Retrenchment liability

So often I speak to sellers of businesses who tell me how concerned they are that the future of their staff will be safe after their businesses have been sold.

While this may be an admirable sentiment, it is rather more self serving than the sellers often realise. The failure of the purchaser to look after the business, keep it afloat, and keep the staff employed is something which should be rather closer to the heart of the seller than one would at first imagine.

For many years the common wisdom is that one only ever sells the assets and goodwill out of a company, and never the shares of the company. This is for reasons of safety. If you have signed any sureties on behalf of the company… and so on. That approach is rapidly changing to one of making darn sure that sureties are dealt with well in advance of a sale, and then selling the shares. The reason is all about capital gains tax and dividends tax. 34% versus 13% from one approach to the other.

Here is another consideration: If you sell the assets and goodwill out of the company, the seller remains liable for any retrenchment liabilities for twelve months after the sale.

So choose your buyer well. If he is undercapitalised and is unable to keep the business afloat, there will be no liquidation assets to pay the staff their retrenchment on liquidation, and you will be chased by them for the money.

If the purchaser decides to retrench to save money in order to avoid retrenchment, you may find yourself dipping into your sales profits.

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