HR Recommendations in Small Business M&A

Welcome to our fifth edition of Private Market Insights, where we bring in experts to provide tactical support to people interested in acquiring and operating a small business. Today we have Jackie Valek, the Founder and President of Anchor Solutions Consulting. They specialize in providing HR support to small business owners, a function that is sometimes overlooked by buyers of small businesses. We are here to help remedy that today.

Jackie has experience in manufacturing, in healthcare professional services and then construction, which lends her very unique perspective. They serve a vast array of clients, from more established businesses that have just been in the growth stage and hit that point where they have to have FMLA compliance to nonprofits that just need performance management systems.

Check out the full episodes for tips and tricks as well as stories from Jackie’s experience with SMB owners:

Importance of HR and Team Culture

HR is often overlooked in small business, but it’s paramount to how culture gets shaped. Culture is already ingrained in the day to day even if it wasn’t a focus when the owner started the business. It has been built inherently over time without even knowing it, and that translated into practices and policies. 

In a world that evolves from a legal perspective, organizations might end up outside compliance, like for example when paying a 1099 the entire time, but really they should be an employee or, paying this person hourly when they should be a salaried person, a non-exempt status versus exempt status, all which open up the company to liabilities. 

Sometimes these are the ways they’ve always done it, and they just didn’t realize they had to make changes to come through. That can be an easy fix where they can run classes for managers to get them aligned on how things need to happen, when you get to a decision point,when you need to escalate etc. 

For others, there might be a need for an in-depth analysis of the team. Ask questions like:

  • Are they doing what they need? 
  • Do they have the right skills and is the performance up to par? 
  • Are you tracking performance correctly? 
  • Do you need to have some tough conversations with those who aren’t performing? 
  • How do we live and breathe our work here? 
  • What is it that our people are doing on an everyday basis? 
  • How are they treating customers? 
  • How do we treat ourselves?

A lot of owners want to be able to move people out that aren’t performing and they wanna make sure they keep and retain the people who are and then sometimes it’s just as simple as having handbooks, so people know what to follow. But culture is critical today, as we are seeing a lot of folks leave jobs due to that reason, and finding a right fit for personal values is more important than ever. 

Identifying Culture and Values during Due Diligence

Start by looking online at what customers and employees say about you and about your business. This works especially well for owners who don’t have defined values. Most people don’t need more than five, seven at max, if they are really serious about it. These values should 110% be lived and breathed in the organization. It’s good to start by making sure values are aligned with the team and that they’re identified. Jackie calls them VBOs (values, behavior, outcome).

First, identify values and then identify what those behaviors are, and how to tell when somebody’s exhibiting that value. And then go one step further to say: when you exhibit that behavior, you will achieve X outcome – it’s a good idea to check whether the business you are looking to purchase has these kinds of incentives.

They paint that picture for everything they do for value based coaching, for performance conversations, and help get people to give that 110%, tying back to those values set in the organization.

After all, estimated 70-90% of all M&As fail to achieve their anticipated strategic and financial objective and the rate of failure is attributed to HR factors such as cultures and management styles, poor motivation, loss of talent or communication issues, which diminish trust and create uncertainty in the goals. 

Yet, HR is often missed at that table and it’s overlooked as a key component. And it might not be there in the beginning stages, meaning like stage one, when talking about identifying the buyers or securing third party services all around. But when you start preparing and you start getting that financial data together, HR should be at that table. 

The information about talent and culture, along with other assessments of employee benefit plans, liabilities, comp structures, contracts, legal exposures are all part of that M&A conversation. And so your HR folks are your boots on the ground that help paint that picture for the business. Your HR folks are the ones that know your culture better than anyone. They know how well the teams are running, which departments need help. Your HR team knows the workforce strengths and weaknesses, who’s in the right seat and who isn’t. They’ll have a great understanding of information and how to help paint that story. 

Setting the Right Narrative after Acquisition

Both the seller and the buyer need to work together to set the right narrative during the last stages of the due diligence process, as well as during and after closing.

For example, an owner that has been in business for 20 years, and has built this successful company, should know why the buyer is coming in – is it an asset allocation or is it truly that they need the brand and the name in the location the business is in. So what’s important to them will help you maybe guide that story from not just the numbers, but to the people and to the whole nine yards of your business.

From a change management perspective, you need to remember, there are people on the other side of that ink and they may or may not even know about the ink drying on the contracts. 

And so the story becomes: what are you doing to work with those folks to ease their minds? Sme of them are going to go off the rails, they are going to create their own stories in their minds and those stories might not align with your intended story. 

So it’s important that you understand, both the former and future owner, how people are feeling and what they’re feeling and what the intention is now. Not everything is going to end up being perfect, not everybody is going to be able to save their jobs. Not everybody is going to end up in a perfect, happy harmony. But at the end of the day, being able to be transparent to some degree about what comes next or what needs to be thought about is going to be critically important.

So that comes down to your communication to your people. You’re going to lose people because they’re going to be scared. They’re going to lose their jobs anyway. And they just bring a lot of anxiety. So while the business owner is super excited about the next step in their life, it’s important to think about what do the rest of the folks being acquired in that company think of what’s happening and how do you help alleviate some of those stresses that they themselves may be going through. 

Questions to Ask During HR Due Diligence

Let’s look at this from a service delivery perspective: 

  • What’s your current headcount look like? 
  • What does the workforce look like from a structural perspective? 
  • How is payroll going? 
  • Are you managing those things appropriately? 
  • Are people classified correctly? 
  • Do you have any overtime violations that could cause you some serious problems? 
  • Do you want to merge the systems that you already have from a previous company or are you keeping them separate?
  • What will merging compensation plans do to people in their current pay grades and how will that affect them long term, will you keep a grandfathered perspective for some? 
  • What benefits is their organization currently offering? 
  • Do you have equity considerations to look at? 

Taking Action Post-Acquisition – HR Best Practices

It’s going to come down to the uniqueness of what you purchased.And the unique situation that particular organization is sitting in is what’s going to drive your first action. But in most cases, it comes down to the basics, like starting with making sure your management team is on the same page, that you all have the same alignment to the goals and that you are communicating and building trust.

Try and find avenues to communicate with your folks. That can mean surveying them, doing skip-level lunches, town halls, whatever works for your team. It’s important to focus on driving engagement, because when you have the engagement, you have the higher profit, and you naturally are going to get more customer satisfaction.

Lastly, Jackie suggests finding ways to measure performance and how people are doing, finding ways to drive up the engagement to run a health organization.

Be sure to check out the full episode for more details on each of the topics we discussed with Jackie. Our goal is to ensure that entrepreneurs have access to the services and knowledge they need as they settle in as new owners of SMBs. Tune in to our next episode on our Twitter Spaces every month, ask questions and let us know what topic and/or guest you would like us to bring to the next conversations.

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