14 Oct Employee Involvement: Who and When during a Buy Process
Identifying the right people to participate in the process can be harder than it seems. The process needs to be part of a larger strategy the business was executing against and as such the target, process and anticipated outcomes should be widely known and understood by those at the executive level. That said, once the company is in an active process pulling in the right people at the right time can become problematic. The due diligence process can be lengthy and should always be split into functional areas with the assigned owners. The likelihood of a company wanting to tackle all functional areas at once is slim and not advised.
So who needs to be involved?
CFO/Finance: The financial elements are often the most important and should be led by the executive with the most insight into the existing business and the corresponding leader on the sell side. These two not only have to reconcile and debate the accounting and forecasts but they may also end up working together post combination.
Corp Dev: The head of corporate development at a corporation is largely involved in managing the inbound inquiries for ongoing processes looking for suitors, but the role is much more than that. We think of corp dev as the strategist, executionist and cheerleader for the “buy” option, out of the commonly considered; build, buy or partner scenarios corporations consider when filling a gap in their offering. Once in a process this individual is the continuity between the information, gaps and misunderstandings that arise in each of the functional areas during the process.
CEO: The CEO’s job during a process is to get the deal done. They often are working with the support system of the process and ensuring that timelines are being met and that the strategic value is agreed upon by all leaders. The importance of group alignment post combination is the difference between achieving a return on the investment or not.
Corporate counsel: Whether internal or external, the attorneys are a key contributor to the process. Not just documenting the combination but in the disclosure, reps and warranties as well as corp entity restructuring as well as regulatory filings and governance. All components required to complete a transaction.
Sales Leadership: Do not bring them in right away. Maintain a sense of confidentiality as we recommend sales people that are out talking to clients shouldn’t be brought into an acquisition early.
Marketing Team: The marketing team is critical with announcing the deal, involvement in rebranding, press releases, post merger integration (PMI) etc. Plan early with your marketing team!
Human Resources: Your HR leadership needs to be involved more in an asset transaction than a stock transaction as you shouldn’t need to repaper the employees in a stock transaction. Bring in leadership on a need to know basis.
The fact is, the more people you tell, the more risk that you could violate your non-disclosure. The rule should always be; “a need to know basis”. This is less about keeping confidential items confidential (which can carry more significance in public companies) and more about keeping people focused on the business. Acquisitions are distracting and if your leadership is all focused on someone else’s business, they are not focused on yours.
Leveraging an advisor such as Revenue Rocket will provide your executive team the guidance and support you need while helping keep your leadership focused on the business. Our team of experts has participated in hundreds of transactions and we can be heavy when it comes to driving the process to the best possible outcome.
Mike Harvath 0:05
Hello, this is Mike Harvath with another Shoot the Moon podcast, broadcasting live and direct here from Revenue Rocket headquarters in Bloomington, Minnesota. Today, we’re going to talk about how to manage employee expectations and communications when you’re buying another IT services company. Joining me for today’s podcast is my partner Ryan Barnett. Ryan?
Ryan Barnett 0:33
Hey, good morning, Mike, thanks for having us today. You know, this is a topic that we hear quite a bit is who should be involved. When you’re buying a firm there, you want to have your right strategy in place, and you want to have the right tactics in place in everything from formulating the idea to implementing the tactics and getting things done. So Mike, just want to kind of pick your brain on this and understand, you know, who should be involved when you’re buying another firm? Let’s start with the executive team, and maybe even the start, what’s the role of the CEO? And when you’re starting to think about an acquisition, and what’s the role of that CEO?
Mike Harvath 1:11
Yeah, you know, I would say that the role of the CEO and you’re thinking about buying another company is to provide a heavy, steady hand on the tiller. And that steady hand on the tiller will involve bringing in various members of the management team. And making sure everyone’s in alignment, that this is a strategic initiative that you’re going to undertake. Sounds like a simple thing, but you need to have everybody on board, in the executive leadership team, in order to have this be effective. Now, I think broader communication about the overall direction of the firm, as part of your strategic planning to the rest of the company, giving them some guidance on where you’re taking the business is also appropriate. But I think it’s oftentimes easy to, you know, try to pull in all kinds of people in this process, when it can be a distraction to their core job in the business. So, you know, to recap, the CEO’s role is to oversee the process and to set direction, and to make sure that, you have key alignment in the organization as this is a strategic move that you should make.
Ryan Barnett 2:31
Yeah, I think the other role of the CEO is that they have to be the chief cheerleader to make sure there is alignment, but they also have to have, I think, key parts in the banking relationships or financial relationships. While they may not have the financial papers, they’re going to be the ones that are setting those relationships with other investors to perhaps that need to be brought in for any kind of investing type of financing.
Mike Harvath 3:00
Yeah, whether that be, you know, equity or debt financing, I think that’s a good point, right? You know, how you’re going to fund your transaction, you have to be thinking about that, and certainly gonna be leveraging your CFO or financial lead in the discussions with those banks and investors. But understanding the ramifications of those investment options and how you will be encouraging or soliciting those investments in order to fund a transaction is also very critical for the CEO and really, them as well as the CFO and or the, you know, financial leadership inside the business.
Ryan Barnett 3:39
Sure, I think the other part that’s worth the discussion is and then let’s switch gears a little bit, and we’ll ultimately come back is, what’s the role of a typical corporate dev person or someone who’s typically in charge of corporate m&a? Now, what’s their role with this? And the reason why I’m going to ask and circle around is, if a seller is working with a corporate development person, are they ultimately the decision maker? And what’s the role between the CEO and Corp dev in a well running organization that’s doing an acquisition?
Mike Harvath 4:14
Yeah that’s a great question. So you know, you need a corporate development function. Some companies try to roll their own corporate development function by multitasking the senior leadership team. We think that’s a failed strategy and that’s proven out in the statistics that say that, companies that tried to do that only had about 1% of the m&a transactions done that they target to do so it’s a very low probability that you’re going to get a deal successfully negotiated. in corporate development plays a critical role, whether they’re representing a buyer or seller and in the right deal would be to have a corporate development function, representing both the buyer and seller You know, companies like revenue rocket play that function for our, what we call buy side clients, for our clients that are looking to acquire firm, we are, in many ways an outsourced corporate development function. And thus, you can minimize the distraction of the team while you’re looking for companies to acquire or working on the negotiations of a deal. Likewise, a lot of sellers are represented by a broker or the place the corporate development function. And, you know, they can play a critical role as well in representing not only their client for sale, but also playing a role as an intermediary. And, you know, we believe that there is certainly a key role for an intermediary or in some cases, multiple intermediaries in order to help get a transaction done and knowledgeable intermediaries, whether they be your internal corporate development department and outsourced corporate department like Revenue Rocket, you know, or even leveraging the sellers broker as someone that can be an intermediary is a good idea.
Ryan Barnett 6:10
Yeah, I think it makes sense. If you combine those two roles, it seems like the CFO or finance fits in, in the middle there. And again, when we’re looking at acquiring a business, what’s the role of that finance and who should be involved within a finance team?
Mike Harvath 6:28
Yeah, that’s a good question. So certainly understanding, you know, corporate finance, and good financial advice is critical when you’re looking at doing an m&a, transaction and communications with them. Oftentimes, you’ll be outsourcing that role to a CPA or someone who’s done outside valuations. And, you know, certainly if you have a corporate development function, you’ll have a financial lead, that can run a valuation and review a company, if you’ve outsourced it to outsource corporate development function, they can do that. But the internal finance lead will also have to look at what the impact of that acquisition will be, to the cash flow of the business. Right? So, you know, if you’re, especially if you’re going to achieve debt financing, can you afford this investment? And how will it impact your overall cash flow and, you know, do some scenario planning, I think, is a healthy exercise and their role in doing that is critical and your ability to make, you know, good decisions as to the size and type and scope of a transaction that you’ll want to do.
Ryan Barnett 7:48
Sure, if I understand this correctly, it sounds like a corporate development function would serve more like an origination team, and perhaps get all the way to a letter of intent. The financial team at that point is probably giving input to a letter of intent, and also looking at how they form a strategic fit to impact with the financials. And then the CEO is really kind of giving the sign off of the strategic direction and the final approval. Do you agree with that, Mike?
Mike Harvath 8:21
Well, I think that’s how many companies see it. And many companies operate. I think a better model, frankly, is to use a corporate dev team or to engage a corporate dev team from the outside to do more beyond origination. Beyond valuation and beyond sort of deal negotiation, everything other than legal work should reside in that function in my opinion. Now, not everybody shares that opinion, but certainly we see that the best in class, highest performing corp dev teams at you know, the biggest corporations in the world, tend to operate that way. And we think, you know, successfully as close so it’s a reasonable model to replicate, whether it be through your own staff or through outside staff.
Ryan Barnett 9:18
Okay, switching a little bit. So if that’s the kind of the head of the team or the Big C suite there, between CEO and CFO, what’s the what’s the role of a sales leader, and or a sales team when evaluating an acquisition?
Mike Harvath 9:37
You know, I think their role has much more to do with the leader, the sales leader, evaluating how this additional business could, you know, get to the one plus one equals three as it relates to go to market and it’s critically important that you bring it That sales leader on a need to know basis and make sure that they’re clear that any companies that are being evaluated, most likely you will be under a non disclosure agreement, and that you cannot disclose who you may be looking at to anyone. Not saying that a sales professional would do that. But typically, sales and sales leadership talk to a lot of people. And that’s our job, right is to be well networked in the business and, and within the client community. And it’s critical that everyone understands this has to maintain a sense of, you know, confidentiality, here, it’s why we generally recommend that sales member sales, folks that are out carrying the bag, and, you know, doing deals aren’t necessarily brought into this conversation about an acquisition early, they’re typically brought in pretty late. Now, certainly the sales leader, the executive, who is the person running the sales organization, will need to know as you’re contemplating a letter of intent to acquire a business and can weigh in on the relevance of that acquisition via their go to market strategy. And that’s a pretty important bit of feedback. But generally, you know, as you get into sales, people and other delivery staff and folks inside the organization, you know, the more people you tell, the more risk that you’re going to violate your nondisclosure. And, you know, the rules certainly should be that you’re going to bring in people inside your organization regarding a specific deal on a need to know basis. And frankly, a lot of people that are out, doing the work in your business just don’t need to know yet. They may need to know as you’re announcing it, or rolling it out a week or so before close, you know, or at kind of close. But I think ahead of that, you know, you don’t want to give your employees additional distractions to be worrying about, in particular the, you know, bag carrying sales team.
Ryan Barnett 12:19
Yeah, that makes a ton of sense. On the flip side, where, what do you think happens? Or what should a good marketing team do in this case, and I’ll give the, I guess, more specific examples. At some point, you’ve got to announce the deal. And you need to help show some future value. And perhaps there’s even investor teams involved at that point. So what’s the role of marketing in evaluating a acquisition and then perhaps a more in the EMI or the rolling out phase of getting into the market?
Mike Harvath 12:53
Right. So certainly, the marketing team will be critical in being able to announce the deal, you know, work with any press contacts and roll out press releases, as well as be involved with kind of rebranding, if you will, if there’s going to be a wholesale brand change, they certainly will be involved with rebranding, offering some on the sellers part, or at least converging them into the overall go to market messaging of the acquirer. So there is a pretty big lift there, particularly as it relates, you mentioned PMI post merger integration, they play a critical role in the post merger integration sort of communications and marketing step that is ongoing beyond sending a press release. Maybe, changes to websites and rebranding and redirection and all that stuff, is going to land with the marketing team. So I think early planning with the marketing team is pretty critical. As you’re getting close to getting the final definitive agreements negotiated, so they can be prepared to do everything that’s necessary to put one face to the market.
Ryan Barnett 14:07
Yeah, I think it’s a very tricky balance. To your point, if you start to look at these initiatives too early, it’s very easy for all of these teams to take their eye off running the business. So it’s an opportunity to, I think you do need that champion that is looking from an external perspective that allows everyone else to to help focus on the business. And perhaps that’s why advisory services went through acquisitions help because it’s not consuming your everyday life. And, and there’s also a way for that third party source to be the bad guy in a negotiation or be able to push back on things. So I think there are some very positive things about using a third-party source. Mike, is there a role with HR and where does HR come in? Is that after post-merger integration is that before it can win some of those personnel type decisions made?
Mike Harvath 15:08
Yeah, that’s a pretty critical role. Because depending on the type of transaction, whether it’s considered a stock or an asset transaction, your HR department needs to be heavily involved in an asset deal, you know, you’re essentially hiring all those employees onto your paper. And they’re going to get released from the seller and hired by the buyer. That requires a fair amount of education and hand-holding with those employees that are coming on. We’ve certainly seen some challenges with that as it relates to non competes and how they have to settle non competes with their former employer and how they get signed as part of the new employer. And, you know, your lawyer can advise you on a lot of those details. But they need to be heavily involved in that process, particularly if you’re doing an asset transaction. And stock transactions a little less important because you’re inheriting those employees as part of buying the stock of the business and you will not need to repaper the employees per se. We have seen a few more stock transactions recently, because of people taking advantage of IRS 1202 exemptions for capital gains. And so certainly those are becoming used more for the types of companies we work within IT services. But either way, you know, the HR departments going to be critical play a critical role, because most likely they’re going to get questions from insiders inside your business that are looking for inside skinny. Hey, I heard that we’re buying so and so what do you know about it? Right. And so making sure that they’re, certainly you’re bringing in HR team members on a need to know basis and, as I mentioned before, emphasizing the confidentiality of that transaction to be super important. But they will play a critical role, particularly in an asset deal.
Ryan Barnett 17:10
Sure, sure. The last department I’m thinking about and perhaps this is different than others is engineering product, technical, or even IT teams. A COO of a company is going to be looking at an acquisition, I’d say fairly early to understand how delivery may be impacted, but any perspective on some of those operation type roles?
Mike Harvath 17:36
Yeah, a lot of that comes down to you know, doing the post merger integration planning with them. And following a methodology that works. And doing it early. I mean, we’ve got a post merger integration charter that we make, freely available to the market. And anyone that’s interested in learning more about that can just drop us a note at firstname.lastname@example.org and we’ll be happy to send you that charter, it outlines everything that’s needed to facilitate post merger integration. And, you know, certainly, those operational and finance functions have to be aligned on how they’re going to execute on that post merger integration, you know, operational details, once the deal is done, and pre-planning there is pretty critical. So I think, you know, certainly I’d be bringing them into that conversation as you’re getting closer to close. And as you’re negotiating the final agreements, and having a plan that they can begin to work on day one is certainly going to help ensure the success of the deal.
Ryan Barnett 18:41
And I think perhaps the alternative view on that is that you’re very outgoing technical, or let’s say you run a product team, they may be the ones driving the acquisition, so they may be looking for the target list, they may know the market and the competitors better than anyone else. So cozying up with the corporate development team makes a lot of sense. If they can find kind of strategic initiatives on some of our buy-side clients. I think some of the people that are first on the list are the division leaders, or the practice leaders. In this practice leaders, in a way become kind of the de facto CEOs as well. While they may not be the person who signs and check, they might have a lot of pull within the organization. And even some of those large organizations, they may not even involve a board or CEO until there’s a $50 million type acquisition in place. So I can see some of those division leaders starting to play a bigger role like anyone else in the process or any thoughts on that?
Mike Harvath 19:47
No now that most firms or many firms are using cloud based infrastructure, making changes in infrastructure has become much easier than it used to be in the past, when there was a lot of premise based technology can get, you know, just getting that stuff transferred over could have been rather challenging. Now it’s less challenging and certainly, we find that most of our clients are having a fairly easy time sort of pivoting the infrastructure of the combined business, provided they’re using similar systems. If they’re not, they have to work through a transition plan to move off of a particular system and onto, you know, a core system, it’s usually the one that the fire your business is using. So, you know, some planning there and again, led by the PMI, or the post merger integration, team and charter would be important.
Ryan Barnett 20:39
Agreed, great. So to sum this up, it’d be great to understand who knows, you know, who needs to be in the know, when. So if we’re looking at origination, the people who are involved or there are really kind of the strategy has to be set up by the CEO and the division leaders to understand who you’re going to target. And why and corporate developments going to know that so can really kind of a core group of teams that starts out that project, it seems from there, you’re going to start involving finance teams. So once the target has been identified, and they’ve been building financial models, you’re going to be involved in that team for kind of the financial planning and analysis as well as the financing type options. From there, you’re bringing in perhaps an operations and HR teams nearly the same time, because they are going to be evaluating the impact of the people, personnel, processes that are going to be used in the the continuing operation and marketing after that, essentially, to help kind of piece together the public facing view of everything. And then salespeople sound like an interview might be completely optional, except for evaluating the sales team talent, but essentially, trying not to blow up the deal is their only job in the deal itself. Anything else? That’s what you’re thinking?
Mike Harvath 22:17
Absolutely. And I think with that, we’ll tie a ribbon on it for this week’s podcast at Revenue Rocket. Thanks a lot and have a great day.