Buying a business with staff: who pays the leave, and how to fund it

If you buy a business and keep its staff, you’ll usually inherit more than their skills. Under Fair Work’s transfer of business rules, their years with the old owner generally count for entitlements such as sick and carer’s leave, and their accrued annual leave either moves across to you or gets paid out by the seller. Either way it’s a cost, and it should show up in the price and in the amount you borrow.

Most buyers focus on goodwill, equipment and stock. The staff balances sit quietly in the payroll system until the first long holiday request lands. This guide explains how the rules work in plain terms and how to plan the money around them.

What happens to employees when a business changes hands?

When a business is sold, the seller’s employment of its staff ends. If you then employ some of those people to do much the same work, they become “transferring employees”, and the Fair Work Act’s transfer of business provisions come into play.

The Fair Work Ombudsman’s page on entitlements on a transfer of business sets out what follows. In summary:

• Service is generally recognised. The new employer usually has to count the employee’s time with the old employer for most entitlements, including sick and carer’s leave, parental leave and requests for flexible working.
• Annual leave can go either way. Accrued annual leave carries over to you, or, if you’re not an associated entity of the seller and you choose not to recognise the prior service, the seller pays out the untaken leave.
• Redundancy service can be excluded in some cases. A new employer that isn’t associated with the old one can choose not to recognise prior service for redundancy, in which case the old employer pays redundancy when the employment ends.
• Unfair dismissal service has its own rule. If the businesses aren’t associated, you may not have to count prior service, but only if you tell the employee in writing before their employment with you starts.

None of this is unusual. It just needs to be decided on purpose rather than discovered after settlement.

Who ends up paying for the leave?

This is the money question, and it’s settled by negotiation as much as by law.

What you agree	Who funds the leave balance	What it means for your loan
You recognise prior service and take over accrued annual leave	You, as the new employer, when staff take it	Ask for a price reduction or settlement adjustment, and keep working capital for it
You don’t recognise prior service for annual leave (not associated with the seller)	The seller pays it out to staff at the end of their employment	Less liability for you, but staff start from zero, which some won’t like
Mixed approach for different staff	Depends on each employee	Track every balance; the paperwork matters

In practice, many buyers take over the leave because it keeps good people happy and loyal through the change. When that happens, the buyer is taking on a debt the seller built up. The standard answer is a matching reduction in the price or an adjustment at settlement, so you’re not paying twice: once in the purchase price and again when the leave is taken.

Why does a lender care about leave balances?

Because it changes how much cash the business needs in its first year.

Picture a business where three long-serving staff each have six weeks of leave banked. If two of them take extended breaks in the first quarter after settlement, you’re paying their leave and possibly paying someone to cover them. That’s a real cash outflow at the exact moment you’re also making your first loan repayments and learning the business.

A good lender will look at:

• The leave liability on the payroll report, and whether it’s reflected in the price.
• Your working capital buffer, and whether it’s enough to cover leave, wages and supplier payments before customer receipts settle into a pattern.
• Key staff retention. Experienced staff staying on is one of the strongest positives in an acquisition, particularly for a buyer from outside the industry.

If you’re still mapping the overall structure, the business acquisition loans page covers goodwill, stock and working capital, and working capital loans explains how a separate buffer facility can sit alongside the purchase loan.

What should you ask the seller about staff before you sign?

The federal government’s guide to buying an existing business suggests talking to employees as part of your research and reviewing the business’s records and legal documents. On the staff side, a practical list looks like this:

1. A current payroll report showing each employee’s accrued annual leave, personal leave and long service leave.
2. Employment contracts, awards and any enterprise agreement that applies.
3. Recent pay records and super payments, so you know the seller has been paying correctly.
4. Who is key. Which employees hold licences, run the client relationships or know how the equipment works?
5. Any disputes or claims that are under way or threatened.

Long service leave deserves its own check. It’s largely governed by state and territory laws, and the Fair Work page notes a specific set of circumstances where a new employer may not need to recognise prior service for it. Ask your solicitor to confirm the position for your state.

If your staff list is sorted and you want to know how a lender would look at the whole deal, tell us about the purchase in a short enquiry. It takes about a minute and doesn’t involve a credit check.

How do you build the entitlements into your funding?

Three steps tend to cover it:

Get the number. Total up the accrued leave you’re taking on, in dollars, at current pay levels. Your bookkeeper or the seller’s accountant can produce this from payroll.

Reflect it in the deal. Either reduce the price, or make sure the contract includes an adjustment at settlement so you receive a credit for the liabilities you take over. Your solicitor will know the usual wording.

Fund the timing, not just the total. Leave isn’t paid all at once, but it can cluster around school holidays and Christmas. Make sure your working capital, whether it comes from savings, a buffer in the purchase loan or a separate facility, can handle the busiest leave period in your first year. If you’re unsure whether the purchase and the buffer lean towards a secured or unsecured structure, the secured or unsecured check gives a quick steer.

Illustrative example

Illustrative only. A buyer is purchasing a commercial cleaning business with twelve staff and several long-term site contracts for $300k. Payroll shows about $45k of accrued annual leave across the team, with two supervisors holding most of it.

The buyer wants both supervisors to stay, because they run the client relationships. So she agrees to recognise their service and take over the leave, and her solicitor negotiates a $45k reduction in the price. She funds the purchase with a second mortgage over her home and keeps $60k of the loan as a working buffer, sized partly with the supervisors’ planned summer leave in mind. The lender takes comfort from the contracts, the supervisors staying and the fact that the leave liability is already accounted for.

Ready to fund a purchase that keeps the team together?

Keeping a good team through a change of ownership is one of the smartest moves a buyer can make, and planning the money around their entitlements is part of doing it properly. Property-secured business loans from $20k to $5m and unsecured options typically from $5k to $500k can cover the purchase and the buffer that comes with it.

Enquiring takes around 60 seconds and there’s no credit check when you first enquire. We won’t spray your details across a list of lenders, so your phone stays quiet. A real person looks at the business, the staff position and your security, then calls you to talk it over. Please fill the form in accurately, including the price and any property you own, so we can match the right option first time.

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