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This Time, It’s Personal
Deals aren’t just about the numbers; your
company’s human capital plays a key role
Against a backdrop of strong M&A
activity in the LBM space, we recently
have seen increasing focus by the
government on various workforce
regulations. It is important for companies to bear
in mind the intersection of these two trends—the
importance of human capital in M&A
transactions.
Nearly all memoranda describing a
company to potential buyers include a section
containing the managers’ biographies. Potential
buyers want to see that the management team
has a track record of success. Buyers favor
companies where the management team is far
enough along in their careers to have gained
wisdom and good judgment. At the same time,
buyers want to know that the managers are not
near their desired retirement age.
For owners who eventually will seek to sell
their company, it is important to establish the
right general wage and salary policies. It is
possible that a charismatic business owner can
create an engaging environment for workers,
making them willing to accept somewhat
below-market wages. If that environment
changes after the acquisition of a company,
workers may experience increased awareness
that other companies are paying more. If, on the
other hand, a company pays its workers too
generously, a buyer may not be willing to inherit
that inflated wage structure.
Notions of pay equity become particularly
important for strategic buyers. When a strategic
buyer folds an acquired company into its
existing business, it does not take long for
workers at various levels of the organization to
become aware of and react to pay discrepancies
between the legacy and newly acquired firm.
Another critical human capital aspect of
acquisitions concerns gaps in the company’s
management bench. If your general manager has
been pinch-hitting for the departed operations
manager or the chief financial officer is in dire
need of a controller, it does no good to try to
gloss over these holes. A smart buyer will detect
them and factor into their financial model the
hiring of whichever individuals are missing.
If your head of finance is overwhelmed with
their current duties, what will happen when they
have a large parent company, a private equity
fund, or a senior or mezzanine debt provider for
whom they must prepare reports? For some
constituents, monthly reporting isn’t enough—
weekly financial recaps often are required. Once
dialed in, most firms report that such reporting
requirements actually improved the overall
operations of the company. It’s not possible to get
to that stage, though, without competent staff.
In an ideal situation, a selling owner will
seek to fill or replace any open positions or
weak links in the management chain. That way,
the execution risk for the buyer is lower because
it does not have to recruit for the positions after
closing. This is especially true of the critical
president position. If at all possible, buyers
should select and groom an internal candidate to
take over the company after a sale. A buyer can
let the president run the company post-sale or
install their own candidate at the CEO position.
Handled correctly, human capital decisions like
these can enhance the value of a company in the
eyes of prospective buyers.