Payroll Considerations for Mergers and Acquisitions: Part 1

Despite the challenges the COVID-19 pandemic brought organizations, the merger and acquisition (M&A) market endured, and we continue to see an increase in deal activity. While there are many considerations businesses must review prior to closing a deal, one that should be on top of the list is payroll and benefits. Below is Part 1 of our article series on key payroll aspects your organization should dig into before closing any deal. Be sure to read Part 2 as well, where we cover change management and employee benefits in M&A transactions.

Due Diligence Considerations

To ensure that your payroll and benefits systems are established by your transaction date, there are a few items that should be included in due diligence. One of the first things you’ll want to look at are the types of pay, union and benefit plans that will be grandfathered into the transaction. If benefit plans are grandfathered in, will a third-party need to administer the plans? And if so, at what cost? This should also be addressed in the Transition Service Agreement. The more specific this agreement between the buyer and seller is, the more it will help set you up for success.

Be on the lookout for potential compliance issues with the organization being acquired. If the acquisition target is not compliant in its tax filings or other areas, then the parent entity will need to take on any penalties, fees and interest associated with the noncompliance.

You’ll also want to focus on talent during the due diligence process. Here are some key questions to ask:

  • What is the existing and future depth of talent?
  • Are the right employees performing the right jobs?
  • What kinds of commitments were made prior to the transaction? (Think: promotions, training, raises)
  • For those who have ex-pat agreements, are they tax equalized? Do they have access to accountants? Are they given types of allowances, and if so, what do they look like?

Payroll Decisions and Processing

Before closing the transaction, make sure your systems will be able to handle a large increase of personnel (especially if your company is doubling or tripling in size!). If your system will not operate well post-close, you may need to look into having two standalone systems or one new system to which everyone will be moved. Think through what this will look like before the last minute; having conversations in advance will help build a case for new systems.

Another thing to think about is employee treatment. Though employees of the acquired business will be at a new company, they will most likely keep their previous service dates, so make sure your systems reflect these. In terms of payroll, you’ll want to make sure there is alignment of pay periods and pay dates. You may consider giving people a “signing bonus” to bridge the gap from a previous pay cycle to align with the current pay cycle, instead of trying to align by squeezing in a short payroll cycle. This can be much easier than running multiple pay cycles. Also, who pays the payroll: the parent company or the acquired company? If the companies go live on 1/1, who pays the 12/16-12/31 payroll? All of this must be outlined in the Transition Service Agreement.

Finally, review the setup of your earnings and deductions codes. Do you need to set up new codes in a new system? Who helps with this: your payroll provider or accounting team? This is a good opportunity to review the new codes, rather than simply doing a “lift and shift.” Perhaps your old codes weren’t compliant or there is a better way to implement them in a new system.

It’s no question that payroll administrators play an important role in the inner workings of a business, and especially so when it comes to M&A transactions. Whether your company is working through the payroll fundamentals of its next transaction or has general payroll questions, reach out to our experienced payroll and benefits experts today, and don’t forget to read Part 2 for more information!

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