For many businesses their most valuable assets are their people, particularly in the services sector.
“When companies talk about ‘talent risk’ in mergers and acquisitions, the conversation usually gravitates towards the top table. Will the CEO stay? What about the CFO? That focus is understandable but it is also incomplete,” says Lee Williams, director, organisation and workforce transformation at Deloitte.
In many deals the people who matter most to value creation sit well below senior management. “They are the account leads, product owners, plant managers, and team leaders who carry deep institutional knowledge, hold key relationships, and translate strategy into operational reality. Lose them, and the deal rationale quickly starts to wobble,” he says.
Research shows that voluntary attrition spikes during M&A, with Deloitte’s analysis suggesting it can increase by more than 30 per cent during transaction periods.
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Part of the problem stems from perceived unfairness. “When senior leaders receive visible exit packages or enhanced rewards, and the people doing the heavy lifting feel overlooked, resentment can build quickly,” warns Williams.
Managing workflow is critical throughout the integration process too. One of the most common reasons issues arise post integration is overloading the very people you’re trying to retain, he explains.
Enhanced employment terms help. “This can include salary increases and clear promotion roadmaps to help demonstrate the buyer’s commitment to investing in talent on a long-term basis, as well as enhanced benefits packages such as upgraded pension contributions, health insurance and life assurance,” says Adam Griffiths, corporate M&A partner at law firm Taylor Wessing.
“Professional development commitments, including enhanced training, particularly as part of the buyer’s existing training programmes, if applicable, and qualifications, can also be offered. Additionally, improved work-life balance provisions such as enhanced annual leave, flexible working arrangements and remote working options may be implemented.”
Equity incentive schemes and completion bonus structures are further options but all parties to a transaction will need to consider tax efficiency as part of their assessment of any incentive proposal, he cautions.
All buyers will look at the key people in any proposed target closely, ranging from key executives and founders to technical talent in knowledge or technology businesses, says Enda Cullivan, partner in Eversheds Sutherland’s corporate and commercial departments.
“A buyer will want to know who the revenue generators are and what the retention rates are for staff. A high turnover of staff is something which a buyer will be wary of. Human capital is not something that you will find on a balance sheet but it will have an impact on the financial calculations of any business acquisition. This would include an assessment of any risks of attrition post-completion and how any M&A deal will be structured, such as, for example, the use of earn-outs, deferred consideration and management incentive programmes,” explains Cullivan.
The most common mechanism used, where senior management are also sellers in the M&A deal is the earn-out.
For the next level down, depending on the situation, improved remuneration packages for middle management, which could include retention bonuses, can help. “Empowering staff to step up and take on more responsibility with a clear career path can also be a useful way of ensuring continuity,” adds Cullivan.
After all, if the seller managers have exited the business, this opens up opportunities for the next layer of management to progress their careers unhindered.
Good communication is vital throughout.
“An acquisition process is a very disruptive and uncertain situation for staff in any business. Uncertainty tends to fill a vacuum that is left if communication is poor,” he points out.
While golden handcuff arrangements have their place in any M&A leader’s toolkit, reducing short-term disruption and providing stability during transition, they are also limited insofar as they are “retentive rather than motivational, rewarding tenure rather than value creation. They can also distort compensation structures and create internal tensions,” cautions Phil Fogarty, partner in law firm A&L Goodbody’s corporate department.
“As a result, we are increasingly seeing our clients use golden handcuffs as a transitional tool rather than a primary incentive. Longer-term alignment is more commonly achieved through value-based incentive models, which can extend beyond senior management and form part of a coherent groupwide framework. Consistency and clarity are key to minimising any discontent in the acquiring group.”
In many private equity-backed businesses, and increasingly in trade sales, his firm is seeing equity and equity-like programmes with much broader participation. “These extend to individuals whose continued involvement underpins the investment thesis, including functional leaders, technical specialists and long-tenured commercial managers,” he explains.
Managing all of this is a vital part of the due diligence process.
“The due diligence process is as much about understanding, in a joint capacity, what is the future business plan, with the actual people being heavily involved. This isn’t about accountants looking at numbers, it’s about making sure that the management team on both sides of the transaction fully understand what that business plan looks like, and believes in it, and has sense checked it with all of the volatility of the markets that is ongoing,” says Katharine Byrne, head of deal advisory at BDO Ireland.
Most vendors now have some continuing role in a business post transaction, whether that’s purely to transition the business and the management team across, or some form of earn-out, so that it’s in their interest to ensure that the business is actually going to perform post sale.
“That means that, if there are synergies and cost savings envisaged by the buyer, that they are realistic and can be delivered on,” says Byrne. “These are the things that differentiate between a transaction that is successful and one that isn’t – because the integration planning hasn’t been done effectively.”
