Employment considerations when selling your professional practice*
Whatever the reason might be to sell a professional practice, whether for the purposes of retirement, a change of career, or no longer wanting to be responsible for the day-to-day operations of the business, there are important business and legal considerations to keep in mind.
There are two primary methods of structuring the purchase and sale of a professional corporation. The transaction can take the form of either a share purchase, whereby the purchaser buys the shares of the professional corporation that owns the assets and operates the business, or an asset purchase, whereby the purchaser buys the underlying assets of the professional corporation. The decision to structure the transaction as either an asset purchase or share purchase will be strongly influenced by legal and tax implications and will also be guided by various business considerations.
Regardless of the structure of the transaction, selling your practice is a complicated process, that if not done properly can end up costing you a lot of extra money and leave you open to unexpected liabilities. When it comes to selling a professional practice, there are several considerations to keep in mind, including the following:
- Plan Ahead. It’s important to plan years ahead of the target closing date to ensure your practice is ready for sale. One of the reasons behind this advanced planning is that there are beneficial tax opportunities that may only be available if an appropriate corporate structure has been put in place.
- Lease. A prospective purchaser will want to be assured that they are able to continue practicing from the same location for a reasonable period of time. The lease should include a clear ability for the tenant to assign the lease or permit a change of control to a new purchaser.
- Employment and Associate Agreements. Termination costs will be a key factor in valuing a professional practice and having employment agreements in place with enforceable termination clauses is essential to avoid unwanted liability down the road. Associate agreements should include a properly worded non-solicitation clause that prevents the associate from soliciting patients/clients of the practice if they leave and practice elsewhere.
- Employee Liabilities. Regardless of whether the transaction is structured as a share purchase or an asset purchase, it is very important to determine how the parties will handle the employment related liabilities of the professional practice.
The above points are just a few of the considerations to keep in mind when preparing to sell a professional practice. For the purposes of this article, we will focus on employment related considerations and employee liabilities involved in the sale of a professional practice.
While you may be focused on the value of the business and transitioning over patients/clients, it is important to not forget about your employees. Not properly accounting for employees during a sale can be costly.
Who will bear the burden of employee entitlements upon termination has increasingly become a major negotiation issue when selling a business.
Employment Considerations when Selling Shares
In a share purchase, the purchaser buys the shares in the capital of the corporation that owns the assets and operates the business. In a share sale, the corporation’s assets are not legally transferred to the new owner as the assets and liabilities stay with the corporation; however, the shares of the corporation that owns the assets (and liabilities) are sold and the corporation undergoes a change of control. As a result, the contracts, including employment agreements, stay with the corporation, and it is not necessary to specifically transfer these agreements or enter into new agreements with the buyer. Importantly, in a share purchase the employer does not change.
When it comes to the practice’s employees, their employment contracts are not terminated when the shares of the business are sold, unless the parties specifically make an agreement requiring the seller to terminate the employment of the employees prior to closing and pay any associated termination costs. This can be a costly endeavour, especially if your practice does not have enforceable termination clauses in its employment agreements and you have long-service employees. In other words, unless the parties specifically agree otherwise, the purchaser assumes most of the employee liabilities when they purchase the practice.
Employment Considerations when Selling Assets
An asset purchase/sale involves the purchase and sale of some or all of the assets of a corporation. The purchaser is able to choose the assets it wishes to purchase, as well as the liabilities it wishes to take on. The employment contracts do not automatically transfer to the purchaser. In an asset purchase and sale, decisions relating to the employees are very important and can be contentious points of negotiation between the purchaser and the vendor.
This means, among other things, that if the employees are not specifically addressed in the agreement of purchase and sale, the seller will have to terminate the employment of its employees and pay the associated termination costs. Alternatively, if the seller wants the purchaser to assume the employees, the purchaser will have to agree to offer the employees employment post-close. If an employee chooses not to accept employment with the purchaser, seller will be responsible for the associated termination costs.
If you have questions about or need assistance with understanding the potential employment-related liabilities and how to avoid them when selling you professional practice, please reach out to any member of Siskinds’ Labour & Employment Law Group.
* Note: this post does NOT discuss selling a business with a unionized workforce, as different rules apply.