Why pension due diligence is integral for deal certainty during the sale of a business

For anyone who has been through the sale of a business, they’ll know first hand how much is involved to get the deal over the line. Thorough due diligence is an essential part of this process, helping to spot and remove potential liabilities and streamline a sale. Without this, a transaction can become protracted, or even stall as buyers falter.

We work closely with our clients to lead them through these complex deal processes and carry out the necessary due diligence at pace. While this is usually led by our national team of corporate lawyers, our full-service offering means we offer a bespoke, wide-reaching service to our clients.

One area of potential liability is company pensions. While areas like SSAS’s and auto-enrolment represent relatively simple issues to resolve, if they’re not dealt with swiftly, they can seriously impact the success of a deal.

During these transactions, our expert pensions team works closely with our corporate team to ensure these liabilities can be managed and if possible removed at the earliest possible opportunity.

Small Self-Administered Schemes (SSAS)

Often found in smaller businesses, Small Self-Administered Schemes (SSAS) allow owners to set up a pension vehicle that holds assets in a more tax efficient way. While these schemes can be greatly beneficial for owners, when gearing up for a sale, they create a liability for potential buyers.

While it is relatively simple to transfer the ownership of these pensions, without the knowledge of what is required it can quickly become complicated for sellers. In some cases, power over the SSAS has been moved from the employer to the trustees without the employer being removed or discharged, meaning they remain an employer without any powers over the SSAS. For many buyers, this isn’t an acceptable outcome, which can lead to lengthy redrafts, delaying the sale.

To avoid this for clients, our pensions team works in conjunction with our corporate team to quickly spot and rectify SSAS’s for both the sellers of businesses, along with potential buyers. On the sell-side, by identifying these schemes as soon as possible, we can quickly draft a deed to either remove the employer from the SSAS, or transfer ownership, stopping it from becoming a query from a buyer. In instances where a SSAS isn’t disclosed at first, we can quickly rectify any buyer queries to prevent delays to the sale.

On the buyer’s side, the enquiries process will often reveal any existing SSAS’s, meaning we can work with the sellers to understand their plans to rectify this, ensuring our client won’t be open to any future liabilities from the scheme after the sale.

Auto-enrolment compliance

Another area of potential liability for buyers is non-compliance with pension auto-enrolment. If a business has failed to correctly comply with auto-enrolment, this creates a significant liability for a buyer where backdated contributions, penalties and Regulator fines could arise after buying the business if an issue is not dealt with properly.

We work with clients throughout the due diligence process to quickly identify and rectify any non-compliance. Recently, when acting for a business that was preparing for a sale, we identified that, instead of auto-enrolling its employees, it had instead asked them if they’d like to join the scheme. This made them liable for staff who hadn’t enrolled to ask for backdated contributions from the point of being asked if they’d like to enrol on the scheme, potentially costing thousands of pounds. This poses a significant risk for future buyers as underpayments into pensions by employers also create a risk of Regulator involvement and fines.

In this particular case, we worked with the client to understand the extent of the non-compliance and swiftly arrange back payments to affected individuals, removing any liability for potential buyers. We then worked with the buyers to create an indemnity that worked for all parties, protecting the buyer while securing the sale for our client.