business
How HR can Protect Company Value
A COMPANY’S POLICIES CAN MAKE ALL THE DIFFERENCE DURING ACQUISITION
Recently, one company decided against buying another
because the organization for sale lacked basic HR
structure. Specifically, there were no written employ-ment
contracts and policies or a formal performance
appraisal process.
Many business owners will consider selling their company at
some point. They may want to cash in and retire, they may be
looking for a new challenge or there may be a lack of potential
successors within the company or the family. When a prospec-tive
buyer expresses interest, part of the due diligence process is
determining the value of the company for sale. When it comes to
valuations, the interested party would want to see financial state-ments,
including balance sheets. Among the factors that determine
value are buildings, equipment, inventory, AR/AP, mortgages,
lines of credit, tax liabilities and cash position. Other factors are
reputation, revenue and profitability.
The purchasing company had been interested in taking over a
company in eastern Ontario as part of a geographic expansion.
One of the components of the seller’s valuation was an amount
of $3 million for goodwill. The purchasing company then asked
a number of questions about the seller’s workforce. It turned out
that the company employed approximately 100 people, whose
average compensation was $50,000 per year, with an average ten-ure
of eight years.
The company did not have written employment contracts in
place that prescribed the Employment Standards Act (ESA) min-imum
for terminations without cause. If it had, and a new owner
decided to let everyone go, the cost of providing each employee
with 16 weeks’ pay-in-lieu would have worked out to $1.5 million.
However, since all employees had all been hired on a handshake,
reasonable notice under common law would apply instead. The
purchasing company, realizing that it was looking at a potential lia-bility
of eight months’ pay-in-lieu for each employee, showed the
seller that this could work out to well over $3 million. The conclu-sion:
“There is no value there.”
When it comes to hiring and promoting staff, it is impor-tant
to have a signed employment contract in place before a new
employee physically reports for duty. Putting together an offer of
employment is the stage where an employer can manage risk. By
contracting out of common law, the employer can limit its sever-ance
obligation.
When companies hire people on a handshake, the liability
for the employer can be substantial when terminating employ-ees
without cause. Stating that an employee will be entitled
only to the minimum notice prescribed by the ESA helps the
employer avoid being on the hook for reasonable notice under
common law.
In light of the fact that labour is usually the largest business
expense, looking at financial statements and tangible assets is not
enough when it comes to valuations. Besides severance obliga-tions
under common law, there is the hidden cost of people being
miscast and miserable in their roles, people underperforming and
being left to flounder, having supervisors who lack management
and social skills and thus trigger turnover – you won’t find any of
these as a line item on a company’s balance sheet.
When it comes to buying and selling companies, HR can
add substantial value for both buyer and seller by putting solid
employment contracts, a meaningful performance review process
and enforceable policies in place. n
Evert Akkerman is an award-winning HR professional and founder
of XNL HR.
By Evert Akkerman
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HRPROFESSIONALNOW.CA ❚ MARCH 2018 ❚ 35
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