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Ineligible employees can decrease company value, salability

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September 7, 2022

When a company buys a business, they typically retain (or re-hire) most of the acquired company’s workforce.

In today’s labor market, the quality and stability of that workforce is extremely important.

Buyers are looking at turnover trends, anticipated retirements and whether employees are legally eligible to work in the U.S.

In one well-publicized case, a buyer acquired an established sauce manufacturing business in Kansas City.

The buyer purchased the 20-year-old manufacturer for $5.65 million.

At the time, the company manufactured 150 products and had co-packing and private label agreements with more than 100 companies.

After closing the deal, the buyer asked employees to complete new I-9 forms, which are required to show proof of eligibility to work in the U.S.

They also notified employees it would check the forms against the government’s E-Verify database.

Soon afterwards, 17 of the company’s 25 production employees quit.

The company later learned these employees were ineligible to work in the U.S. and that upper management was, the buyer claimed, well aware of the issue.

The buyer sued for damages of at least $2.9 million.   
I-9 employment verification
When acquiring a business, the buyer can assume the risks and liabilities of the acquired company’s I-9 forms.

Or they can elect to have all employees complete new I-9 forms immediately after purchase.

We recently represented a company where the I-9 forms had not been fully completed.

This was revealed in a due diligence I-9 audit prior to sale.

To rectify the situation and reduce risk for the buyer, the sellers had all employees update their I-9 forms.

To the best of our knowledge, everyone was eligible – it was simply an error in paperwork and process management.

Generally, this is not the kind of employee activity we want to see right before a sale.

For example, we don’t want to see a wave of non-compete requests or I-9 updates because these out-of-the ordinary requests can raise questions and make employees nervous.

If employees have any suspicions you’re trying to sell (hopefully they don’t), these requests can fuel the fire.

Change of any kind can make people nervous, and rumors of an impending sale could send your best talent to the job market.

Even if you believe all your employees are legally authorized to work in the U.S., it’s best to make sure this paperwork is fully completed and squared away before you put your company on the market.
Disclosing an undocumented workforce
If you run a business and you know you have ineligible workers on your team, you must disclose that in a transition.

In limited cases, you may find a buyer who is willing to accept the problem and address talent issues after an acquisition.

Unfortunately, if you’re selling your business to a strategic buyer (e.g. another company), you’ll find that the appetite for an undocumented workforce is generally low.

Larger organizations usually don’t want to take on the kind of liability and risk it brings.

You may still find a strategic buyer, but expect price reductions and other adjustments to the deal structure.

For example, we have a buy-side client who was evaluating a potential acquisition in Texas.

The sellers acknowledged that a significant number of employees could be ineligible to legally work in the U.S.

If our buyer had chosen to proceed with the deal, by cleaning up the employee eligibility issues, they would have faced the loss of skilled employees, likely production shortfalls and higher human resources costs.

Those risks necessarily lowered the value of the opportunity.

Employers who are challenged with a potentially ineligible workforce should consult their legal counsel for guidance.

Talk to your mergers and acquisitions advisor as well for advice on how to time paperwork updates, employee communication or employee changes prior to a sale.

Jason Salisbury is a mergers and acquisitions advisor, business development manager and member of the leadership at Cornerstone Business Services in Green Bay.

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