Considering Buying a Business? Guidelines for Navigating Employee Rights

Our June poll asks readers whether or not they believe the self-employment route pays off in the long run, or whether having the financial security provided by an employer paycheque is smarter. Be sure to weigh in with your views, but in the meantime, Knowledge Bureau author Philippe Richer provides food for thought for those considering leaving the 9-to-5 behind for self-employment.

Excerpted from Philippe Richer’s legal blog.

Buying a business can be an exciting and stressful experience. First new owners must dig deep into their savings and-or remortgage their home. Then, when they take over the business, they face a steep learning curve. New owners step into the shoes of the selling owner, oblivious to the nuances and “personality” of the operation.

A new owner would be well advised to simply jump into the driver’s seat and stay the course. Depending on the complexity of the business, this can range from six months to a year. During that time, the new boss will acquaint him or herself with the business. In addition to the operational functions, the new owner will learn about customers (which ones are good customers and which ones are bad). He or she will also have a chance to see how employees perform in the job and how they interact with the rest of the staff.

After the initial familiarization period, the new owner will likely want to implement change. We know that some people adapt to change better than others. In certain situations, employees refuse to adapt. Or, the new owner will realize that while certain employees function well in their specific capacity, they do not work well with others. In these situations, a new owner will have little choice, but to terminate employment. While necessary, these are never pleasant experiences.

While not easy, so far, this sounds pretty straightforward, right?

Not so fast! 

Before the new owner terminates anyone’s employment, he or she should first determine the cost of doing so. In Canada, the Supreme Court determined that employer-employee relationships are contractual in nature. You can read more about the basics of employment contracts here.

Essentially, unless a written contract exists where an employee agreed (in writing) that the employer can terminate the contract without giving notice (subject to the labour code minimum notice periods), an employer must give sufficient notice of termination. The notice period is determined by using several factors which include: employee age, seniority, position in company, and education level. While each case is fact dependent, as a rule of thumb, an employee is entitled to 2 to 4 weeks notice for each year of service.

A new owner inherits employee seniority. This can be a significant liability. Terminating someone (who really should be fired) can be costly. New owners can rarely afford this, especially considered the leveraged position they put themselves in to acquire the business in the first place. Every bit of profit is needed to service the debt.

The cost of paying out the notice period could (or should) be negotiated with the vendor at the time a potential buyer negotiates the contract to buy and sell the business. In any event, if someone buys a business with employees, they inherit all of the liability associated with those employees. This is an often ignored fact when buying and selling.

Have you weighed in on our June poll question asking: Consulting in a "gig" economy is appealing to many, but is the move from employment to self-employment a smart one? Leave your comments before the poll closes this Friday!

Philippe Richer is President of TLR Law Group located in Winnipeg, since 1996. The office serves the middle class and small business with a focus on estates, wills, real estate and corporate law. Philippe also instructed the français juridique class at the Faculty of Law at the University of Manitoba. He is also the author the Business Law course for the Executive Business Builder Program.

Additional educational resources:

1. Join Knowledge Bureau in discussing tough issues, like these, that affect Canadian business leaders, on the LinkedIn Executive Business Builder Network. Also, register today and join fellow business leaders from various industries at the Business Builder Retreat, where Philippe Richer will speak, that we are so pleased to unveil for the first time at the Distinguished Advisor Conference in November.
2. Enroll online and study at your convenience. A free trial of Business Law from the Executive Business Builder Program is available. Or, complete the full designation.
3. Are you a small-business owner ready to brush up your skills to better address operational needs? Register for our Insurance Strategies for the Small Business Owner or T1 Professional Tax Preparation – Proprietorships certificate courses.

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