I wanted to take a moment to educate the SearchFunder Community on something I learned the other day about buying a company with Union employees. Let me start off by saying I have nothing against Unions or Union employees. However, I think the Searchfunder Community needs to be aware of some risks that exist when buying a company with Union employees.

If you buy a company with Union employees typically it needs to be a stock purchase and you end up taking over the relationship with the Union post closing. If at a future date the employees decide to de-unionize, then as the business owner you can be stuck with the bill for the pension liabilities the Union has. As I understand it, the Union does not need to disclose the potential pension liabilities that exist at time of closing on the purchase. It is typically an unknown liability you are assuming as part of the purchase and can be an ever changing liability over time. In fact, there is a good chance the seller might not even be aware this liability exists. I understand that Congress passed a law in 2009 that allows the pensions to pass the unfunded liabilities onto its employers, and this gets triggered automatically when an employer's employees leave the Union, and typically must be paid within 90 days of the de-unionization.

Let me give you a recent example. I have a friend who purchased a business with Union employees within the past two years. Not too long after his purchase his employees decided to de-unionize. There were a number of reasons why they supposedly decided to do this, but the reasons really do not matter. The owner had no say one way or the other in them voting to de-unionize. About two weeks after they officially de-unionized he received an invoice from the Union for unfunded pension liabilities of over $750,000.

This is a small company. Revenues range around $1 million dollars. Now all of the sudden he has a huge bill, that is no fault of his own as he did not make the decision to de-unionize (his employees did), that must be paid within 90 days. Despite the fact he had a profitable business, even if he could get terms to pay the pension liability, he would in essence be working to pay that liability for the next 10 years plus. When he could not pay it within 90 days both the Union and the National Pension Security Fund filed suit against the company and him personally as he is personally liable as the owner.

What ended up happening is the client has filed bankruptcy and has been forced to shut the company down. He does not have the money to pay the claim or even to fight the lawsuits. He has defaulted on his Bank loan and is working through a liquidation of the company.

As this was the first time I had heard of this happening in my long career, I spoke with several other SBA lenders I know about it. Two of them have had the same situation happen at their institutions in the past.

The lesson to be learned here is two-fold. First, whenever you do a stock purchase, regardless of the reason for doing so, you need to understand all of the potential liabilities. Whether disclosed or note disclosed, whether known by the seller or not know, there are always unknown risks with any stock purchase.

The second lesson is, if you plan to buy a Union company, you better be sure you are aware of the risks and you have some sense of what potential liabilities might exist should your employees decide to de-unionize in the future. This individual is now going to have his life turned upside down, and he did nothing wrong. He had counsel help him document the loan, he had it approved by a SBA lender, he signed all of the proper paperwork. But the liability that ended up shutting him down he was never made aware of, and from my understanding, there was nothing requiring the Union to make him aware of it.

Tough lessons learned. I do not want to see anyone else have the same issue, as now I am aware of three times it has happened. I hope this is helpful.