Asset Sale vs. Stock Sale: How Deal Structure Affects Employees
The structure of your deal has a direct impact on your employees' legal status, benefits, and rights. According to the International Business Brokers Association, approximately 90% of small business sales (under $10M) are structured as asset sales, which has specific implications for employees.
Asset Sale (Most Common)
- Employees are technically terminated by seller on closing day
- Buyer offers re-employment (usually same day, same terms)
- Existing benefit plans end; new plans begin
- PTO and seniority may or may not carry over (negotiate this)
- New non-competes may be required by buyer
- I-9 employment verification must be re-done
Stock Sale
- Employees remain with the same legal entity
- Employment contracts continue automatically
- Benefits continue (but buyer can change them later)
- PTO and seniority carry over
- Existing non-competes remain in force
- Less disruption but buyer inherits all employment liabilities
Michigan Employment Law Considerations
Michigan is an at-will employment state, meaning employment can be terminated by either party at any time for any legal reason. However, several important protections apply during business sales:
Federal WARN Act
If a sale results in mass layoffs (100+ employees at a single site, or 500+ at any number of sites), the seller or buyer must provide 60 days written notice. This applies to larger transactions and PE-backed deals where consolidation is planned.
Michigan Employment Security Act
Employees who are not rehired by the buyer or who are laid off within a short period may be eligible for unemployment benefits. Michigan unemployment insurance rates may increase for the successor employer.
COBRA and Benefit Continuation
In an asset sale, employees who lose group health coverage are entitled to COBRA continuation for up to 18 months. The buyer's plan does not have to match the seller's plan exactly, but most purchase agreements require comparable coverage.
Pension and Retirement Obligations
The Michigan Pension Employee Protection Act requires specific handling of pension obligations during ownership changes. Defined benefit plans have particularly complex successor liability rules.
How to Communicate the Sale to Your Team
Communication is where most sellers fail. Here is a proven framework used by business owners across Metro Detroit:
During the Sale Process (Months 1-6)
Maintain strict confidentiality. Only the owner(s) and senior advisors should know. Use code names for the project. Sign NDAs with all parties.
After LOI Signed (30-60 Days Before Close)
Tell key managers on a need-to-know basis. These are people whose departure would kill the deal. Offer retention bonuses (typically 5-15% of annual salary) with 12-month vesting.
1-2 Weeks Before Closing
Announce to all employees with the buyer present. Have a written FAQ ready. Address benefits, job security, and who their new contacts will be. Allow questions.
Post-Closing (Day 1-90)
The buyer should meet individually with every employee within 2 weeks. Address compensation, benefits, and reporting changes. The seller should remain available (per transition agreement) to reassure employees.
"The way you communicate a sale to your employees defines your legacy with them. I've seen owners who handled it beautifully become mentors to the new team, and owners who handled it poorly have their best people walk out the same week."
-- Matt Sitek, FuturePath Ventures
Retention Strategies That Work
Employee retention after a business sale is critical -- loss of key employees is the #1 cause of post-acquisition value destruction. Here are the most effective retention tools:
| Strategy | Cost | Effectiveness | Best For |
|---|---|---|---|
| Retention Bonus (12-month vest) | 5-15% of annual salary | High | Key managers, sales leads |
| Stay-on-Board Agreements | Legal fees only | Medium | All employees |
| Enhanced Benefits Package | 10-20% above current | Medium-High | Entire workforce |
| Equity/Profit Sharing | Variable | Very High | Senior leadership |
| Title/Responsibility Upgrades | Low-Medium | High | Ambitious mid-level staff |
Considering Selling to Your Employees Instead?
An employee ownership transition (ESOP or management buyout) eliminates most of these concerns entirely. Read our complete guide to selling to employees, or schedule a consultation to discuss the best approach for your team.
Employee Impact FAQ
Are employees automatically laid off when a business is sold?+
No. In most small and mid-size business sales, the buyer wants to retain all or most employees because they are essential to the business's value. In asset sales, employees are technically terminated by the seller and re-hired by the buyer (often on the same day with no gap in employment). In stock sales, employment contracts continue under the new owner. Layoffs after acquisition typically happen in larger corporate mergers, not in small business sales.
Do I have to tell my employees I'm selling the business?+
There is no general legal requirement to notify employees during the sale process. In fact, premature disclosure is one of the top deal-killers -- key employees may start job searching, and morale can plummet. Best practice is to maintain confidentiality during the sale process and communicate after the LOI is signed and closing is likely (typically 30-60 days before closing). If layoffs of 100+ employees are possible, the WARN Act requires 60 days notice.
What happens to employee benefits (health insurance, 401k) after a sale?+
In an asset sale: the seller's benefit plans terminate at closing, and the buyer establishes new plans. There is often a brief gap. Best practice is to negotiate that the buyer provides comparable benefits starting day one. In a stock sale: existing benefit plans typically continue, but the new owner can modify them after a reasonable period. 401(k) plans can be merged, terminated with rollover, or continued. Health insurance is usually the biggest employee concern -- address it specifically in the purchase agreement.
How do I protect my employees during the sale?+
Negotiate employee protections into the purchase agreement: minimum employment terms (typically 12-24 months), comparable compensation and benefits, retention bonuses for key employees, severance provisions if the buyer does reduce staff, and non-solicitation protections. Many sellers make employee treatment a deal term, especially when selling to private equity buyers who may have different priorities.
Can a non-compete prevent my employees from leaving after the sale?+
In Michigan, non-competes are enforceable if they are reasonable in scope, duration, and geography. However, non-competes signed with the selling owner don't automatically transfer to the buyer in an asset sale. The buyer needs to have employees sign new non-competes, and Michigan law requires additional consideration (something beyond continued employment) for existing employees. New employees can be required to sign as a condition of hire.
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