Managing unionized labor is a fact of life for many business owners; however the private equity and investor community is typically not a fan. In many cases, unions are a necessity to operate in specific markets or geographies which create barriers to entry; however they can also create risk from the perspective of managing labor costs and potential liabilities associated with underfunded pensions. The key is to understand the facts of a particular business and their relationship with the union(s) before assigning undue risk to a deal.
Below are a few areas you should be aware of as you look to buy or sell businesses with union exposure. In all cases, you’ll want to engage an experienced employment law representative that is familiar with the specific union you are dealing with.
- What is the relationship between the union and the employer? Is there a history of striking? Ensuring that the labor force is dependable and that collective bargaining agreements (CBAs) are in good standing is often predicated by past practices. In some cases, employers assign their rights to larger bargaining associations and do not interface with union leaders directly. In this case, be sure to understand the terms you are accepting as it is difficult to amend CBAs once they are in place.
- It is not uncommon for unions to be affiliated with multi-employer pension funds (MEPs). If so, do your diligence around whether or not the MEP is fully funded or under-funded. If the MEP is underfunded there is a chance the employer is on the hook for withdrawal liabilities that can be trigged at the time of sale. Even if the withdrawal liability is not triggered in a sale it can carry over to new ownership. Either way, withdrawal liabilities can become a sticking point during transaction negotiations and should be vetted very closely during diligence.
- Consider the impact being unionized will have on scaling the business. In some cases, there are limitations around operating in both union and non-union environments, notably when there is a discrepancy between prevailing wage rates and those of union wages per CBAs. If structured appropriately, companies can operate as both union and non-union – we call this “double breasting.” Qualified attorneys can help set organizations up to ensure labor requirements are met.
It is our experience that most business buyers have a negative, knee jerk reaction once they learn that a target is unionized; however that does not mean the opportunity isn't a solid investment. It is important to understand the facts and get ahead of the message before the buyer defaults to certainty.