when embarking on such an endeavour, such as timing, finances, tax, forward business planning, corporate structure and asset protection.  One aspect should not be forgotten is the people or HR angle: as getting it wrong can be time consuming, expensive, and result in key persons in the business that you may have wanted to keep moving on.

So what are the key factors to consider?

Firstly you need to decide if you are purchasing the business as an asset sale or a share sale. A share sale is usually where you purchase the shares in a pre-existing limited company that has been running the business. An asset sale is where you buy all the business and assets but without taking on the legal entity that has been running it. Read more about these 2 types of deal in our previous article ‘Buying the assets of a business’ and ‘Buying the shares in a business’.

Secondly, you need to think about what people are already involved in the business. You will need to find out complete details of:

  • Any employees: how many? Doing what roles? Under what terms and conditions of employment? How long have they been there? What bonus, commission or enhanced redundancy payments are they entitled to?
  • Any consultants or self employed persons: how many? Doing what roles? Under what terms? What notice provisions?
  • Any agency staff or ad hoc workers? Often people don’t mention these as they are just ‘casual’ but they can have rights too.
  • Any directors or non executive directors and shareholders. Who are they, how long have they been around, what agreements are in place and are they family members?
  • Any trade union that is involved or recognised by the business.

You may need to sign a data protection agreement or receive this information in an anonymous format initially. It is often the case that as part of the transaction a ‘due diligence’ request will be sent by your solicitor to the seller’s solicitor asking for this and wider information both on the people and business generally. It is also usual however for basic information about these people to have passed between the parties before solicitors have been appointed.

Thirdly, you need to think about what legal rights or risks attach to those people.  If you are buying the business through a share sale, the relationship between the business with each of the above will already be in place. You inherit all the risks and liabilities that come with that historic relationship. Usually the position of the directors and shareholders is then negotiated as part of the purchase (often with them leaving).

If you are buying the assets only, the Transfer of Undertakings (Protection of Employment) Regulations 2006 (‘TUPE’) is  likely to apply. This would be most likely where you are planning on continuing to run the business in the same or similar way after buying it. This is a complex area so do take advice from a specialist if you are not sure if TUPE applies.

If TUPE does apply, you automatically inherit all the employees on the same terms and conditions and with the same length of service as if you had always been their employer. There is legal protection for these employees  in that you cannot dismiss them or change their terms of employment without risk of a claim.  Note that this does not apply to agency or casual staff (although you have to be careful that these individuals are not actually employees).  It can apply to directors of a business if they are also employed.

It is really important therefore that you know what you are inheriting and understand:

  • What the payroll and on-costs are for those staff (including any entitlement to bonus, pension, pay rise etc):
  • Whether there are already any pre-existing issues with the staff (disciplinary issues, long term sickness absences, capability issues etc);
  • What the staff would be entitled to if they were made redundant in future – which could be possible if you changed the structures of the team;
  • Whether there are any ongoing claims or disputes you may be taking on;
  • If a trade union is recognised, you need to know in respect of what matters and on what terms.

Finally, there are certain processes that need to be followed and protections you can arrange in the business purchase agreement that relate to staff. It is important that if you are taking on a business with employees that you speak to a specialist who can help you with these.

Verity Slater is an employment partner in our Truro office. To discuss the content in this article or any other HR issue call 01872 265100 or email employment@stephens-scown.co.uk