Who pays severance when a business is sold?

Nobody wants to discover after closing that they are on the hook for a departing employee’s severance, but it happens on both sides of small business deals — usually because nobody addressed it in writing beforehand.

Share sale: the liability travels with the company

Because a share sale leaves the corporation intact as employer, any severance obligation — whether it arises from a termination the seller carried out before closing or one the buyer carries out after — is, in the first instance, the corporation’s obligation. The buyer now owns that corporation, which means the buyer effectively bears the cost unless the purchase agreement allocates it back to the seller through an indemnity or a price adjustment.

Asset sale: the seller usually ends its own employment relationships

In an asset sale, the seller is the one ending the employment relationship, if it ends at all — the buyer is not the seller’s employer and generally is not liable for severance the seller owes to staff it does not go on to hire. Where the buyer does hire the seller’s staff, provincial continuity-of-service rules can still credit that person’s time with the seller when a later severance calculation is done by the buyer, which is a cost buyers frequently overlook.

Why the purchase agreement has to say something

Deal documents should state plainly who is responsible for terminations that happen around closing, whether the buyer is assuming any accrued severance exposure, and how any known departures are being handled. Silence does not mean nobody pays — it means the default rules apply, and they are not always the outcome either party expected.

Where this gets contested

• A long-tenured employee the buyer chooses not to hire, whose service history predates the sale by years
• A senior employee let go shortly after closing, where prior service with the seller may still count
• A unionized role where a collective agreement imposes its own severance-style entitlements