During cross-border M&As, especially in the case of a carve-out deal – where a parent firm sells a minority stake in a subsidiary to outside investors as part of the partial divestment of a business unit – many buyer companies do not yet have a legal entity in the country of expansion. Unfortunately for these organizations, legal entities can’t be created overnight. They require time and the fulfilment of a number of criteria, namely: opening a bank account, with all the paperwork this entails, having a physical address to serve as an office in the country, and even at times, earning the seal of approval of numerous government agencies.
Naturally, meeting all these requirements can take months, and in some cases even years — time that most buyers simply do not have if they want to close M&A deals, which are notorious for their complexity and strict deadlines.
This is where an Employer of Record proves to be most useful.
As a third-party service provider legally registered in the country of choice, an EOR becomes the legal means through which a company can act. The EOR hires the employees of the M&A, fulfils tax, payroll, benefits, and compliance obligations on behalf of the buying company. The latter can then simultaneously begin the legal process for the creation of a new, local entity without being worried about meeting tight deadlines.
In this way, EORs also allow companies to focus on matters of greater importance to them. Companies are safe in the knowledge that these operational tasks are being taken care of in such a way that they do not have to worry about such matters exploding into greater issues.
For buying companies, mergers and acquisitions are also an opportunity to test out new markets. Thanks to an EOR, these companies don’t have to go through the complex, costly, and time-consuming process of creating a local entity to understand if the business will take on or not. On the other hand, if companies do opt for a local entity and the business unfortunately does not work out, they will have to face the cost of company liquidation.
As part of an acquisition transaction, both parties involved usually negotiate a Transition Service Agreement (TSA) whereby the seller typically agrees to manage payroll and other HR tasks for a set period of time after the deal has been closed. This is done so as to bridge the gap between the sale and the takeover of the company, giving the buying company time to create takeover strategies. Unfortunately, this period of time rarely proves to be enough for buying companies. Sellers, on the other hand, are usually reluctant to extend TSA agreements, eager to fulfil their obligations and move on to other matters.
An EOR allows buying companies to forgo the need for TSA agreements as the EOR already takes on all such responsibilities, making for a smoother transition.
Some companies may resort to hiring employees as independent contractors in order to lessen the burden of compliance and HR process. Such manoeuvres are fraught with compliance and reputational risks.
If buying companies are found guilty of classifying an employee as an independent contractor, the repercussions will be severe and may include the payments of penalties, time off, sick days, social security contributions, and other benefits mandated by the local law. By using the services of an EOR, companies engaged in M&A discussions can help ensure that no such offence is committed.