PE imperative: 4 ways to empower people after an acquisition

Retain key employees — and set them up for success

Editor’s note: This is one of three stories in a series on how PE firms can build value immediately after an acquisition. In addition to this article on human capital, see our stories on optimizing operations and modernizing the finance function.

It’s no secret that even the most well-conceived private equity transaction will fall short of expectations without stellar contributions from the people who are supposed to execute it.

The days after an acquisition announcement are often filled with a mixture of excitement and fear as people work to understand what the move means for the organization — and for them.

At the same time, it’s critically important for leadership to get all the important people-related issues addressed. These include:

• Identifying and working to keep the key and critical talent.
• Understanding and addressing the cultural implications of the move.
• HR system and process needs.
• Meeting regulatory requirements.

Identify and retain key talent

PE leaders understand the worry that a purchase can bring to the employees of the company they have acquired.

Many times, their performance improvement plan includes shedding jobs that they might view as redundant or unnecessary. With good reason, employees may fear that PE’s “efficiencies” will send them to the unemployment line.

At the same time, an acquisition only delivers maximum value when key and critical people stay with the company after the deal. How do you keep these people from streaming to the exits?

It starts with identifying them.

“That’s done through conversations with leadership and reviewing and understanding the organization structure, succession plans, and job descriptions,” Nalwa said. “This review is typically done in the human capital diligence phase. We really get a feel for who leadership is and the key employees they have relied on the most.”

It’s important to evaluate all levels of the company — not just management — to determine which people are key and critical. Especially at smaller companies that may have proprietary technology or systems, the most critical talent may be middle managers who have information, competencies, certifications, or licenses that are critical to the business. Even in lower or entry-level positions, there may be some rising stars whose contributions drive the organization’s key performance indicators and have high potential for future leadership positions.

Deciding who is key and critical can be difficult. In an add-on acquisition, for example, duplicative roles are common. If the management team from the add-on is strong, they may be retained as divisional management for the business that has been acquired.

Get a handle on culture

To get the most out of an acquisition, it’s important to understand the culture of the firm you’re buying.

If you’re buying a startup whose best people wear jeans to work and spark innovative collaboration through daily games of table tennis, you can expect a clash in an add-on with a company with a strict formal dress code and a traditional meeting structure.

The cultural understanding also goes deeper than that, Nalwa said, to determine how decisions are made in an organization. Questions to ask include:

• Are decisions made through a top-down hierarchy, or are they consensus-driven?
• Does innovation start at the bottom of the organizational chart, and if so, how does leadership seek and implement those ideas?
• What is the organization’s governance model?
• Does the organization generally just have difficulty making decisions and following through on them?

In a platform acquisition of an organization that’s producing strong results, it may be advantageous to keep the current management team in place and reinforce the existing culture. In an add-on acquisition, understanding the cultural differences on both sides is critically important to a successful integration.

Sometimes cultures on both sides need to change a bit to enable the integrated company to continue to work smoothly. In the best of circumstances, the startup employees will find comfort in the structure of a formal meeting where their ideas are heard.

And the executives at the company with a more traditional culture may fall in love with table tennis.

Build success in HR systems

One acquisition that Nalwa recently performed diligence for involved buy-side diligence for a large company acquiring a mid-sized business with different HR technologies.

“The buyer decided neither of the HR systems in place were going to suit their purposes moving forward and scale for further growth,” Nalwa said. “Their strategy for HR technology integration quickly pivoted to a business case for a new HCM technology.”

Such a radical change won’t be necessary in most acquisitions, but the action shows the urgency of getting HR systems right after an acquisition. Particularly with payroll, compensation and benefits, this is a table stakes initiative that you simply must get right.

You will lose employees quickly if you can’t get them paid on time — or if you tell them they can keep their doctor under the new health plan but their insurance is denied when they show up for an appointment.

“If it’s an add-on, you also need to make sure the employees of the newly acquired company are added to the payroll system in the right way, making sure all the relevant data is ported over,” Nalwa said. “If it’s a standalone, how will payroll, compensation and benefits be provided to employees? Do they need to acquire a new HR technology system or provider, depending on the size of the company? What is the total rewards strategy?”

Compliance: Thorough assessment needed

Verifying regulatory compliance is a critical component of post-acquisition work, and a substantial portion of these regulations are the responsibility of HR. This work actually should start well in advance of finalizing a deal because, for example, an acquisition target that is misclassifying people as contractors may be significantly underreporting workforce costs in its financials.

Worker classification is one of the most common HR compliance issues for PE buyers to verify, particularly in light of new regulations taking effect March 11, 2024, that were issued by the U.S. Department of Labor. Smaller, growth-stage businesses often make extensive use of independent contractors, and their regulatory compliance may need to be closely examined.

“This workforce analysis should be performed before the acquisition closes to understand the make-up of the workforce, the use of independent contractors and consultants, and whether independent contractors are being appropriately classified.,” Nalwa said.