More than a transaction, the measure of a successful merger or acquisition isn’t found in the formal paperwork and signatures. Rather than measuring success by closing a deal, M&A success should be evaluated in the 2-3 years that follow. The years after a merger or acquisition are undoubtedly a time of challenges and often where failure can develop roots. Fortunately, many of these challenges can be mitigated by simply prioritizing people first.
The High Stakes
Cultural problems can destroy firm value and undermine deals before they even close. M&A plans lacking a lead with people approach may face low morale, reduced productivity, loss of key talent, and declining revenue. Such high stakes make dealing with people risks before, during, and after a merger or acquisition critically important.
To help you anticipate people risks and maximize M&A return, we’ve outlined the top roadblocks firms face and suggestions to overcome them early in the process.
Top 3 People Related Challenges
Focusing on Finances and Forgetting About Culture
Working in the M&A field for many years, I believe that success hinges on the effective integration of the two firms. Yet, many buyers and sellers still ignore or wait too long to address cultural incompatibilities. Often, buyers and sellers focus primarily on the “deal,” and once an agreement is reached, they then go back and look for cultural alignment. This approach can be problematic because culture has a much more significant impact on success than finances.
Bottom line – even when a deal makes perfect strategic and financial sense, keep a critical eye on early identification of cultural differences and begin to address them immediately after signing a letter of intent (LOI).
The Change from Owner to Employee
People issues aren’t limited to employees; they can also impact the executive leadership level. From both a buyer and seller perspective, changing from owner to an employee may not seem like a significant problem. But beware, this is a multifaceted issue that tends to make an unexpected appearance post-deal close and can have substantial repercussions.
Many firm owners can’t remember the last time they had a boss and are understandably hesitant about becoming an employee again. Typically, the most significant concerns associated with this change include loss of autonomy, loss of year-end shareholder distributions (which may be substantial), and the buyer’s expectation that the selling owner will help ensure that profit targets are achieved.
The dynamics of the situation are complex and personal. As a buyer, showing sensitivity and dedicating time during the integration process to address seller concerns can go a long way towards success. This isn’t necessarily an easy task, especially if the buyer acquisition team members have never been a small firm owner or never worked in a small firm setting.
Bottom line – sellers need to do their part to fully understand what the change from owner to employee will involve, and buyers need to realize that this change can be a difficult transition to make. Addressing these and other seller concerns early in the acquisition process will help ease the pain of transition.
An Integration Plan that Lacks Detail
Some say that the effective integration of two firms will make the greatest contribution to post-acquisition success. It’s certainly a success factor we can easily observe.
The smooth integration of two firms requires both a detailed integration plan and an appropriate level of commitment from both parties to implement the plan. This Peter Drucker quote is often woven into our merger and acquisition engagements, “Even the most grandiose plans must eventually degenerate into work.” Integration plans involve work and should also involve a high level of detail related to the vast number of cultural and operational decisions that must be made.
The number of details may vary depending on the situation. For example, when a large firm acquires a smaller one, the large firm usually dictates, to some degree, how things will be done. For firms that are more similar in size, an investment in a best practice study may be highly beneficial. The best integration plans will break each area into small tasks with a particular person or a small team assigned to ensure each task stays on track and reaches completion. It can be a substantial investment of time, but the payoff after the deal is closed is monumental.
Bottom line – buyers should dedicate time to plan integration in sufficient detail and then hold the assigned managers responsible for plan execution. Sellers should insist that integration planning begin as soon as the LOI is signed and make closing contingent on demonstrated progress.
To learn how to position your merger or acquisition for maximum success by putting people first, join our upcoming webinar M&A Success: The People First Factor. Featuring SN’s AE Advisory team members, this webinar will provide an M&A insider look at the critical human elements that should be integrated into your pre- and post-transaction process.
Brad Wilson, CMA, CDA, MBA | Director, AE Consulting
Brad’s 30+ year career spent working with architecture and engineering (AE) firms includes his most recent role as Partner with TWO CPAs & Consultants, Inc., as well as being a Consultant with PSMJ Resources for 17 years. Additionally, after serving as an outsourced CFO and controller for numerous firms, Brad has deep firsthand knowledge of how to develop and execute successful finance and accounting practices in the AE industry.