So which is it:

Time for a sharp exit – you need time for your exit strategy to kick-in
Time for a sharp exit  – you need to plan the timing of your exit?
Time for a sharp exit – your exit needs to be swift?
Time for a sharp exit – you need to start thinking about how you are going to exit the business…

Preparing Your Business for Sale

Getting your company in shape for a sale

It’s time to turn our attention more specifically to ensuring that your business is well positioned to achieve an optimal outcome in an outright sale or indeed on a partial sell-down by the existing owners. The ideal scenario sought by business owners often involves a high price, payable in cash on completion, with no onerous terms and minimal disruption during the process. This can often be achieved, but not without prior planning.

All too often business owners are not well prepared when a decision is made to sell and believe their business is worth considerably more than a purchaser is prepared to pay. The timing and reasons for a business sale can be critical to determining the outcome. Unfortunately, the decision to sell is often forced upon the business by circumstances and many business owners fail to unlock the true worth of their business.

Reasons for selling

Common reasons for a business sale fall into two categories – planned and unplanned – and include:

Planned – Retirement.

 Access to capital to fund business growth.

– The entrepreneur that grew the business recognises that the management capability required is beyond his/her skill sets.

– There are no family members to pass on the business Realisation of personal wealth to pursue other business or personal interests.

– Expectation of future profit erosion within increasingly competitive environment.

Unplanned.

– Health issues, such as illness or death.

– Financial difficulties, either within and external to the business.

– Divorce, family split up or other change in personal circumstances.

– Partnership/shareholder dispute or divergent shareholder objectives.

-Opportunistic approaches by potential acquirers.

– Loss of a major customer, comprising a significant part of the business.

Whether a business sale has been planned for some time or is the course of action decided upon in response to particular circumstances, the outcome will almost certainly be better if the business has been well prepared for sale.

In order to ensure that your business is positioned to achieve an optimal outcome on sale, the following eight key issues should be addressed:

1. Establish a clear competitive edge.

The value of your business will be considerably enhanced if you are able to demonstrate a clear competitive advantage in a particular niche or market segment, leading to more sustainable margins, greater customer retention and an increased ability to win new business.

This means understanding where the core capabilities of the organisation and its management lie, aligning these two areas of market opportunity, and repositioning the business if necessary to develop a clear and sustainable competitive advantage within these areas. This can be a major undertaking, which may take several years to achieve. However, in the absence of a competitive advantage, potential purchasers may view your business not as a strategic acquisition, but simply as the opportunity to achieve rationalisation benefits through adding production capacity – a far less valuable proposition in an industry suffering from overcapacity.

2. Ensure adequate strength and depth of management.

Many businesses rely heavily on the business owner or a small management team. If you intend to leave the business following the sale, you will need to ensure that the business is able to operate without you and that the ongoing management has the desire, energy, ability and commitment to take the business forward in an increasingly difficult environment. Generally, a business owner should progressively step back from the business over a period of at least 18-24 months prior to the anticipated date of sale, handing over key relationships and responsibilities to other members of the management team. Also, the reporting line to you must be established on the operations of your company in a regular time frame. By taking this action you will receive a better price for your business.

There is also a need to assess whether there are talented and committed people in the wings to become the next generation of managers, to ensure as far as possible that the business is not reliant on one or two people. If particular individuals are key to the business, it may be advisable to align their interests with yours by offering a bonus linked to a successful sale of the business, or indeed an equity stake.

3. Mitigate risk of customer losses.

If your business is overly reliant on one or two major customers, it may detract significantly from the value placed on your business by a purchaser or investor. This is particularly so if your product or service is not differentiated and/or the customer relationship is not secured through a contract or by other means, such as being the provider of an end-to-end solution closely integrated with the customer’s own business processes.

In order to limit the risk of customer loss on the business and provide a purchaser with greater comfort in relation to future revenues, consideration should be given to entering into contractual arrangements with major customers, whilst greater diversification may also need to be built into the customer base to reduce the financial impact of the loss of any single customer.

4. Eliminate personal transactions.

In presenting financial information to a prospective purchaser, it is advisable to eliminate non arm’s length transactions between the business and its owner (and related parties of the owner), in order that the financial statements reflect the true underlying performance of the business. For example, personal expenditure incurred by the business should cease, any transactions with the business owner or affiliates, should be on an arm’s length basis, personal assets such as expensive cars or yachts, should be extracted from the business, and the employment of any family members should continue only if they are paid a market salary for duties actually undertaken within the business.

The existence of complex or undisclosed arrangements such as these not only distorts the reported financial performance of the business, but also can significantly undermine the confidence of a purchaser in the reliability of the information provided.

5. Ensure robust Management Information Systems.

Having a management information system that provides timely, accurate and relevant information both improves the quality of decision making and provides a potential purchaser with considerable comfort with regard to the way in which the business is managed. It is fundamental to costing and pricing, the purchase of supplies, stock holding, work scheduling and the overall management of profitability and cash flow. This in turn should translate into management accounts ensuring that management keeps its ‘finger on the pulse’.

6. Review the state of financial records.

Of equal importance is maintaining the financial records in a healthy state and making sure that all statutory requirements are complied with within the required timeframes. Yearend financial statements that are easily reconciled to monthly management accounts, debtors and creditors ledgers, tax returns, etc without any surprises provide confidence to prospective purchasers, investors and financiers.

Additional confidence or surety is further gained when a business has been regularly audited. There is certainly a sense of greater corporate governance and acceptance of the figures presented by would – be acquirers.

7. Evaluate tax planning and structuring opportunities.

At the end of the day, it is what ends up in the pocket that matters most. With every sale, there are a raft of structural considerations and taxation implications which, all other things being equal, can make a substantial difference in the net cash received.

Often these considerations are left to the very end, resulting in a less satisfactory result being achieved. Planning well in advance can assist you in ensuring that the business retains valuable tax attributes (such as tax losses), and in establishing a structure which minimises the likely tax liability on sale.

8. Build a track record of profitability and cash flow.

Finally, the most important determinant of a business’s value from a purchaser’s perspective is its future earning capacity and ability to generate cash. Given that past performance is often used as a predictor, in the assessment of likely future performance, it is imperative that the business can demonstrate a track record of profitability and strong cash flows. Therefore, if this has not been the case, sufficient time may be required to rectify the situation.

Warning signs to purchasers

If your business displays one or more of the following characteristics, its value is likely to be impaired, even if there is a strong underlying business. – One or two customers comprise a large proportion of revenue. – All the knowledge and key customer relationships reside with the owner. – No ‘new blood’ coming up through the ranks. – Accounting records in a mess and not up to date. – No transparency between tax return and management accounts. – Extensive personal assets and expenditure within the business. – Fluctuating historical revenues and profits and unclear growth expectations. – No cash flow forecast and profitability projections.

Whether or not you plan on selling your business in the near future, a little planning and preparation can significantly enhance the likelihood of an optimal outcome when the time comes – bearing in mind that it may not be of your choosing. Grasp the opportunity now to make the business more attractive and increase its value to a purchaser you have nothing to lose and everything to gain!

Maximising The Value – in Your Business………

Preparing Your Business For a Successful Sale

Eight Ways to Optimise the Sale of Your Business

`Selling/Buying Your Business Successfully`

Realise – Your Business – Your Future – Your Potential!

Plus, information on obtaining guides on:

`Buying a Business` and `Due Diligence Guide`

“ An Investment in Learning, gaining Knowledge and Skills Pays the Best Interest for You”
Colin Thompson

To some, this may appear as a rather precarious discussion to have, as what we see thru the media does not always depict a full story. And there’s almost always several sides to the Iran chronicle.

Nevertheless, one can gather from the gist of the current news and media that Iran is bracing itself for significant change. No doubt, the country is seeing the brunt of it right now. But inevitably, Forex rates may in fact start to stabilize soon-which is always an encouraging sign for economic development.

Promises & bravado aside, foreign stake and ownership have truly become more transparent and realizable. FIPPA (Foreign Investment Promotion & Protection Act) provides clear and easy to follow guidelines for company setup, delivers protection against expropriation and nationalization, and simplifies & accelerates repatriation of profits and capital abroad. Hence, despite the momentary cold feet that many multinationals are experiencing, there is no doubt in anyone’s mind that M&A opportunities in the country are immense. Whether your business is focused on agriculture, mining, hospitality, healthcare, energy, technology, or MTS/MTO manufacturing, there are certainly opportunities for the taking. And more often than not, these opportunities appear to be worthwhile to pursue.

Moreover, Imports have practically become redundant; in fact, it is quite surprising why imports ever worked in the first place. The fallout from imports has always been damaging and risky ie: limited forex options & international credit terms, LC and wire transfer restrictions, logistics, Days in Inventory (DII), Out of Stocks (OOS) etc. The list goes on. In addition to bureaucracy and red tape associated with customs and clearance, high duties, and most importantly logistics and Cash Flow Cycle Time have all been undeniable hindrances to imports, let alone a deterrent. Which is all the more reason why local manufacturing is the logical approach for any multinational or multilocal.

Consequently, as previously mentioned there appear to be a plethora of M&A prospects in the country, and this in part due to the fact that the country has been shunned for many years, particularly by major multinationals who could under normal circumstances provide a boost to the local economy and businesses within.

On the hindsight, the past several years have proved to be a windfall for many local businesses who have faced minimal challenge from competitors; and in essence, have had an open road to success.

Examples are FMCG dynamos, some of which operate more than 3000 distribution vehicles, but who are yet to recognize methodical and financial implications of applying elementary KPIs such as Time to sell, Drop Size, DII, Truck utilization and the likes. As a result, a dearth in challenging competition has only wired local firms-some gradually being morphed into formidable powerhouses-nonetheless, often running wild, handling the customer and consumer with little or no reverence, and basically doing what they please.

So, what could motivate a local business to consider a M&A? Afterall, with all this autonomy and unconventionality, there seems to be quite a lot of money-spinning going around. Why would anyone in their right mind even consider joining hands, or even contemplate selling a well-oiled cash machine?

In fact, the rational could be remarkably simple and ingenuous. Sharper business minds, of course have little doubt that a turnaround is imminent; there are a multitude of reasons for this conviction—socio-economic issues topping the list. But even traditional minded business owners fully recognize that the country has been deprived and shirked for many years. And not just referring to roads and infrastructure; rather, all the knowledge and principally Industry Best Practices that have been left unexpressed and contained by multinationals.

Hence, smart entrepreneurs have little doubt that upending the competition and maintaining an edge will require immediate and sustainable change. This superiority, however, can only be possible upon the adaptation and successful implementation of relevant industry best practices—something local companies have not been adequately exposed to for quite some time.

With this prelude, let’s take a closer look at some of the risks and challenges associated with the M&A process in Iran.

Identification and Analysis:

Assuming we have engaged in some preliminary exploration to identify M&A candidates—whether having been approached directly or surveyed the market for potentials, and before taking the decision to look at Top-Line or Bottom-Line numbers, it is critical to note several key characteristics of Iranian businesses:

First, due to the prolonged dispossession and inability by companies to invest, this new Capex spending binge is by no means short term, as many companies have only recently begun to invest in new machinery and equipment. Existing equipment are either outdated, capacity capped, or in derelict shape due to extended usage and inappropriate maintenance; the latter being a direct consequence of heightened sanctions.

As a result, many FMCG companies have to a great extent become capital intensive. Even in the event that companies manage to successfully acquire machinery necessary to fuel growth, many are still chapters behind their successful overseas foes, and will have to continue investing in more advanced manufacturing and particularly packaging technology, just to reach parity with multinationals or other regional competitors.

Hence, analysis of EBIT or EBITDA will not get us very far at all. In fact, even a FCFBT analysis may only cover small grounds, as we have yet to uncover the true effects of ROIC and the trends over the years which affect our cash flow. Naturally, once we have a closer and more cognizant view of the above, we should be able to confidently propose a more realistic EV for the business, and even possibly include a transaction premium where necessary. To summarize, it is crucial to get our finance specialists to work in collaboration with the seller’s team. This will undoubtedly deliver a closer and more diagnostic look at the trends, which will in turn enable us to rather contentedly distinguish simulated prospects from golden goose money makers—and fortunately, the latter are a plenty. We’ll touch on Valuation, and Valuation Adjustment risks and options later on. But first, let’s take a quick look at Due Diligence routes.

Due Diligence:

Contrary to the common belief, DD should not prove to be a heinous task after all. At least one of the big four audit firms (EY) has an active presence in Iran, and another operates in affiliation. Naturally, this will create a more consoling environment for finance individuals who may sometimes undesirably get immersed in hair splitting attention to detail.

Nevertheless, here are several grey areas which should be attended to with care:

Authentication and Valuation of Assets has always proven to be a delicate and sometimes scheming task. However, since the nationwide centralization of real estate deeds into an integrated national network in 2021, authentication of assets and their status has become routine and free of fraud.

Accordingly, Valuation has grown into a more simplified task and price comparison is easily achievable. Crucial to note that companies regularly adjust book value of assets to account for inflation and real estate price increase; hence, utilizing the services of a reputable audit firm is nonpareil in order to ensure that price adjustments are per market norms, and verifiable.

Financial Statements: Many companies have made the decision to switch to single book accounting—although for those who opt to keep a second set of books, it does not necessarily refer to any illegal practice, and they may be simply retaining two books in order to ease preparation of management accounts vs. official. However, almost all companies are using one or possibly two well established ERPs or integrated software to maintain and generate data. And regardless of whether the software is operating under web or directly via decentralized servers, access to data is generally single source and easily verifiable. Goes without saying that a warning sign is what we could refer to as LDI (Low Data Integrity); that is when a company claims to have two sets of accounting books and no record of their official numbers which they claim on the M&A financial statements.

Whilst performing DD, some audit companies determine to temporarily place auditors on the ground over a specified period of time. In essence, when related to FMCG companies these auditors make a daily count of trucks exiting company warehouses. If required, these numbers are then extrapolated to compare with projected assessment of sales volume; naturally, seasonality is almost always factored in.

Though this may appear to be a cumbersome task, in principle it provides significant information and validity. Similarly, access to accounting records such as daily cash, checks and DSO, procurement contracts and DPO, and inventory levels are sometimes performed in a similar manner to the above—by temporarily stationing auditors on the ground and comparing actual transactions with ERP records.

Legal and Taxation DD is relatively less problematic, as any possible damages may be shielded thru well thought out Warranties and Indemnities clause. Noteworthy to add that warranties and indemnities are not widely employed in Iran, and sellers may be wary of and frown upon the idea.

Most M&A in Iran will probably be comprised of share sale

Nevertheless, most M&As in Iran will probably be comprised of share sale rather than the sale of assets; hence, warranties should be as extensive as possible to cover all aspects of the business. As common practice, we must make all attempts to avoid reducing seller warranties and compel the seller to flush out material and intelligence which has not yet been revealed. Additionally, we should push for Indemnities, particularly for those contained in disclosure letters received from the seller.

Whether the seller is entirely opting out of the business or choosing to remain a shareholder, typically, they will want to take some of the recently acquired cash and invest in other areas of focus. Accordingly, employing escrow accounts, which are largely unheard of in Iran will be extremely difficult to enact.

However, other viable options are available which could be presented by the auditors—commonly, the use of inland bank guarantees or real estate deeds are an acceptable norm. With regards to real estate deeds, it is important to have the entire deed or a relevant portion signed over to the buyer and notarized at a public notary. Considering the accuracy of real estate valuations and the predominance of similar transactions, this is an adequately safe option we should accept with open arms.

On the surface, Operational DD may pose as one of the most grueling tasks; but far from impossible when performed thoroughly. Specifically for FMCG M&As, it is critical to get a scrupulous involvement from Ops teams on both sides.

Naturally, once the new organization is up and running, all efforts will be put in place to improve productivity throughout. Implementation of best practices should be at the center of all priorities, restructuring will be an imminent aftermath, and cost savings will be anticipated thru all modules.

Nevertheless, it will be extremely helpful if we have a thorough understanding of frontline operations activities. Bear in mind that sanctions have had a direct and negative impact on supply and logistics; hence, incongruence is expected throughout. But it is important that we predict a timeline, and understand how soon we are able to fill in the gaps in order to ensure there is a smooth operation, post signing.

For starters, we need to identify whether or not there is an ERP in place, or if we are using an MRP at the plant level which is harmonized with other sales and finance software. Do we have written SOPs? Do we have hourly production recordings or an end of shift compilation report? The former being crucial, particularly if at some point in time we are aiming to impose Pareto Analyses, separately analyze operations and technical downtimes, and capture unaccounted production time. Do we have SMS communication/advisory for logistics notifications, such as gate traffic, dock time & dispatch, and arrival of raw mats? Though a vast portion of Operations issues will be addressed in detail during the transition phase, ignorance is certainly not the right approach. Fortunately, local companies are always excited to boast about their achievements, and will have minimal objections when it comes to glamorizing their feats.

Furthermore, it is critical to recognize that one of the biggest challenges is maintaining desired inventory levels. When market is cash driven, supply and demand are to some extent reversed—and this retrogresses back through the entire supply chain.

So, we have to get key stakeholders involved in the process; over communication in its most expressive & consequential form, alongside slightly expanded and augmented delegation matrix. And with the aid of MRP developer devise Live SMS advisory at manufacturing plants in case non is in place.

Thus, it is all the more important to sink our teeth deep into the operations and request as much information as possible. Bear in mind that operations initiatives which some of us take for granted, may only be touched at the very surface, as managers tend to prefer reviewing macro vs micro details.

The same level of prudence could be applied to other modules, including sales and HR. For example, to locals HR is mostly Admin and GR; employee contracts, and so forth. Granted, HR has made tremendous progress over the past 10 years, and this is evident in large and small organizations alike. Centralization of HR function, devising designations & grades and using HRIS local software are all accomplishments which have been well undertaken. Even tasks such as Recruitment, Budgeting & Planning, Employee Induction & Orientation, Training & Development and Employee Retention have experienced improvements.

Nevertheless, when it comes to more intricate HR involvements such as performance development reviews, balance scorecards, career development plans, and even multiskilling at the factory floor, though not implying that they’re non-existent, they are rather stroked at the very surface.

Even multinationals who have had a sturdy presence in the country have generally managed high level HR from regional offices outside the country. Thus, top notch caliber and competence essential to running such magnitude and potential of a market has not always been exploited to the fullest.

Moreover, due to sanctions and a fear of OFAC, reviews and supervision of the market in some cases, may have been trivial and shallow—where senior managers prefer to look at macros only, and stay away from anything they fear ‘Legal’ could frown upon. Naturally, in Iran’s sanctioned environment, opportunities and options have become rapidly restricted and regulated, and Legal departments have moved into the spotlight as every decision seems to have started to revolve around them. Ultimately, some businesses whose dealings encompass multinational or oversees partners, have had to abruptly undertake new rules and regulations, some falling under an entirely different set of codes. During this evolution, adhering to structure has sometimes become unwelcome.

As a result, accountability is often harder to come by, and this is a caveat which can be sensed within different modules of many local organizations.

Having said that, for those of us who almost always see the glass half full, we can only envision opportunities. And we’re talking about vast unchartered territories where a progressive multinational executive will only eat for breakfast. Specifically referring to HR, and in preparing the organization for the transition it is a good idea to obtain an in depth understanding of existing practices.

We’re not only referring to introducing appraisals—9 Block Grid, Balanced Scorecards, Succession Planning and Accountability—but most importantly, enhancing team caliber by recruiting, training and retaining key functional talent for positions which were previously concealed with no accountability.

On a positive note, literacy and education in the country are quite impressive, with 55% of the work force comprised of women, and an almost comparable number of university graduates being women … talent is a plenty; and if one has the slightest affinity with the culture, they’re soon to notice that learning capability and even competence is effortlessly at par with the immediate region—MENA.

Therefore, tasks such as designing work flows to develop dependency with other departments, creating respect for each other’s work and ultimately achieving mutual trust should be at the top of HR’s to do list.

But dependency is only good if we can safely maintain regular spot audits, as too much reliance may sometimes lead to team fraud and racketeering. And though local understanding of Internal Controls, is Internal Audit (the former generally being unavailable), setting up a solid Compliance Team who possess an unyielding attitude towards auditing and SOP integrity, can’t be stressed enough.

Innately, Valuation and Valuation Adjustment techniques will be attended to by our finance experts. But regardless of whether they propose Market Capitalization, DCF (Discounted Cash Flows) or simply an analysis of Book Value, it is still essential that we take several fundamental steps to mitigate our investment risk. And in any event, our final Valuation is subject to satisfactory results of the Due Diligence.

Given that the functional currency of most transactions will be the Iranian Riyal, The Purchaser is ultimately agreeing that it is investing in a local Iran business which strictly operates on the local currency. Consequently, and irrespective of the US Dollar/Euro estimate of FCFBT (Free Cash Flow Before Tax) or other valuations, Seller is committing to deliver results denominated in IRR (Iranian Riyal) as per financial documents submitted to Purchaser; and this is sometimes prone to deterioration, given inflationary nature of the economy.

But again, there is no reason to fret on the subject. First, most reputable businesses in Iran tend to somehow correlate IRR budgets to projected and conceivable USD/Euro bottom line numbers. This, of course is conventional practice. The point for contention, however, is whether profitability projections are reliable and in harmony with inflationary trends. Naturally, our finance experts should utilize their sharp-edged proficiency and knowledge to wrangle with the seller, dispute and mitigate risks.

Additionally, our legal team can draft a Valuation Adjustment clause within the Heads of Terms accord, which can later be instated into the share purchase agreement. For example, on FCFBT valuation we can include a clause for a pre-agreed percentage deviance from Max and Min FCFBT over a certain number of years after closing of transaction, whereby downward adjustment is calculated and paid by seller to buyer, and vice versa for upward adjustment. Again, we shall leave the calculation technique to the experts; but what’s important is that we have a mechanism in place to safeguard our interests, especially in the unlikely event that assessments for profitability and valuation submitted by the seller are off track.

Undoubtedly, a final agreement scrutinized by finance and legal experts will contain a myriad of safeguards, including loans and indebtedness at time of closing, working capital sufficient to cover all regular business needs in raw materials, supplies and services procured from third parties, and necessary funds to operate the business at the Production Capacity.

Clearly, big risks mean big rewards, and this is precisely why Emerging Markets have always been a lucrative target for multinationals. But the setting may be even more attractive for Iran.

Driven primarily by oil exports and a rise in oil prices, the country experienced considerable growth over the past several years. Moreover, government support to fuel growth, in terms of loans and subsidies has been on-going and has only reached a hiatus due to heightened sanctions. In essence, the transition to a full-fledged capitalist economy started years ago, post conclusion of the Iran-Iraq war, and gradually slackened the years following 2013.

Nevertheless, what many of us may be oblivious to is that sanctions have only had an indirect effect on a small segment of industries—initially, those entirely dependent on imports of raw materials essential to function. However, even the most dependent companies managed to identify contingency plans and escape routes; not necessarily to crosscut sanctions themselves, but majorly in the direction of effectively managing their logistics and particularly cash flow cycle time. Fundamentally, sanctions have mainly affected companies with vital mismanagement issues; companies who did not have the knowledge and/or exposure to attract talent that could provide remedy and alchemy.

Even though foreign investments in Iran economy have been negatively affected, largely due to political uncertainties, there is little doubt that opportunities for the taking are immensely rewarding—perhaps unmatched anywhere else in the region.

In today’s competitive business world, many organizations are choosing to focus their growth strategy through mergers and acquisitions. The value proposition for leaders is that by joining forces with another organization, growth can be more exponential and accelerated when compared with attempting to expand organically. When an organization is considering a potential merger or acquisition, they often place a priority on evaluating the prospect’s industry segments, geographic footprint, revenue, and service offerings. While this is critically important to achieve the desired goals, if the people & culture component is overlooked, there is a significant risk of turnover, low engagement, and low performing teams which in turn affects the experience for clients and ultimately organizational performance. This is where HR leadership has a critical role to play.

Before we dive into some best practices, I’d like to take a moment to differentiate between a merger and acquisition as these words are used interchangeably. A merger occurs when two organizations agree to join forces to create a new, joint organization. The recent merger of BKD and DHG to become FORVIS is a good example of a merger. Conversely, an acquisition is where one organization is absorbed by another. The recent agreement for tech giant Oracle to acquire Cerner is an example of this type of transaction. It is important to note that since an acquisition can have a negative connotation as a “takeover”, it is sometimes informally referred to as a merger, leading to the use of these terms interchangeably. Now that the business lesson has concluded, let’s return to the topic at hand.

Regardless of the type of transaction that is taking place, it is essential to have people strategies as a central component, particularly at the onset of conversations between two organizations. For this to occur and for HR leaders to be invited to this conversation, a prerequisite is for these individuals to establish credibility as a strategic business partner so they can have a seat at the table. For more on this topic, visit my blog and download the whitepaper “How to Get a Seat at the Table”.

To truly put people first, here are five best practices to consider for your next merger or acquisition:

Conduct People Strategy Due Diligence

At the onset, a people workstream should be formed to conduct due diligence for the prospect organization. This team’s responsibility is to evaluate the following elements of the potential transaction:

• Cultural Values
• Benefits Structure and Philosophy
• Compensation Structure
• Critical Policies
• Personnel Structure
• Performance Processes

The focus of the people workstream is not to look for 100% alignment in all of these areas, but to envision what the future state of the organization would look like given this information and how it would impact the employee experience. Even if the prospect organization would be forced to transition to the acquiring organization’s policies and practices, how would this transition play out and would differences have an impact on employee morale and retention? Alternatively, would there be elements of the prospect organization that you’d want to adopt? These are just a few of many questions that you’ll want the people workstream to dig deeper into.  

Develop a Consistent, Repeatable Due Diligence Process

Especially if you are an organization that plans to have significant M&A activity in the future, there is great benefit to having a well-thought-out process that can be replicated and scaled up/down as you look to evaluate a variety of different prospects for a merger or acquisition. It is important to have an “apples to apples” comparison process so that you are consistently looking at the same metrics of each organization being evaluated so that you can be objective in the decision-making process. This does not mean you would need to have similar size organizations you are evaluating, but rather a consistent set of principles to operate from as you do the due diligence. For example, if you are looking at three different organizations, using the same principles for evaluating benefit structure and philosophy will help you clearly identify the best fit given your goals for the transaction.  

Develop a Robust Internal Communication Plan

Likely one of the most important elements of the M&A process is communication, and more specifically, internal communication. There are two components to this: the announcement and the integration. During the announcement phase, important elements will need to be considered such as how and when your employees find out about the deal, who they hear it from, and what type of medium the information is being disseminated in. Moving forward to the integration, employees need to feel as though their organization cares about them, regardless of what side of the transaction they are on.

Below are three key goals that should drive your communication plan:  

1. Engagement and Retention: How will you provide the opportunity for team members to stay informed, feel invested in the change, and have a compelling reason to stay?
2. Career Planning and Development: What will you to do help your team members connect the dots between now and the future as it relates to their career growth?
3. Team Building & Connection: When the transaction is complete, what will you do to empower your leaders to facilitate high performance and connection within newly formed teams?   

Create Great Onboarding Experiences   

Particularly in the case of an acquisition, it is essential to have a thorough onboarding process. This begins with the sharing of basic organizational information, operations, and benefits, but extends beyond the first day to help new employees become assimilated into a new culture. During their first 90 days, employees will begin to form opinions about their role, their leader, and the organization overall. How they feel about these components will drive the likelihood of retention. As a result, there is a great opportunity to create a world-class onboarding experience for new employees to include elements such as the following:

• Local social gatherings
• Team building events
• Exciting project opportunities
• Intentional coaching conversations
• And much more!

If you can envision the first 90 days like a “red carpet” treatment where each employee is taken through a personalized experience, the chances of that person feeling engaged and connected is high and the probability of them staying is increased.

Mergers & Acquisitions: Closing Thoughts

There’s no way around it; mergers and acquisitions are hard. Having been through many of these through my career as an HR leader and employee, I can attest that there are always challenges to overcome and varying perspectives to navigate. But the one thing you can control is to have a well-thought-out plan in place that puts your people first. If you do this, your chances of success will only increase.

If you are looking to learn more about mergers & acquisitions or are getting ready to go through one and would like a guide to lead you or your team, I’d love to help!

Alberto Elli looks where the resources are concentrated during the three major temporal blocks of an acquisition

After so many years of being involved in business development, I think one of the most critical moment in an acquisition is the integration phase, when there are great chances to destroy shareholders’ value.

Let’s see where the resources are concentrated during the three major temporal blocks of an acquisition:

1. Strategic intent, target setting and proforma decision to justify the deal price. Great focus from top management, quite unrealistic expectations pushed both from inside (needs for growth) and from outside (bankers driven by fees as a percent of acquisition price).
2. Negotiations and closing. Seller, buyer and advisors have strong vested interests to get the deal done, also stretching proforma. Maximum peak of resources involved: multi-functional team from the acquirer and handsomely paid consultants from outside: lawyers, environmental experts, tax experts and accountants, bankers for financing and for advising on the deal. Once Due Diligence is completed (and at times it is done too quickly and without depth) and Purchase Price is set, all these actors tend to disappears because they have reaped the biggest rewards.
3. Once Senior Management is on a new acquisition and the “clock” of external advisors has been stopped, the local team and a bit of divisional support is left with the huge task of integrating the new acquisition and to deliver the shareholders’ value they are committed to.

RISK ASSESSMENT

To better understand the challenges of integration, an analytical risk assessment will help to highlight the areas that will need most management attention and dedicated resources. The following model can be run both in a qualitative way (describing the issues) and in a quantitative way (assigning values to each variable based on prior integrations experience). The latter approach is particularly valid for “serial acquirers” that will quickly size the risks and assign internal or external resources based on prior experiences and … lessons learned!

Nature of the transaction
1   Clarity of Strategic intent
2   Board of Directors Approval
3   Highly leveraged
4   Proforma on more than 5 yrs.
5   Acquisition and integration costs budgeted
6   Target, public or private
7   New Market Entry
8   Bolt-on acquisition
9   Transformational
10  Joint Venture
11  Minority Participation

Complexity “up-front”
12  Sales $10 – $50 Mill. Or more
13  Multi-divisional
14  Multi-geography
15  Plants to shut-down
16  People to reorganize / downsize
17  Due Diligence -> major adjustments
18  Net Worth Adjustments
19  Ear-out on multiple years

Customer Facing / Front Office
20  Key Management to Retain
21  Criticality of customers – Sales retention
22  Criticality of customers – Terms&Condition
23  Bad Debts Reserve
24  Compliance issues / severity – FCPA specific

Back Office
25  IT integration complexity
26  ERP to implement
27  Business Intelligence
28  Supply Chain established
29  Production Planning
30  Safety Procedure
31  Inventory management / slow moving
32  Centralized Purchasing
33  Critical Suppliers
34  Finance – closing and reporting in less than 5 days
35  Finance – monthly B/S reconciliations
36  Finance – Cost Accounting
37  Finance – Bank relationships, complexity
38  Finance – Cash Flow Management
39  Finance – Tax strategy
40  Risk Management – Insurance and Legal support
41  HR – Payroll (internal or Outsourced)
42  HR – Labor Contracts repository
43  HR – Benefits defined, perquisites definition
44  HR – Pension Plans assumptions understood and funded

Others
45  Culture, consonant or dissonant to acquirer
46  Regulatory and IP protection, criticality of issues
47  Warranties on long term sales contracts
48  Warranties on long term purchasing contracts
49  Documentation of Labs procedure
50  FX hedging in place

WHO HAS TO LEAD THE INTEGRATION PROCESS?

Every each integration is different but the best practices on the resources needed have informed the following considerations:

1)  CFO (Acquiring or the acquired)

Given the ultimate goal to deliver on expected shareholders’ value creation, the involvement of the acquiring CFO is very important but cannot be the sole responsible, given the many others concurrent responsibilities. At times, the acquired CFO has been asked to lead the integration; results are mixed because the internal knowledge can be over weighted by the temporary nature of his/her mandate. Only if the acquired CFO will have a long term place in the organization, the integration role works pretty well, actually if executed with excellence is the best entry in the new organization.

2)  Internal Project Leader (Full time or part-time)

PMO skills are needed; either imparted through internal training or available in specific professionals but the true integration leadership is quite different: best is to have a manager that is slotted to become the leader of the acquired entity or the leader of another acquisition.
Depending the size of the organization and the frequency of acquisitions, the investment of full-time resources is to be considered; the experience is usually multi-functional and the resource can be redeployed quite easily.

3)  External Project Leader

Solution to consider when the acquisition is one-off or is particularly complicated from a geographical/cultural point of view. Difficult to recruit the right profile but once is individuated the scope, the timing and the cost is fixed, even more important is the independence from internal politics and divisional agendas.

4)  Internal Team (permanent or ad-hoc)

Best practice is to form a full-time internal group of experts that can be redeployed after the acquisition is integrated or kept as a team if more are foreseen. To be noted that integration can be a relatively compressed time frame but full achievement of synergies can be a longer effort, like for Supply Chain and for IT in the contest of ERP implementations.

5)  External Team

Risky proposition in term of having the right quality and number of resources for all the time needed to complete integration. Once a resource is hired for a functional area, always ask to identify a back-fill. If possible, try to shy away from time and material contracts in favor of closed end sum, or based on payment at milestones’ achievement.

CONCLUSION

Clarity of the objectives to achieve, well defined timetable, proactive risk assessment and correct deployment of resources are key to a successful integration that will deliver the full value of an acquisition.

About the author: Alberto Elli for the last three years has been Interim-Chief Financial Officer for private and PE-owned companies in the space of consumer electronics and fashion, leading processes of turnaround and exit strategies.

From 2008 to 2013, he was Vice President and Controller of Sherwin-Williams Global Finishes Group (OH) (Automotive Finishes; Chemical Coatings; Protective and Marine Coatings and Emerging Markets) with about $3 billion Sales. Since inception, in 2008, the Group grew sales 70% both organic and with several acquisitions. Alberto joined Sherwin-Williams in 2006 as Vice President and Controller of the International Division after ten year experience in the pharmaceutical industry with Schering-Plough. His first assignment was as Finance Director in Italy and he was later promoted VP of Finance for the Healthcare Division headquartered in US-NJ and after three years was named VP of Finance, Pharma International, a group of $4 billion Sales. From 1985 to 1996, Alberto held various financial positions in Italy, the last of which was from 1989 to 1996 as Finance Director for SCA, a leading Swedish multinational in paper and packaging industry.

Alberto earned his degree of Dottore in Economia e Commercio from the Universita’ L.Bocconi, Milano, Italy