Imagine identifying an acquisition target that looks great on paper: strong earnings, efficient operations and good workplace environment. But after acquiring the target, a key employee leaves, taking with him or her key customers and suppliers. From day one, the newly acquired business is treading water due to the lack of business continuity after the acquisition.
Even though an acquisition might look good in theory, the reality of its execution poses multiple threats that could disrupt the business after the transaction, including employees who view the change in ownership as a threat or a risk, customers who feel the change in ownership might be a good time to shop around and suppliers wanting to perhaps renegotiate contracts. In order to alleviate some of these risks, potential buyers need to address these considerations head-on during the due diligence and negotiation process.
Many companies find that they do not often meet their set goals for an acquisition due to their failure to retain key staff during the transaction. Prospective buyers actively pursuing an acquisition of a business should consider the following when dealing with employees of the target business during the negotiation and due diligence phase of the transaction:
- Identify key employees early in the process. As part of its due diligence, the buyer should inform itself of the target business’ staff and make note of any key employees. Are there any executives or sales representatives who have unique expertise or strong ties to a particular key customer, key supplier or the industry as a whole? If a certain individual left on day one, would the buyer be able to replace the individual immediately or, at the very least, be able to fulfill the individual’s duties before a replacement is found? In a stock acquisition, buyers should work with legal counsel to review any employment-related agreements currently in place with employees to see what type of arrangement the employees and the company are currently bound to.
- Use retention agreements and retention bonuses. A well-written retention agreement between the buyer and important employees ensures that essential personnel needed to maintain the continuity of the business stick around after the close of the acquisition. Prudent buyers will sign retention agreements with essential employees as conditions to closing within the purchase agreement. If there is push back from employees relating to the retention agreements, buyers can evaluate and consider offering monetary retention bonuses to top-performing personnel. Buyers should consult with legal counsel to make sure there are sufficient agreements and enforceable non-competition covenants (as discussed earlier in this blog) in place with key employees (as well as the prior owners) to protect the continuity of the business after closing.
- Build trust among your new employees. Since many buyers get wrapped up in retention agreements during an acquisition, many forget that there is more to employee retention than just agreements and monetary compensation. Buyers should communicate as soon as possible to employees about the future of the company: will there be any staff reductions? Will the business operations change or remain the same? Legal counsel can assist with drafting communications to employees regarding the company’s future to ensure compliance with labor and employment laws. Buyers should also think about utilizing HR programs that will help bolster confidence in the new ownership, such as programs recognizing accomplishments and achievements of employees (especially those accomplished under the seller’s ownership), promotions for high-performing employees, and internal fast-track trainings or management programs for employees wishing to climb the corporate ladder. From a legal standpoint, buyers should work with their benefit providers or counsel to see what issues regarding employee benefits may exist and how any changes to employee benefits should be effectuated.
- Create contingency plans and integration teams. It’s inevitable to have some employee turnover after an acquisition. For essential personnel, buyers should have contingency plans that designate succession actions in case an employee unexpectedly leaves. Further, the buyer should designate integration teams that will work with existing employees to avoid single points of failure and better help integrate the company’s existing technology, policies and systems into the new ownership structure.
- Use the transaction to cut ties with employees. While losing key employees after an acquisition can prove costly, an acquisition also gives an ample opportunity to buyers to cut ties with unnecessary employees within the company before they become integrated into the new management structure. In an asset acquisition, a buyer typically has the ability, through the purchase agreement, to choose and hire the employees of the business it wishes to take on after the transaction, leaving the rest of the unwanted employees for the seller to terminate. In a stock acquisition, the buyer may negotiate with the seller to have the terminations of certain employees be conditions to the closing. With these considerations in mind, buyers are strongly encouraged to consult with legal counsel to ensure that applicable labor and employment laws are complied with and that all employee-related issues are addressed before the deal closes. Further, legal counsel can draft indemnity provisions in the purchase agreement to ensure that any liabilities arising from the termination of employees stay with the seller and don’t follow the business after the closing.
During the due diligence and negotiation phase of an acquisition, it’s easy for buyers to get wrapped up with issues revolving around purchase price, indemnification and other aspects of the transaction. However, ignoring key employees completely during the process is to the buyer’s detriment. As we know, the last thing a buyer wants after a stressful acquisition is to have an essential employee or executive leave on day one and potentially sink the business.