After spending several decades building a highly profitable, and successful, medium-sized manufacturing business, “Fred” 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 staying on was best for both of them.
But things began to sour soon after the deal was struck.
A horde of corporate integration specialists from the home office descended to acclimate the company to the new parent’s operating methods. “We couldn’t make a move without being told that our methods were outdated, that we’d have to adjust to the company’s way of doing things,” Fred said several months after he retired. “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 uncommon. And his story ended as many others do: with feelings of helplessness, frustration and sadness.
Buyers typically look at three main areas during a deal: risk exposure, business sustainability and the fit between the organizations.
This week, I want to focus on fit, the human side of acquisitions, in particular, as I have witnessed many acquisitions go awry because buyers and sellers didn’t pay attention to the cultural harmony of the merging companies until misunderstandings and resentments started to develop.
Often these troubles grow quickly and become impossible to manage. They can end in costly and demoralizing personnel losses that could have been avoided if more care and attention had been given during the acquisition process.
While there is no magic formula to successfully blending cultures, steps can be taken by the seller to give him and his team insights as to “life” after closing.
Fred admits that he made mistakes during the selling process. If he had it to do over again, he said, he would have hired an independent transaction team, rather than hiring accounting, law and wealth management firms that had little transaction experience, but were owned by his friends.
He had never bought or sold a company, but he thought he could negotiate the sale on his own to save money.
His inexperience hurt him.
He didn’t ask the basic questions: What are your plans for my company? What will be my specific responsibilities under the new structure? What are the reporting relationships?
He also didn’t ask questions of managers from other companies his buyer had acquired to find out what its track record had been.
“I should have reviewed the factors and situations which could become post-acquisition points of contention,” he said, “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 owner will take 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 payoff 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 an earnings-based bonus, insist that the details of the 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 had the seller examined the cultural fit before closing. 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 around “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 should be very careful before he gives it over to a new parent.
Gary Miller is 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.
Strategic Planning By Gary Miller
