After spending several decades building a highly profitable, and successful, medium-sized manufacturing business, “Fred”, a middle-aged president sold his company with the understanding that he would stay on as CEO until his retirement, some three years later. At the time the sale took place, both the seller and buyer said it was the best thing for both of them.
But soon after the deal was struck, things began to sour.
I talked to Fred several months after he retired and asked how the post-integration had progressed.
Fred said: “Immediately following the acquisition, a hoard of corporate personnel from the home office descended on us. Each was a ‘specialist’ in the integration process. Their stated purpose was to integrate and acclimate us to ‘our new parent’s operating methods’. What they succeeded in doing was driving my people crazy. “
He continued, “We couldn’t make a move without being told that our methods were outdated and ‘we’d have to adjust to the company’s way of doing things’. When I complained to Corporate about the situation, I was told if I squawked too much, my position would be in jeopardy. The net result was the company’s morale was destroyed and my key people began leaving. It wasn’t long before I followed them.”
Fred’s experience is not an uncommon; and his story ends as many others do – a feeling of helplessness, frustration and sadness – after years of being successfully in charge.
In the many transactions I have been a part of, buyers look at three main areas:Exposure to risk; sustainability of the business and “a fit between the organizations”.
I want to focus on “fit” — particularly the human side of acquisitions – the“cultural fit” as I have witnessed more acquisitions go awry because of this one, most often overlooked area. Generally, both parties are oblivious to the blending of two cultures until misunderstandings and resentments start to develop. Often these troubles grow quickly and become impossible to manage. They then end in a costly and demoralizing personnel loss which could have been avoided prior to closing if more care and attention had been given during the acquisition process. While there is no “silver bullet” to successfully blending cultures, steps can be taken by the seller to give him and his team insights as to “life” after closing.
Fred admitted that he made several mistakes during the selling process, and if he had it to do over again, he would do the following: Hire a professional team with transaction experience including a lead consultant, law firm, tax advisory firm, investment banker and a wealth management firm. Fred was good friends with his accounting firm’s lead partner, law firm partners and his wealth management firm’s partner. All had little transaction experience. Fred didn’t hire an investment banker and a consultant to lead the team as Fred decided he could fulfil that role and save money.
Fred said he led the negotiations even though he had never bought or sold a company. He should have asked some basic questions such as; “What are your plans for my company?” “What will be my specific responsibilities under the new structure?” “What are the reporting relationships?” Fred went on, “I should have consulted management from other companies the prospective buyer had acquired to determine what its track record might be.”
“I should have reviewed the factors and situations which could become post-acquisition points of contention such as compensation of my staff, the acquirer’s objectives, reporting relationships and the degree of autonomy allowed to existing management”. The following are some considerations a wise seller would have taken into account before selling.
Employment contracts. Negotiating employment contracts may give the seller a good idea of the prospective buyer’s intentions. If the buyer is not serious about retaining management, it is not likely to tie itself to financially binding contracts. Contracts can serve to protect the seller and his top management, not only by assuring a pay-off if the post-acquisition period does not go well, but also by telling — before the sale — whether the buyer is really interested in retaining existing management.
Compensation and Benefits. If you are guaranteed a bonus based on earnings, insist that the details of the bonus package are clearly delineated in the Purchase and Sale Agreement. Determine if your profit sharing plan will stay or be integrated into the purchaser’s plan. Make sure the buyer’s plan is of equal value to yours and that it includes all of your employees if your present plan includes all of your employees. If your compensation is higher than your peers, detail how you will be compensated in the purchase price if the acquiring company takes away your company car, reduces your salary, eliminates your deferred compensation, and reduces your vacation and health care benefits. The best way to preclude potentially unhappy scenarios is to insist upon thorough, well-managed negotiations (on your part) in the first place.
Organization Plans and Reporting Relationships. Many of the organization changes made after a company is sold would not have been acceptable to the seller and his management before the deal was closed, if the seller had examined the cultural fit. The seller has more control over his company’s future if he tries to pin down such matters during the negotiation process. Key questions to ask are: How autonomous is existing management? Do I report to the Corporate CEO directly or through channels? Does affiliation with the parent company serve to bog down, or to expedite work flow? Does management have to devote more time than is warranted to corporate meetings and reporting requirements?
The Need for Understanding. When acquisitions go sour, bitterness arises because the seller “doesn’t understand “the corporate culture of the buyer. No matter how well a seller feels his management style meshes with the culture of the buyer, no matter how many assurances the seller gives that you will remain in control, you should understand the sale will bring a change and may bring unexpected consequences. Without a doubt, well-managed negotiations are the key to dealing successfully with questions of “What happens to my people after I sell?”
A seller must be aware that over the years of developing and growing a successful company, he has largely considered it his “baby”. He has taken a parental interest in his key management. He should be very careful before he gives it over to a new parent.
By Gary Miller, founder and CEO of GEM Strategy Management Inc., a management consulting firm focusing on strategic business planning, growth capital for expansion, mergers and acquisitions, value creation and exit strategies for middle-market company owners.