So your company is buying a division from another company to complement its product line. Apparently there will be employees in eight countries who will need payroll support. Since you oversee the payroll operations in the United States, which is currently the only payroll for the company, the acquisition team is looking to you for answers.
First, you need to figure out what you don’t know about international payroll, and specifically these new locations. Most often the acquisitions team will have consultants and accountants helping them with the transaction who also will be integral in the implementation of the services needed for the new locations. Typically these encompass administrative functions including finance, accounting, human resources, and payroll.
These advisors will help to ensure the conversion goes smoothly. But the more information you know about the process, the better. Here are the first few concepts you need to understand to determine the type of infrastructure you will need to build:
- Did your company purchase assets or equity?
This is the most important question, as 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, good will, 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 alone basis. If it is, then the buyer needs to just 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 it wants 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 transaction.
b. Assets: This is a more challenging situation as often the buyer does not currently have an entity in the country through which to hire these employees for payroll purposes. Companies have a couple of options:
- In some countries, if the employee populations are low, the buyer can just set up a payroll identification number linked to the HQ or regional entity Germany, France, and Sweden.
- But in other locations such as Italy, Korea, Russia, etc., the company will need an entity to set up payroll. This can take some time to set up, and often companies want to use their own 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 three to six months to set up the appropriate legal structures. All employees obtained through the acquisition will start as new employees on the payroll as they will be hired by the new entity. Additional struggles with this scenario include set-up of benefit plans, employment contracts, element taxation, cost centers, and general ledger reporting.
- Is a Transition Services Agreement (TSA) in place?
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 three to 12 months, although they can be longer or shorter. This will allow the buyer time to build the necessary infrastructure. It is important to ensure that the TSA covers an adequate enough time to set up these various functional areas.
- What types 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 benefit programs of the seller need to be reviewed to determine if similar benefits can be purchased for the transitioning employees. If not, new benefit 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.
- 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 and 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.
Read Part II in the April issue to find out what a transition plan should entail once the transition team determines that the acquisition will be an asset purchase.
Once the basic decision between asset or equity purchase is concluded, you can select the appropriate course of action, which will determine the next steps for implementation of the transition. TSAs are critical to the transition timeline and will highlight which functions need to be operational first. Payroll is often the most critical component of all transitions, as the acquiring company wants to make a good first impression to its newest employees. Learning as much as you can about the structure of the transition, timing, resources available, and implementation plans will help you position your company for transition success.