Have you recently thought about the impact that a business acquisition can have on a business that is in the market for a sale? Perhaps not. It is possible that this impact thought will only occur if you, as a business owner have considered your various sale options – ranging from shutting the business down, selling the business to your employees or a key employee(s) to acquisition by an outside group of investors.
There can be at least 10 options available to owners who are considering that transition to leaving the business. Today I want to discuss how acquisition by a private equity (PE) firm could impact how the acquired business can find itself in a situation where the PE firm determines that some of the key employees of the business may be superfluous to their acquisition intent.
Dynamic With Long-Time Executives
Call me parochial but in my executive search practice I consider it important to understand the dynamic that develops when long-time executives in a business find that they have been identified as expendable, in spite of their considerable contributions to the past success of the business as well as their contributions to ensure a successful transaction between ownership and the PE firm.
I recognize that a PE Firm (or any other acquirer) is entitled to make their own decisions regarding a company that they decide to purchase. After all, they become the driver of the business in all aspects of a company’s existence. Often the drivers for the acquisition focus on financial metrics – earnings multiples, cash flow, price to earnings ratios, EBITDA, and others. Other metrics can focus on quality and quantity of earnings, or product and service offerings, customer concentrations, branding, marketing strengths and weaknesses, often what I refer to as the intangibles of the business.
Intangibles Impact on Business Value
Several years ago, I co-authored some research with Dr. Michael Flynn regarding the impact of Intellectual Capital or Intangible Assets. It’s interesting to note that intangible asset impacta on both the business’ value as well as its operational effectiveness are inextricably linked. One of the key intangible assets that impact business value is the executive team that are in the business at the time of the transaction.
Whether a PE firm or other potential acquirers consider the value of the executive team’s intangible asset value will vary, however business valuation processes do incorporate executive team and other intangible assets into the overall valuation process. Researchers find that succession planning is presently deemed as an important organizational resource that sets the path for the enterprise’s strategic direction by focusing on the unique knowledge, skills, abilities, perspectives, and experience that an owner and other senior management may bring to the succession process.
Executive Team Transition Considerations
Each acquisition has its own dynamic, so it is important to avoid making sweeping statements about the transition process that occurs in each acquisition. Consider then a specific example – the business being acquired finds that several key executives have decided to exit the business after acquisition, so that they can enable the new owners the ability to secure its own group of key executives.
In this example the new owners may decide that certain key positions, such as the CEO, may not need to be replaced, since their intent is to designate their own CEO who is quite successfully leading their existing company effectively, as the new company’s CEO. The PE firm determines however, that there is a need to keep the existing Chief Financial Officer and Chief Operations Officer in order to provide financial and operational stability.
As the acquired company is integrated into the PE firm’s model certain other succession-related impacts may occur. In this instance my caution is to seek a more comprehensive understanding of the acquired firm’s intangible assets so that the acquiring firm can benefit from the talent that exists within the executive team prior to decisions being made on succession planning in the newly acquired company.
 (Strober, 1990; Finkelstein & Hambrick 1996; Hambrick & Mason, 1984).