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Do Not Let Benefit Issues Derail a Transaction

March 24, 2017 Advisory

If your company is planning a merger or acquisition, don’t overlook an important factor — the existing benefit programs and liabilities of all parties. 

The decision to sell a company or expand operations through a merger or acquisition is generally guided by business considerations. Consequently, issues involving employee benefits plans are sometimes overlooked until well after the deal negotiations are underway. Delays in recognizing the importance of employee benefits in a merger or acquisition can increase the complexity of the transaction and create obstacles to its completion.

For example, issues involving benefits plans can impact M&A negotiations in a number of ways:

  • The plans can be a source of large liabilities (such as an underfunded pension plan) or legal obligations (such as COBRA coverage).
  • As a crucial factor in employees’ compensation, mistakes or misunderstandings involving how benefits obligations will be handled can have severe employee relations repercussions.

Therefore, taking steps to understand how benefits plans will be handled is crucial to the transaction. Business owners and executives entering M&A negotiations need a thorough understanding of the affected employee benefits in order to assess the financial significance these plans bring to the transaction. Here are some questions to get answers to:

  • What is the funding status of your pension plan (and the other party’s plan if relevant)?
  • Who will take responsibility for the COBRA coverage of employees terminated from the seller?
  • Will the health insurer continue coverage for employees affected by the transaction?
  • If health insurance coverage is self-funded, what is the extent of outstanding claims and potential liabilities?
  • Which party will be responsible for any severance pay, accumulated vacation time or paid time off?

Unforeseen liabilities associated with issues such as these can result in unwelcome surprises if discovered well into the negotiations.

Involving human resources and benefits personnel in the early stages of a transaction and working with accountants and other business professionals knowledgeable about M&A issues can be a key ingredient to avoiding problems. HR and benefits executives and staff are the individuals in a company with the best knowledge of the employee benefits plans. Furthermore, they understand the business strategies supporting the plans; how the benefits fit into the company’s philosophy; compliance issues; plan provisions; and vendor-related issues that may be involved in an M&A transaction.

Involving human resources personnel is also vital in communicating M&A-related issues to current employees who will be affected by the transaction. Employees are often concerned about the potential for job loss or other changes. Invariably, this is a stressful time, with the potential for lower productivity, higher absenteeism and increased medical and disability claims. Human resources personnel can answer questions, address rumors and clarify misconceptions to help keep these types of problems to a minimum.

Overall, employee benefits plans can present a myriad of complex challenges to a merger or acquisition. If dealt with upfront, the chances of these issues having a negative impact on the transaction are minimized. Involving knowledgeable professionals from the beginning helps to ensure that employee benefits do not get in the way of a successful deal.

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