Buy-Side M&A - Seller Employment
Buy-Side M&A - Seller Employment
With regard to buy-side M&A, when purchasing a company, it is important to make an objective assessment of the seller as a potential employee. Typically, these “employees” carry particularly high risk. Unless the seller is truly essential to the running of the company, it is usually better to remove them from the company as soon as possible. If a seller is retained at the company needlessly, they will often be an obstruction to the future running of the business.
The reason that sellers often make poor employees is that it is difficult for them to remember that it is no longer their company. They are accustomed to doing things their own way, working independently, and in some cases, they may have personal relationships with former customers that prevent them from effectively dealing with new clients that might be competitors of their old “friends.” These types of events undermine the buyer’s ability to lead employees and take the newly purchased company in a new direction. The buyer’s role must be unambiguous; therefore, employing a seller is a risk that should only be taken when it is necessary to do so.
If a seller has a vested interest in a business’ success, any continuing relationship between them and the company after closing is usually outlined in the sales agreement. Of course, the nature of that relationship must match the nature of their interests, for example, performance based earnout payments, consulting agreements, etc.
Employment of the seller is not always the best way to enable the seller to monitor the status of their vested interest. There are better ways to accomplish this task by sending the seller monthly or quarterly financial statements, providing audit reports, granting the seller rights to “audit” results, etc.
If employing the seller for an extended period of time is unavoidable, it is important to help him or her prepare for their new role. It is quite common for sellers to unintentionally find themselves filling their former role. For the buyer to be successful, this must be avoided. Some ways to gracefully usher the former owner aside include:
Having the new CEO move into the seller’s office. As the employees are accustomed to the person in charge being there, this will also make it easier for them to see the buyer as that person.
Suggesting that the seller not take the lead in decision-making, and instead adopting a back-seat role.
Asking that the seller to redirect staff questions to the new CEO.
Use the seller as a source of advice, but demanding that the staff go to the new CEO when they need recommendations or decisions made.
Asking that the seller use the pronoun "we" when he or she talks to customers.
Giving the seller plenty of time off, especially during the transitional period immediately following the closing of the transaction.
However positive the buyer’s relationship with the seller is, he or she will eventually need to be removed from the company. Very likely, the seller will be looking forward to this day as well, so it is useful to plan ahead when the buyer is preparing the consulting or employment agreement. Thus, on the buy-side of MA, being stuck with a seller as an employee can be a major obstacle in the running of the business, so unless you have no choice, try to get them out as soon as you possibly can.
Versailles Group is a 29-year-old Boston-based investment bank that specializes in international mergers, acquisitions, and divestitures. Versailles Group’s skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies with revenues between US$2 million and US$250 million. Versailles Group has closed transactions in all economic environments, literally around the world. Versailles Group provides clients with both buy-side and sell-side M&A services, and has been completing cross-border transactions since its founding in 1987. More information on Versailles Group, Ltd. can be found at www.versaillesgroup.com.
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March 23, 2016