Asset or Equity? That Is Question One

Written by Michele Honomichl

Greg overheard Robert telling Sara that the company made an acquisition of a complementary product line. It is always good news that the company is growing! He was glad that he had warning when his manager stopped by and mentioned that the acquisition comes with 16 new countries for payroll, and by the way, how should we handle the transition?

Transition? Greg starts thinking hard. He has been working with the same local UK payroll provider for years, and it was already up and running before he took his current position. So what was he going to do now? He did not even know what he did not know. What questions should he ask? Thinking hard, he remembered meeting a consultant at a conference that may be able to help. So he started digging through his desk looking for his stack of business cards (silently wishing he had kept his linked-in connections up to date) and found one for Carol the consultant. He dashed off an email to Carol to see if she could at least get him started.

The next day, Carol came back with a few concepts he needed to research first. She provided the following list with some commentary.

1. One of the most important questions to be asked is “Did your company purchase assets or equity?” It will determine the next steps in how you transition payroll. You need to determine if the company bought the equity (the entities in each country) or the assets (brand, equipment, employment contracts, goodwill, etc. but no entities).

a. Equity: If it is an equity purchase, then each location will already have a legal framework, benefits, processes, etc. This typically makes the transition easier if the entity is processing payroll on a stand-alone basis. If it is, then the buyer needs just to continue processing the same way if it is in-house. If the entity is using a payroll provider, then the buyer needs to determine if they want to continue with the current provider under the current legal framework or change the provider in the future. In some cases, a payroll provider will request a new contract with the buyer at the time of the transaction.

b. Assets: This is a more challenging situation as often the buyer does not have an entity in the country in which to hire these employees for payroll purposes. Here in lies a couple of options. In some countries, like Germany, France and Sweden, if the employee populations are low, the buyer can just set-up a payroll identification number linked to the HQ or regional entity in place. But in other locations like Italy, Korea, Russia, etc. the company will need an entity to set-up payroll. The process can take some time to set-up, and often companies want to use their banks to pay employees and taxes, which takes additional time after the entity is set-up. It would be prudent to expect no less than 3 to 6 months to set-up the appropriate legal structures. All employees obtained through the acquisition will be started as new employees on the payroll as they will be hired to the new entity. Additional struggles with this scenario include set-up of benefits plans, employment contracts, element taxation, cost centers, general ledger reporting, etc.

2. Is there a Transition Services Agreement (TSA)? A TSA is set-up between the buyer and seller when the buyer does not have the immediate resources to support the infrastructure of the acquisition. The seller then provides support typically for IT, HR, Payroll, and Finance for a fee. TSAs are in place typically for 3 to 12 months, although they can be longer or shorter, thus allowing the buyer time to build the necessary infrastructure. It is important to ensure the TSA covers an adequate time to set-up these various functional areas.

3. What type of benefits are being offered and can they be replicated? If the company purchases equity, then the benefits should be in place. There may be additional costs as the seller might have bulk pricing that covers many entities. If the company is buying assets, the current benefits programs of the seller need to be reviewed to determine if similar benefits can be purchased for the transitioning employees. If not, new benefits programs need to be put in place, or employees are often provided cash in lieu of certain benefits if the administration of the programs outweighs the value to the employees.

4. How are pension, vacation and other accruals being handled? It is important to determine what types of benefits are currently being offered and how balances for accruals are going to be managed. If it is an equity purchase, there will be minimal disruption to these calculations. If it is an asset purchase, then the buyer has to determine if pensions will be paid out, remain with the seller, transitioned over to the new entity, or if the seller is willing to transfer accrued funds for these programs as a part of the sale. Additionally, accruals for vacation and other benefits may need to be reviewed to determine what will be carried forward into the new legal structures.

Greg scratched his head. These were good starting points. He had no idea of the answers but had a good starting point for a discussion with his manager. He sent Carol a quick thank you email and started building a master list of information he needed. Once he had this information, he might have to go back to Carol for some more insight on how to get the transition kicked-off.
Previously published in Purely Payroll emagazine.

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