Buying a business? Protect yourself from high severance costs

Question: I’m about to purchase another similar business that will effectively double my business. I wish to retain all the staff at the new business and, with the exception of one employee, all have been there short periods (1 to 5 years).
There is one person with 20 years’ experience. Obviously, I would inherit the severance liability if I recognized those 20 years (but I am not buying the corporation, just the assets) but the current vendor does not want to “discount” the price of the business by the amount that I have calculated I could be liable for, should that employee not work out. In fairness to the situation, I don’t believe the employee will ever force me to terminate his employment; however, business is business. I need to protect myself.
I’d like to achieve three things:

  1. Ensure that the employee still feels that he has his 20 years of service recognized vs. starting at zero.
  2. Protect myself from severance, should that employee not work out.
  3. Knowing that this is a deal I’d like to complete, I’d like to accept some liability/risk, but have it limited, so I’m willing to share up to 50 per cent of the severance costs.

Any suggestions on how this could be written into our purchase agreement and/or a contract with this employee?
The Answer: Plan for the worst and hope for the best.
The employment relationship might not work out with a long-service employee after you buy the business. He may resent the change or your style, or he may just resent you. Since he will be unlikely to simply pack up and leave, you will have the burden of firing him and paying his severance if things go awry. Fortunately, you get to make that call.
You need to put a proper employment contract into place with him – a contract that protects you. Not just an offer letter. This contract has to delineate your severance obligations. Without a contract (or a good one) a 20-year employee could receive up to 24 months’ severance, effectively handcuffing you if you want to let him go. A contract can cut that down considerably. The issue is getting him to agree to it. This may require some negotiation.
Ironically, even though the clauses in this contract are intended mostly to protect you, he will probably still want one. Why? Most employees wrongly assume that a contract protects their rights, when those rights are generally protected by the common law. Under employment standards legislation, he automatically receives credit for his previous service. Contracts that confirm that employees will receive this amount may appear to provide them with that “right,” but in actuality, simply reaffirms a right that already exists.
The contract is your best, cheapest tool. If you do negotiate as part of the purchase agreement that the vendor will pay all or part of certain severance costs, make sure a lawyer reviews that clause carefully. Long-time employees may well claim constructive dismissal because of changes to reporting relationships, reduced severance entitlements, titles and cherished benefits. Make sure your indemnity provision covers this. You also do not want the vendor playing Monday morning quarterback on your severance negotiations, and leaving you on the hook for more than you bargained for. So, make sure your clause covers more than just “reasonable” severance costs, as there may be other claims a dismissed employee might make.
Finally, be careful about limiting the agreement just to severance payments. If a terminated employee makes additional claims on top of severance, such as bad faith or discrimination, the vendor may well insist that your agreement does not cover these damages.
Author: Daniel Lublin
Publication: The Globe & Mail