KEY ARTICLE TAKEAWAYS
Learn how most buyers view the team members of a target acquisition
Understand the key ways you can protect your team following an acquisition
Learn why most employees are wrong about what they expect to happen following an acquisition
What are my employees thinking?
When employees hear their company is going to be acquired, they are likely to get really nervous.
Many employees believe that if their company is acquired, their job is going to be eliminated. They have heard horror stories about buyers (whether private equity or strategic) who come in following an acquisition and fire teams of people because they want to cut costs and then sell the company again for a higher price. Fortunately, in most cases, this is an incorrect assumption.
The business model of a SaaS company helps create more certainty in its future cash flows. SaaS customers subscribe for a specified period of time (could be a month, quarter, year or longer) in order to have access to the software being sold as a service.
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For good business that are not “turnarounds,” sophisticated buyers understand that to continue the company’s historical growth and profitability, they are going to rely heavily on the existing team. In fact, most buyers are going to be very focused on retaining key team members because they know they are going to need them to deliver the financial results they are counting on.
If you are in the process of selling your company or plan to sell your company in the future, it is important that you communicate to your team just how important they are going to be to any buyer – they are, after all, the ones who helped take the company to where it has become attractive enough to be purchased by someone else. The last thing a buyer wants is to have to replace people who have all of your company’s institutional knowledge and expertise. A mass exodus of employees introduces a lot of unwanted risk into their investment.
The business model of a SaaS company helps create more certainty in its future cash flows. SaaS customers subscribe for a specified period of time (could be a month, quarter, year or longer) in order to have access to the software being sold as a service.
Are there differences between private equity buyers and strategic buyers?
Buyers come in two broad flavors – institutional investors like private equity firms or family offices, and strategic buyers or companies in the same or a related industry.
Institutional investors typically do not have significant experience operating companies, and almost none of them have a stable of people ready to parachute in to operate a business following acquisition. A sophisticated buyer’s goal is to build on the existing team, not tear it down. They want to create growth opportunities that will be good for the existing team.
The deep-dive
They send their initial list of due diligence items they need to see – it is about 12 pages long, single-spaced. You’ve never seen anything like this before, and it is quite intimidating. You spend the next few weeks gathering information, trying not to raise any suspicion among your employees that a potential sale is imminent.
You send the information over to the buyer, and they and their advisors (accountants, attorneys, consultants, etc.) send you countless e-mails with dozens of questions you feel like you have answered at least five times already. This process takes four to six weeks, and then the buyer comes to you and says they have found some things that are “concerning” – problems they did not know about when they put their offer together, so they’d like to discuss how to deal with it.
You have now been working for 2-3 months, answering questions, digging up documents, re-answering questions, trying to keep a lid on things in the business, and ignoring your traditional work duties because you have been so focused on this potential transaction. If only you could just get this deal closed and get back to your day job…
There are usually some specific functions that will need to be enhanced following an acquisition. For example, institutional investors in many cases will use debt financing for a part of their purchase of the company, which will require ongoing covenant management and compliance following closing. As a result, an institutional investor might want to supplement an existing finance team with people who have experience managing lender relationships.
Strategic buyers also usually want to retain the existing team of a company they acquire, although there are cases in which there will be overlapping functions which will require them to eliminate some positions.
Most experienced strategic buyers will communicate well in advance with employees whose job might be eliminated, giving them ample time to plan for their next opportunity and the buyer will usually provide some type of severance payment to ease the transition.
Sophisticated strategic buyers understand that if they treat departing employees poorly, the existing employees (on both their team and the target’s team) will view this dimly.
What about all the horror stories?
In our experience, if employees are terminated following an acquisition it is usually because the company’s performance has deteriorated and is not delivering on the buyer’s expectations.
In these cases, the company’s cost structure might be too expensive for the level of revenues it is generating, or the buyer might conclude that certain members of the team are not up to the task of growing the company.
In addition, if the investor is buying a company that is losing money and intends to execute a “turnaround” plan for the troubled company, they will usually look to address the company’s cost structure, including eliminating specific jobs that are redundant or cannot be supported in order to get the company to profitability.
Summary
In almost all cases involving the acquisition of a good business, employees have no reason to fear for their jobs.
Buyers want to see their investments do well over time. In order to achieve their objectives, they want as little disruption to the existing business as possible to reduce the risk that the company cannot focus on its growth goals.
If you are thinking about potentially selling your company and would like to talk about how to deliver the right messages to your team, please feel free to reach out to us at chris@classvipartners.com.
If you’d like to learn more about how your business is currently positioned with respect to the areas outlined above and dozens of other potential risks, click on the red banner above to take our CoPilot Assessment. CoPilot will help you identify what specific risks your business has that decrease company value. CoPilot identifies over 90 different types of potential risks your company could have that will make your business less valuable in the eyes of an investor. Get the test ahead of time and build value today with CoPilot.
AUTHORED BY:
Bobby Motch | Head of Sponsor Coverage | Class VI Securities, LLC
As head of Sponsor Coverage, Bobby is responsible for managing financial and strategic sponsor engagement, developing sponsor-related content, and managing Class VI’s Buyer CoPilot program. Prior to his role as Head of Sponsor Coverage, Bobby was responsible for executing and closing transactions and supporting Class VI clients through financial analysis, modeling, market outreach, industry research, and valuations.
The views expressed represent the opinion of Class VI Partners. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While Class VI Partners believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and the Class VI Partners view as of the time of these statements.
Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Testimonial may not be representative of the experience of other customers. Testimonials are no guarantee of future performance or success. Testimonials are NOT paid testimonials.