Knowledge for business owners: Do you have to keep all employees when taking over a business?

When you want to take over another company, the employees are often the ones that can tip the scales in one direction or another. Most buyers would prefer to get rid of unprofitable employees and keep profitable ones. But is it as easy as that for you as a business owner? In this post, we have set out the most important aspects you need to consider here.

What options are available generally speaking when you want to take over a business?

There are two ways of taking over a business in Germany: by way of an asset deal or a share deal.

A share deal involves you buying shares in a corporation (normally a limited liability company [GmbH] in Germany). These shares are always for the entirety of the corporation. That means: If you buy 100 percent of the shares in a limited liability company, you are also buying everything contained within this limited liability company – including its employees. If you buy a certain percentage, you will only acquire a certain share of the company, but again with everything in it. This also includes each and every employee working at the company at this point in time.

Put bluntly, a share deal basically means that you buy what it looks like, but you get what’s inside it.

An asset deal involves you buying “objects” from a corporation. That means: You can buy anything from a single asset (e.g. just a pocket calculator) to all the assets, including the goodwill, of the entire company.

If you are now thinking to yourself: “Hey, great! I can just buy the patent and the production machinery and warehouses for product A from the company XY by way of an asset deal. At the same time, I can leave the longstanding, expensive employees with the seller,” then you will need to think again. It is not as simply as all that when it comes to an asset deal.

Put bluntly, an asset deal basically means that you buy only (parts of or) the (entire) inside and only get when I sell using what’s inside. But beware: If what I buy is of material importance to the company and its ability to operate as a going concern, then I also have to acquire the employees. Even if they were not part of the purchase agreement.

The law states that employees are inseparable linked to certain parts of a company.

Lawmakers introduced a number of labor market regulations so as to prevent wage dumping practices and high levels of unemployment in the country. This is where Section 613a of the German Civil Code (BGB) comes in.

Without getting caught up in the details, it can be summarized as follows: If material foundations of a business are acquired, any employees associated with these parts must also be kept.

The same also applies when dismissing employees (in company with more than ten employees), in that the must be a business-related reason for this.

What this means for the seller is the following: The seller is not allowed to make the sales offer look more attractive and then say, after selling, that there is no more work for individual or all employees because he has sold the material foundations of the business to someone else.

By the same token, the buyer cannot simply decide to fire individual or all employees because he does not want to keep them or expressly stated that he was not acquiring them.

Employee rights are and remain protected.

Is the buyer able to change employment contracts unilaterally?

If the employee is disadvantaged, then no, you cannot change the employment contracts. And if you did, any such changes would be legally invalid.

Employees are also protected here by Section 613a of the German Civil Code (BGB).

Is it not beneficial for your internal planning to keep all employees? What are you allowed to do when taking over a business?

Employees are protected by Section 613a of the German Civil Code (BGB). There is no way around this. However, what you can do is offer such employees a settlement that encourages them to object to the business transfer (which happens legally). This would mean that they would leave by way of a termination agreement.

However, the employees in question won’t simply object. You need to offer them something. At the end of the day, no-one voluntary gives up a (good) job.

And remember that you won’t get it for nothing. You need to make a good (normally financial) offer. There are a number of models to choose from here: severance pay model, partner severance model [Abschichtungsmodell], retirement model, etc.

These costs are (yet another) part of your purchase price for the material foundations of the business.

And remember: The offer should be made to unfavorable employees before the material foundations of the business are bought and the employees object.

Exception: Business-related termination

As already mentioned briefly before, there is only one legally effective reason for firing employees: the business-related termination.  A business-related termination generally relates to circumstances when there is an urgent business need and it is no longer possible to continue employing them in another position of equal value in the company. For example, a carmaker would have the option of exercising special termination rights if the market for car XY no longer existed. In this case, the company would be allowed to dismiss all employees involved in the production of car XY if this situation meets the criteria for business-related termination.

In contrast, grounds for a business-related termination do not exist if you acquire a business and would be able to reduce the workforce by 20 percent by taking advantage of synergies (e.g. with your existing business). In such cases, you would need to make and agree on an offer with the employees as described above and determine what would be in the best interests for your business in the long term.

What needs to be considered from a business administration and tax law perspective?

As a businessman, you would only like to buy what you want to have. But it is not within your power to decide against having to acquire associated employees, isn’t it? Legally speaking, that’s true. But this is not the case for the commercial side.

The price being paid for the material foundations of the business should also include the additional expense incurred for employee severance pay models. It is not simply a price for a (material) item.

How do you go about doing that? You deduct the costs for the employee model from the price for the material foundations of the business. This will enable to you to make a preferred offer to employees without having to pay more at the end of the day.

And under tax law?

There is also a major difference here from the tax perspective: Personnel costs have an immediate impact on profit whereas the costs for acquiring foundations of the business do not (cost breakdown for business-owned property: 33.3 years, for goodwill: 15 years, for machinery: it depends on the remaining useful life).

That means: You ultimately only pay the price for the foundations of the business, but create immediate and deductible loss potential.

How do I recognize an obligation to keep employees?

Under Section 613a of the German Civil Code (BGB), you are required to keep employees if they are transferred to a business or branch of business (not to be confused with business part(s)).

A business is defined as an organizational unit comprising (functional and qualitative) work equipment. A distinction is to be made here between “business” and “company”: A company relates to the commercial and legal entity (limited liability company or partnership [GmbH, GmbH & co.KG]). A branch of business is an independent entity in the company.

To make this clear, consider the following:

A business is something that has work equipment (such as machinery) and that organizes work in such a way to be productive. That means: If you buy the material assets required for a business, this equates to buying a business (or a branch thereof).

It is normally assumed that you are buying a business / branch of business if you buy functional and/or qualitatively important assets belonging the business.

Whether an asset is materially important or not can be determined from two features:

On the one hand, what is important is how the actual asset is used in the company and how it fits into the business activities (referred as the functional consideration). On the other hand, the existence of considerable levels of hidden reserves constitute a material foundation of the business (referred to as the quantitative consideration). In all cases the question of material foundations of the business must be assessed on a case-by-case basis(referred to as norm-specific consideration).

If you only purchase assets of lesser important (to the business’s ability to function as a going concern), you are not acquiring a business. If, however, you buy at least one material asset, you are also acquiring a business.

This means that you do not always have to buy everything for you to have acquired a business from a legal standpoint. On the other hand, you might not have acquired a large of number of assets, but yet still have bought a business. This can only be determined on a case-by-case basis.

Conclusion: Only take over a company with employees with legal support and detailed calculations.

As you see, there are a number of things to consider, both from a legal and business standpoint, when taking over a business that has employees. Please remember that this post does not serve as a substitute for legal advice. 1. I am not allowed to give such advice as a tax advisor and management consultant. 2. The idea here was just to give you a small insight into the legal aspects that should be considered. You will certainly need support from an attorney specializing in labor law.

You will also need to draw up a concept and a cost/benefit calculation for the employees in question. The key thing to remember here is to balance the cost of higher one-off expenses against long-term lower costs, and to base your decision on this.

My aim in writing this post was to show you what you need to consider when taking over a company that has employees.  I hope that I was able to help you become a little more familiar with the topic of business takeovers and with everything that comes with these.

Kind regards,

Thomas Breit

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