What happens to your staff entitlements when you sell

Most sellers think about employees in terms of who stays. The bigger question at settlement is what the entitlements do, because that one has a number attached to it and the number comes off your proceeds.

The two groups

Under the transfer of business rules, some entitlements move to the new employer whatever anybody prefers, and some are the buyer's choice.

Always carry across. Sick and carer's leave, the right to request flexible working arrangements, and parental leave. The new employer recognises the employee's prior service for these and there is no election available.

The buyer can decline. Annual leave, redundancy pay, long service leave and service for unfair dismissal purposes. Where the buyer is not an associated entity of the seller, they can choose not to recognise prior service.

That distinction is the whole commercial point, because an asset sale to an unrelated buyer, which is how a normal business sale is structured, is exactly the case where the election exists.

What the election costs you

If the buyer declines to recognise service for annual leave, you pay out the untaken accumulated annual leave at settlement. If they decline for redundancy, the redundancy exposure stays with you, subject to the rules about an employee who rejects an offer on similar terms that recognises prior service.

For a business with a long serving team, that is not a rounding error. Eight staff averaging four weeks of accrued leave is roughly two thirds of a month of payroll, payable in cash on the day, out of the proceeds you were counting on.

Why it should be settled before you go to market, not at contract

Three reasons, and the third is the one that actually causes trouble.

It changes the net number. The price is not what you receive. The price minus the payouts, the apportionments and the fees is what you receive. An owner who has not run that calculation is negotiating on the wrong figure.

It is a negotiating variable, not a fixed cost. Whether the buyer recognises service is something that gets agreed, and it can be traded against other terms. It cannot be traded if nobody raises it until the contract is being drafted.

An inaccurate entitlements schedule breaks trust at the worst moment. If your leave accruals turn out to be understated during due diligence, the buyer does not simply correct the number. They start asking what else in the financials was prepared the same way. A leave balance that is out by twenty per cent is a small problem that creates a large one.

What to do about it

Get an accurate accrual schedule from your bookkeeper or payroll system, employee by employee, covering annual leave, personal leave and long service leave, with start dates. Then have your accountant confirm the balance sheet provision matches it.

Then put the question to your solicitor early: for a sale structured this way, in this state, which of these transfer and which are paid out. The answer belongs in the information you give a buyer, not in a discovery.

The part that is not about money

Your staff will ask what happens to their leave. Being able to answer that accurately, on the day you tell them, is worth a great deal to how the handover goes, and the handover is part of what the buyer is paying for.

An owner who has to say "I'll find out" has told the team something about how prepared the sale is.