We are consistently seeing an unfortunate situation during the negotiation process for business sales where clients are unaware of the adjustment mechanisms for employee entitlements and just how much this may impact the amount of money changing hands.
This can derail price negotiations when a disappointed party seeks to change the purchase price when they realise the quantum of these adjustments. Buyers, sellers, agents and advisors involved in business transactions would be well advised to develop an understanding of these adjustments so everyone has a clear picture at the start of negotiations.
Here is what you need to know to avoid any nasty surprises:
- the Standard Conditions of the REIQ Contract for Business Sale (the commonly used document for small to medium business sales) provide for an adjustment to be made in the buyer’s favour (ie. a deduction to the amount payable to the seller) equal to 70% of the value of all accrued sick leave and annual leave for those employees who are continuing their employment with the buyer. Accordingly, this is the default position and the parties must negotiate specifically for different adjustments. Depending on the number and tenure of employees in the business, these adjustments can easily translate into tens of thousands of dollars being deducted from the price payable to the seller by the buyer;
- sick leave, like annual leave, accrues continuously - this means that it does not ‘zero off’ at the end of the year (a common misconception) if the employee has not taken all of their accrued sick leave. Consequently, long-serving employees may have significant sick leave accrued, which translates to a significant adjustment in the buyer’s favour at settlement; and
- the Standard Conditions also provide for an adjustment in the buyer’s favour for accrued long service leave for any employees with five years service with the seller or any previous owner of the business. Again, potential sellers should make sure they are aware of the current accrued long service leave entitlements prior to entering into negotiations to sell the business.
Buyers should note that they may need to revise their operating budgets to take into account the accrued leave liabilities.
If you are considering selling or purchasing a business, our expert Commercial + Property team can help you. Please contact Amanda Tolson (who has recently returned from maternity leave) or Peta Gray for further advice.