One of the major challenges of any merger or acquisition is avoiding a mass exodus of key people and senior management, which can seriously undermine the value of a company post-acquisition. Keeping pivotal people in place must therefore be a priority for the buyer, but not all strategies are equally effective when it comes to retaining these key staff.
A key factor to consider for any buyer of a business is the people who run its day-to-day operations, meaning talent retention has become a real area of focus during the due diligence process – particularly as it can directly affect value, says Fergal McAleavey, partner and head of EY Ireland Corporate Finance.
According to McAleavey, with any transaction process there will be an element of disruption to normal business. “The uncertainty surrounding a new buyer, a potential change in strategy, the perception that there may be job rationalisations to realise synergies, if not appropriately managed can lead to people from all levels seeking a move.”
EY has noted an additional focus on “the talent question” from buyers, according to Ronan Murray, a partner in EY Ireland Corporate Finance.”This helps in ensuring a smooth transition to the new owners and equally assists with retaining key internal knowledge and know-how.”
Depending on the type of deal, the preparation for this transition can differ somewhat. “Private equity buyers place a greater emphasis on the existing key people and wider management team as it is them that they are backing to run the business,” says McAleavey. “The success or failure of the management team to deliver goes straight to the future value mechanics of the business.”
With a private equity deal a non-executive director is typically appointed to the board of their investee companies to work with key management and ensure they are aligned in terms of strategy, culture and vision. “Once there is alignment on these matters people are more invested in the business and thus more likely to stay – which results in their investment being more resilient and primed to grow into the future,” McAleavey says.
For trade buyers, Murray says, it is important to develop a clear M&A strategy with defined acquisition criteria. “This should proactively address key questions such as whether you plan to integrate the new business or perhaps leave it as a stand-alone. The people aspect to that decision will be key, particularly around motivation and empowering existing staff.”
When it comes to how best to retain important staff members post-acquisition, Keavy Ryan, corporate partner in A&L Goodbody, says this question should be top of any purchaser’s list.
“Acquisitions are not just about acquiring a business but increasingly are about acquiring the right people and putting a framework in place to ensure they remain committed post-deal,” she explains. “They also need to ask themselves, who are the leaders that need to be incentivised? Senior management is the obvious answer but buyers should also be looking to employees who have skills that could be decisive during the integration phase or crucial for delivering long-term targets.”
For buyers one way to manage and potentially mitigate the risk of shareholders leaving and ultimately protect the buyer’s value is through an “earnout”, or contingent additional payments “earned” if the business acquired meets certain financial or other milestones after the acquisition is closed.
“Furthermore, management incentivisation plans can be put in place to help retain the key employees and also help attract the talent required for future growth,” says Murray.
Indeed, management incentive plans (MIP) have been proven to be one of the most successful ways of retaining key talent in the business post-acquisition. “An MIP enables a management team to participate in the future equity upside of a business as it scales,” says Murray. “It is also a great way of attracting new talent into the business as there is a tangible future financial reward beyond their normal pay package – it gives employees ‘skin in the game’.”
Ryan also points out that, given the competition in the broader employment market, incentive arrangements are now extended to employees up and down the organisation. “Incentivising teams broader than just management can help secure financial and cultural success during the post-acquisition integration.”
“Given the challenges in the current labour market, management teams we work with are coming up with innovative solutions such as sourcing from non-traditional labour pools which brings with it a greater diversity of thought and process,” adds Murray.
Yet there is no one-size-fits-all solution to the problem of potential brain drain. Any plan should be specific to the business and built around the targets that need to be achieved, both financial and qualitative, Ryan says. “This may mean a mix of short-term and long-term incentives, consisting of both cash and equity or phantom equity.”
Awarding equity is not for every business, but for those companies who are considering awarding shares to senior executives they should seriously consider a restricted share or “clog” plan, Ryan advises. “This can offer tax efficiencies and gives employees skin in the game which aligns well with both investor and management expectations.”
Transparent and honest communication throughout the entire acquisition process is crucial, says Murray. “It is critical that buyers clearly communicate with key employees to ensure they are informed, aligned and to address any of their concerns. Typically, a buyer will work with the management team on a robust integration plan to ensure the business continues to perform in the new structure and prime it for growth into the future.”
Ryan agrees. “Ideally have your incentive arrangement ready to put on the negotiation table during the acquisition process and try to avoid last-minute proposals – timely communication is the key when dealing with people.”