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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.