Anyone who has taken part in military training likely remembers the adage involving the seven Ps: Prior proper planning prevents painfully poor performance. When considering what’s involved for completing a successful acquisition, I’ve adapted that maxim by not leaving out the most important P in the process: People.
Purchasing a business (or assets of) regardless of size is a serious transaction with many pieces and parts that can generate a positive or negative outcome based on proper planning and prior consideration. Ignoring or badly executing certain parts and pieces of the process will almost always result in a poor outcome. Sometimes buyers and sellers fail to consider the important people needed to make an acquisition successful. Finding out the hard way that not planning for the people aspect can devastate what otherwise would have been a picture-perfect deal.
People Participating in the Process
Buyers and sellers: In any business transaction, there are always at least two participants—a buyer and a seller. They are on different sides of the deal, but these parties must have aligned goals from the start in order for both to enjoy a successful outcome in the end. This calls for open and honest communication throughout the process. Too often people approach transactions like a poker game and think holding cards close to the vest is the way to go. This frequently leads to bad decision-making, needless conflict, mutual disappointment, and a poorly executed transaction. When contemplating an acquisition, buyers and sellers must first enter into a pact of mutual discretion, confidentiality, trust, and respect for each other if they want positive results. They don’t have to be best friends, but both parties should be committed to achieving the goals and objectives of each so when the transaction is in the rear-view mirror, everyone is satisfied with the results.
The best deal is a win-win for all involved, and, in some cases, both parties may have to compromise to get what they want. However, with reasonable participants, open communication, aligned expectations, and prior consideration of all people affected, most acquisitions can be successful.
Employees: Too often when there is talk of buying or selling a business, the negotiating parties only consider how the buyer and seller are ultimately affected. This is extremely shortsighted thinking, since the impact on other individuals not properly considered in the beginning often can negatively influence the transaction in the end.
During the acquisition, in addition to the buyer and seller, it is important to consider and plan for the existing employees of both entities and how—or if—they fit in to the new combined entity. Relating to employees of the buyer, one fundamental question is if staff can take on the additional workload associated with the assets purchased. For example, if the buyer’s reservations staff will inherit no new agents but are expected to field twice the number of incoming calls, emails, and daily trips, it’s more than likely that service levels will be immediately and negatively impacted. Staff bandwidth, additional production possibility, and distributed workload scenarios should be considered before any acquisition activity is even contemplated.
If any employees of the seller will be offered positions with the combined entity, compensation parity (pay and benefits) is a key issue to tackle before the deal is finalized. Pay plans associated with service delivery should be of primary importance. For example, if the buyer’s chauffeurs are hourly employees, but those of the seller are paid a commission per trip or are independent operators, there may be a clash of cultures and mayhem during the first payroll period. To minimize service disruptions and unhappy chauffeurs, pay scales should be a key topic of discussion even before an agreement in principle is reached.
However, there may be times where the key employees of the seller won’t work well in the new company’s culture. If they don’t fit, buyers may inadvertently create “transaction spoilers,” who cause problems after the close of the deal. We have all heard stories of management who were displaced when the owners sold the entity using the acquisition as a reason to start their own business, and then began poaching a client base. When this happens, obviously the combined entity is damaged and, in cases where sellers have taken what is known as an “earn out,” syphoning off customers will affect the compensation they receive for the sale of assets over time. Successful acquisitions plan for all foreseen employee and personnel issues prior to the transaction and if necessary pay stay bonuses or compensate key employees for executing non-solicitation or other restrictive agreements.
Clients/customers: Having been involved in merger and acquisition activity in three different industries during my career, I am amazed when I see one critical group of people overlooked before a transaction. Sadly, when this group reacts badly to an acquisition, there is always plenty of blame to go around, and both buyers and sellers pay a price. Who are these people? The clients, of course.
Most people are uneasy about change; some dislike it, many fear it, and others outright hate it. Even when the outcome could be to their benefit, many people respond negatively, especially when that change was not of their doing and therefore perceived as not within their control. This is especially true of customers unknowingly swept up in the sale of one business to another. There is some science behind this but the bottom line is, in most cases, customers made a conscious choice to give their business to a specific operator. But now because of a business deal they had nothing to do with, they are required work with another company altogether because the one they chose has been sold.
"When contemplating an acquisition, buyers and sellers must first enter in to a pact of mutual discretion, confidentiality, trust, and respect for each other if they want positive results."With any acquisition comes customer attrition, and even with the best prior planning and communications to customers, buyers should plan for the loss of up to 10 percent of their existing client base of the seller within 12 to 18 months of any acquisition. The operative words are “plan for.” In poorly planned and communicated acquisitions, it is not uncommon to lose up to 30 percent or more active customers during that same period. Fortunately, for both buyers and sellers, there are many ways to plan for and avoid unnecessarily high attrition. Again, the operative words are “plan for.”
“Act Alone in Haste Results in Regret and Repentance in Leisure”
The above phrase is so true with every important action we take and major decision we make in life. I added the words in italic for emphasis as to how this phrase should be heeded during acquisitions.
Let’s deal with the first part of the original phrase “Acting in haste.” When it comes to acquiring a business, a timing and flow are integral to each element of the process; however, performing them quickly in many cases is not conducive to doing them correctly. The critical steps of an acquisitions process cannot be skipped. If speed is the foremost consideration, chances are the most crucial steps will not be performed as thoroughly as needed to assure a successful outcome. When considering an acquisition, the best advice I can give in terms of timing is: Doing it right takes as long as it takes, regardless of the size of a transaction. Frankly, even the smaller transactions you assume can be done quickly cause the most headaches afterward because you missed something critical in your haste.
Adding the word “alone” to the phrase is of equal importance. As a chauffeured transportation company owner, hopefully your expertise is efficiently and effectively operating your business every day. If you are growing and profitable, this should be indeed the case. But, I can guarantee your expertise is not equal to in-house attorneys, CPAs, and a team of full-time employees part of an internal department solely focused on M&A transactions. Unless that is the case, going it alone, without engaging outside professionals, is a fatal mistake in every case. I don’t care how small the transaction, how friendly the parties, or how simple you think the deal can be—buyers and sellers need third-party professional advice to put together an optimum transaction. It’s a common myth believed by many business owners that it is simply an added and extraneous cost to hire professionals to provide expert advice and guidance during a transaction. This is not accurate: It is almost always a benefit. No one knows how to minimize risks and maximize results for both buyers and sellers like professionals who specialize in their disciplines, practice them full-time, and have experience performing their role over many years. It is always valuable to have a neutral perspective assess the deal.
So when it comes to acquisitions, remember that proper, prior planning, preparation, and people prevent painfully poor performance and make for a successful outcome. For more about Important Ps of the Acquisitions Process, email me and I will send you an informative ebook of the same name. [CD0719]
Ken Lucci is a consultant to the chauffeured transportation and hospitality industries. He can be reached at Klucci@drivingyourincome.com .