M&A: People buy people

People are at the crux of any M&A transactions, writes Bob Cronin of The Open Approach

Just about any article or book on the topic of mergers & acquisitions boldly displays an image of people shaking hands or coming to agreement in some other way. And rightfully so. People are at the crux of every transaction. Sure, M&A is about making a proper exit and getting a solid financial return. And sure it’s about gaining new power and capabilities. But if those were the most important elements of M&A, wouldn’t we see more images of money and muscles? Judging from the magazines at the supermarket checkout, they would seem more appealing.

In my 40 years’ (yikes) experience in this industry, I have held positions as CEO and/or executive decision maker of acquirers and selling companies. And over the last nine years, I have served as M&A counsel to hundreds of others. I have seen co-owners’ disagreements destroy what could have been highly lucrative transactions. I have watched private equity plans get derailed by management teams who weren’t on the same page. And I have seen family and staff considerations go unaddressed, causing deals to die in the final hours. People are perhaps the most underestimated component in the M&A process. Time and again, considerations for them are an afterthought, and sometimes they are brought up only because the deal is starting to unravel.

This isn’t because we’ve grown cold-hearted. Today’s financial pressures, investor expectations, lending issues, and changing legislation have taken priority. These influences are now more like obstacles, and entrepreneurs are looking to tackle them first. These have also accelerated the pace of things, as owners try to make deals before new estate taxes or reporting requirements come into play. The people issue sometimes never gets a chance to be thought out. And that can wreck your M&A plans before they even get started.

Deals die every day because management staff or other key contributors are not on board. Nervous staff can lower the value of a transaction with gossip or 'ship jumping.' Vendors can spill the beans to competitors, who leverage the information to their own advantage. Even once a deal goes through, people can make things go wildly off track.

Attaining M&A success requires that the transaction is understood and embraced by all your people. You, your family, your management, your employees, your investors, your buyers, your bankers... Everyone who has a stake, an interest, a desire in, or a future with your company must be a consideration. With this in mind, I offer you five people-related tips to ensure your best results from any M&A transaction.

1. Consider yourself. 

Your number-one consideration must be you. Carve your deal out so that it provides for your needs – business, future, financial, personal. Think through needs for yourself, your spouse, your family, and others. Then narrow your focus on what type of transaction will fulfill them.

Leaving a company that you have grown and nurtured can be much more an emotional decision than it is a financial one. Do you want to make a complete exit, or would you like to still participate? What do you envision for the future of your company, and will the deal help see this through? What do you need to do to ensure this? If all related parties are leaving a family-branded company, will you allow new ownership to carry on your family name? You are not simply leaving a business; you are leaving a legacy. What do you want yours to be?

2. Assess your culture.

Before you start thinking about doing any M&A activity – buying or selling – you need to have a real understanding of your culture. Every organization has its own unique culture, and some simply do not mix well with others.

If you are selling, think how your people will respond to new ownership structures. If you are buying, what key characteristics will be most ‘mergeable’ with your ideals? This could include everything from the sales process, to staff attitudes about work hours/overtime, to customer service chains of command, to empowerment issues. You’ll want to think through your level of professionalism, competitive approach, problem-resolution protocols, and other factors. If you need to make some changes to reframe your culture (people or otherwise), start the process now. If certain aspects of your organization may be detrimental to your transaction, take measures to fix them.

A very successful company once bought another very successful company, but failed to examine key differences in compensation plans. When the two were merged, the acquiring entity’s structure took over, changing reps’ steady paychecks to a less predictable ‘salary plus bonus’. Rather than accepting the unknown, the acquired reps (who were not under non-competes) all left the company, taking their accounts and relationships with them. What could have otherwise been a highly profitable transaction turned out to be a waste of time – all because of a difference in culture.

3. Solidify relationships with bankers, boards, and investors.

Sometimes the question isn’t should you do a deal, but rather can you do a deal? Many owners start the process without knowing how their overarching support structures may come into play. Depending on your investor or board agreements and participation level, your options may not be as open as you think.

More important, how strong is your banking relationship? Do you have the credit/leverage to get a deal done? Will you be restricted to an asset-based deal? If you have any history with M&A, how strong is your track record? Have you demonstrated other successes? What does your banker think of your company, and what do they think about labels as an industry? If negative, can you change their opinion, and how long will it take to accomplish?

As you work through people issues in these areas, it may be wise to enlist the assistance of tenured M&A counsel. They may be able to help open you up to new resources and overcome concerns with boards and investors.

Understanding how these people may affect your transaction in advance – and having them on your side now – will save you a lot of time and headache down the road.

4. Advise management, and time their involvement appropriately.

All too often, entrepreneurs avoid telling their employees about their plans to sell the company. Long-time owners can be concerned about staff fear, or not want customers to know they are up for sale. They might also wish to avoid gossip that could be fodder for suppliers or competitors.

Regardless, it is imperative to have your management team on board with any M&A venture as quickly as possible. Whether you are looking to sell to private equity or start an acquisition strategy, these people will be integral. Your management team must be fully aware of and confident in the value and opportunity of a potential transaction. Their participation in the process will be a critical driver in attaining success.

Moreover, whichever route you take, make sure you have the right people in place to take things to the next level. If you are exiting, any role you perform day-to-day should be transitioned. Your customer contacts should be comfortable with remaining players, and your supervised staff should be the same.

In any M&A deal, there is always the chance that key management or employees are replaced, or that staffed family members take on smaller roles (and smaller salaries). Yet, the negative impact of a surprise once the deal has started will be significantly tougher to deal with than a pre-emptive reality check.

Work with your advisor to determine optimal timing, and then communicate the deal with your operating team and directors. Your CFO will likely be one of the first you consult with. But don’t forget your human resources lead. His/her knowledge and cooperation will be essential throughout the process.

5. Champion your trajectory with staff and key constituencies.

The best way to ensure people’s buy-in is to involve them as early as practical with a consistent message. Once you get your key managers and financers on board, prepare your message to your staff and key constituencies.

Many companies enlist their sales staff to communicate M&A and other moves. Not only does this result in many conflicting – and often erroneous – explanations, but also it obliterates the importance of your staff and their considerations and input. The anger of a customer service rep or an accountant who feels left out can have dramatically greater consequences than the opinion of an average customer.

Being part of the team means knowing its important moves and decisions. No employee wants to learn of a pending ownership change the day before the deal closes. Certainly an acquisition of another entity may seem more positive and easier to communicate. But news of a company sale can be equally exciting and prosperous.

The only way to control your exit is to craft your story and communicate it with your people, in advance, yourself. In my experience, this is the best way to ensure their ongoing commitment, enthusiasm, and hard work. You can enlist the help of your managers, operational leaders, and human resources, as needed. But, don’t fail to champion your trajectory with your general staff, agents, clients, and suppliers. These indeed are the people who make your business happen.

No achievement – for anything – is simple. You will not, cannot, and shouldn’t even think about M&A without considering – and planning for – your people.

Indeed, the ‘people’ component of every deal is the ultimate determinant in whether your deal goes down as a lucrative new opportunity or a colossal failure.

You sell your company only once, so you have exactly one chance to get it right. Finances. Capabilities. Power. Prosperity. And people. People are at the heart of the M&A experience. They can – and will – make a difference.

This article was published in L&L issue 5, 2012