Everyone says it, “A company is only as good as the people in it.” The human capital part of an acquisition is a critical component to any company wanting to grow and prosper, yet done so poorly by so many. It is difficult enough to find good people these days and that is one of the primary reasons for acquisitions being preferable over building a new shop — the people. Over the years I have been on both sides of the fence many times as both the acquirer and the acquired, and I have learned a lot about the importance of the leadership skills needed for a successful transition from one company to the next. So whether you, the reader, are planning on selling your company or perhaps you are looking to acquire additional locations for your growing business, I hope this article will help you avoid some of the leadership pitfalls that commonly occur during a business acquisition.
The “secrecy” factor
Buying or selling a business takes a long time, even after the initial buy/sell agreement is made. Most businesses feel that it is in the best interest for everyone to keep complete secrecy and most legal agreements include non-disclosure language that demands that no one tells the employees of the company being sold or anyone else for that matter. I understand that most companies do this to gain a quiet competitive advantage in a particular market and to keep the employees in place until the acquisition is announced. Also, in many cases, the buy/sell deal falls through which could also leave employees feeling insecure if they hear about it.
Some of the reasons businesses go secret:
- Public uncertainty and loss of revenue
- Retaining DRP and other referral relationships
- Vendor relationships
- Competitive advantage
- Retaining employees
Loose lips sink ships
Several years ago I was working full-time for a company as a consultant. In short, my job was to increase the value of the company by increasing profits, securing a good work force, and improving operational efficiencies in order to make the business more “sellable.” The owner of this organization was transparent with me about his intent to sell, but was contractually obligated to keep quiet about a newly reached buy/sell agreement. Within 30 minutes of the agreement being reached, the news had already traveled back to me and to everyone else in town. I marched up to the owner’s office to confirm the rumors on the street and he said, “how the heck did you hear about that?” Someone in the buying party had apparently been bragging to friends. There were even rumors running rampant that the acquiring party was bringing in their own crew and everyone was going to be terminated from the company I was working with. This violation of secrecy was devastating to both parties and took many additional months of hard work to restore the damage that had been caused. Eventually the purchase did get finalized, but by that time employee trust had deteriorated and most of the employees ended up leaving anyway when the new leadership was in place.
The big surprise!
Shocked and disappointed faces have been deeply imprinted in my mind: A woman seated in front of me covering her face to hide her tears. An older gentleman sitting near the back with a disgusted sneer at the former owner, probably wondering how this is going to affect his retirement. Yesterday I felt like a conquering hero, today in this room, in front of these real people, I felt like a jerk. I had never met any of them, only heard stories about them, but today these people were real and I was to be their new boss. This describes the practice of the acquisition announcement done wrong. When employees are called into the big scary meeting where these transactions are suddenly announced they are absolutely blind-sided in most cases and the emotional damage can be messy. It is difficult indeed for an owner to make the announcement to his employees, but before you subject them to the presence of the new owner and acquisition leadership team, I find that it is best that the owner breaks the news to his team first and then later introduce them to the new owner after they have calmed down a little.
Sometimes it can be difficult for the selling owner to keep quiet about his or her plans to sell. A great deal of guilt can occur which may cause the owner to want to come clean with his team. Many of us prefer to always be honest and it is difficult to keep it inside, but in most cases it is critical that you do so.
I talked to Brad Mewes of Supplement (http://supp-co.com) about this. Brad specializes in buy / sell transactions in the auto body industry. Brad told me, “I ran my family’s shop for many years so I understand why some owners feel a sense of obligation to disclose certain things to their employees. But this is a practice we generally advise against in a business sale. There are too many factors out of your control that can jeopardize the entire transaction. As an owner, you have to ask yourself, is this sense of obligation worth the potential risk of blowing up a deal representing years of hard work? The irony is that in attempting to protect your employees you may actually put them at more risk.”
The Three Big Concerns
Typically, when these transactions are announced and the shock starts to settle down, people will immediately begin wondering about these three things: 1. Is my job secure; 2. How will my pay change?; and 3. How will my health insurance and other benefits change?
In most of the cases I have seen, especially with large consolidator MSOs, the goal is to keep the entire staff of the company they are acquiring. Some consolidators are even trying to keep the old owners in place for a while. During the announcement of the sale, employees will usually be given a termination notice from the old company and then are invited to join the new company. Some people will not stick around, most will. At least until they figure out the answer to their three questions.
As an acquiring company, you need to figure out the answers to the three questions before announcing the deal. I have seen some pretty stupid things being promised to employees in these highly charged conversations that always come back to bite! “We will be taking a look at your compensation packet and will let you know soon, but don’t worry, we won’t let you go backwards.” Does this sound familiar? I guarantee this person will be on the phone with every other shop in town within the hour! I cannot stress this enough:, clarity is needed with these people up front or trust will continue to erode and they will leave. I have seen it happen dozens of times.
Respect
Many acquiring companies do not want a long drawn-out “journey” to take place when they acquire an existing business. New systems must be put in place quickly in order to maintain the consistency expected at most MSOs. Most successful MSOs rely on their standardized systems to sustain their growth so most companies use the “rip off the Band-Aid quickly” approach to integration. I am guilty of poorly using this acquisition approach myself and have learned a lot about doing it correctly. It starts with showing respect and establishing trust. As an acquiring company if you come in and start bashing the old operating procedures that the existing staff had worked hard on for years or you start moving technicians’ tool boxes around, you are not going to be making any friends! Be respectful. Chances are since you’ve just sprung the huge surprise of being their new boss, there are going to be some trust issues for a while. Mind the ego and sit down with everyone and explain why it is critical that new systems must be put in place and ask the staff for feed-back how they may be able to best integrate it together. You have to be firm with the staff sometimes, but respect them and show empathy for what they are now dealing with.
Avoid these quotes I have heard people say even if they are true:
“If your systems were any good, you probably wouldn’t have needed to sell your company.”
“Wow, that’s how much you are making on commission? No wonder your company wasn’t making any money!”
“You have been doing that wrong for years. You will like our systems much better.”
A final thought about respect is that you will never get a resistant staff to buy into your new ways of doing things by arguing with them over whose system is better. For permanent change you must allow the person to decide for themselves. You explain to the person why the change is necessary and you ask them to give it try and decide for themselves. If their system is truly better, and depending on various factors, including the size of the acquiring organization, maybe you can incorporate some of their systems into yours? If a resistant person will not conform and you have respectfully used good leadership principals, sometimes they may need to find employment elsewhere.
The paradox of accountability
Not long ago I asked a former co-worker who is employed with one of the largest MSO companies how she liked working for this company with my expectations being that she would hate it. What she told me was quite surprising, at the time, and also a good lesson for many of us. She said she preferred working for the new consolidator company much better than the old purchased company because every day she knew what was expected of her.
I have to give a lot of credit to some of the large MSO consolidators for the great systems of accountability they have in place. I think this is an area where some of the smaller companies could learn some valuable lessons.
So how do you get a culture of accountability into a company where it didn’t exist before? It’s not as hard as you might think. In fact, most of us crave structure and accountability. Successful MSOs are able to sustain this culture through a potent combination of clearly written standards (SOPs), lots of training, and testing. Once the acquiring company has earned the trust of the employees, it is crucial to establish a structured approach to standardization, learning, and holding each other accountable to the standards. Like children, we say we don’t like being held accountable, but most of us actually crave it!
Despite the challenges faced during acquisitions, for a growing business it is a very rewarding and exciting time when done correctly. I feel that right now is a great time in history for companies wanting to grow and add additional locations and I don’t think you need to be a huge MSO Consolidator company to do it, you just need to be smart about growth and become a student of the modern leadership skills that are required. Understanding how to lead and respectfully treat our companies’ greatest assets (our people) is one of the most critical skills you can possess.
