Open Under New Management

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Successful M&A comes down to the people, and fumbling that end of things can poison an otherwise promising deal.

Hopefully, with vaccines coming we’re close to starting the back nine of Covid-19 and if we are, I expect the impact on small and midcap enterprises to be as dynamic as those following 9/11 and the Great Recession. Some companies will have prospered and grown in line with their ‘essential’ business classification, others which had sufficient reserves will begin to recover and yet others will be on the ropes or already gone.

Those which prospered may seek to consolidate their position by purchasing weakened competitors and some of those who did not prosper, but survived, may view the experience as the last straw – now beginning to focus on an exit strategy through a change of control.  Some buyers may be predatory, others compassionate and while price matters, so do people!

Someone once said to me when a company is in play, suitors look for all the reasons a purchase will work and then, during due diligence, they look for all the reasons it won’t.  Not so different for the people involved; they have both dreams and fears when their enterprise is being sold or merged.

This is about the people. I’ve been involved in several businesses that undertook liquidity events; in a few, I was part of the team facilitating the event and in others, an advisor to the ‘seller.’ In all cases, the human factor weighed heavily. CEOs (and owners) put a high priority on ensuring their teams, both executive and rank and file, had a path forward much like the one they had been following.

Best of intentions don’t always translate to best results and when they don’t, the emotional price can quickly poison the sale.

Some reflections:

• A private client sold to a large public company giving the latter access to a new market. The acquirer had pledged, but not in writing, that there was no need for restructuring or consolidation…my client’s business “ran like a top.” Within six months the new parent centralized all functions system wide, asked people to transfer or retire, fumbled the ball for over a year and lost the dominant market position it had acquired.

• After a series of progressive negotiations, a letter of intent was reached that would provide an exit strategy for the service business’s founder. The remaining open item was for the acquirer to reach an employment agreement with the VP of sales, a key figure in the company’s success. The VP had not known about the potential sale but quickly realized he had the leverage and demanded far more than his current compensation package. The acquirer got “deal fatigue” and walked, leaving the founder devastated and the VP tarnished.

• A direct but larger competitor made an unsolicited premium offer to buy. Along with the premium came conditions; operations would be merged into other facilities in other cities, most of the executive team would not be offered continued employment and there was no role for the selling founder. Rejected!

The best of intentions to ‘take care’ of our employees are not likely to prevail unless set up as preconditions to a liquidity event. Establishing them isn’t an admission of intent to sell, merely a good faith gesture to provide some peace of mind…just in case.

Some acquirers like to negotiate with key employees while others prefer to have them already ‘committed’ for the near term. Some options to consider on behalf of those employees:

• A change-of-control employment agreement that ‘kicks in’ only if there is a liquidity event, specifying similar responsibilities, same or higher pay and relocation restrictions without employee approval. Usually included is a payout for the unfulfilled period of the agreement if asked to leave involuntarily without cause.

• Separately or in some combination with the above:

  • A percentage of the net transaction, likely a fractional percentage.
  • Phantom stock or stock appreciation rights.
  • A success fee for those essential to presenting management’s role in the value proposition of the enterprise…to date and going forward.

• And for the CEO (and/or founder), the preconditions related to your continued role, post-acquisition. It’s much more efficient to work through such matters early on than to have them become deal breakers later.

If you’re selling from strength, these conditions, if not excessive, may not have a material effect on price; if you’re selling from weakness, they likely will. The message: there are those on your team who will always look over their shoulder wondering what their fate will be if the company is acquired. The best time to deal with such concerns is well before the process starts.

Lesson learned.

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