An all too common scenario. A going concern business has an interested buyer. The enterprise is valued and a deal is struck. While a significant portion (70%) of the value of the operation, the employees are never consulted or informed during the process. The new owner takes control and the most valued employees—top talent (43%)—exit en masse within the first year. The business fails within three years.
Two sides of the transition coin
As required at the start of any process, the majority of succession planning is focused on the seller. Then, the purchaser for:
· Financial capacity
· Strategic alignment
· Values match
· Cultural compatibility
· Future financial goals
However, if we want to ensure the long-term continuity of the business itself—the legacy—it is imperative to refocus the lens on the largest portion of the business value—the human capital. Studies show that the continued lack of consideration or appreciation of the “people” power of the operation throughout the transition process, results in overall business failure, lost jobs, opportunity and a growing economic hole in our country.
When the employees are not considered during process
Employees have legislative rights that are not suspended during the merger or acquisition process. When there is a benefit plan in place, the components of the plan, along with the use of the coverage must be considered for liability and other risk factors before, during, and after the sale.
· What happens to the employee tenure after the transition?
· Are employment contracts being revisited?
· Will the benefit plan continue, be absorbed into the buyer’s plan, if applicable?
· What about any pension or retirement plan?
· Who is responsible for the severance packages and costs of employees either voluntarily or due to redundancy being terminated?
Are “they” replaceable, really?
With the intangible human capital representing approximately 70% of the overall value of the business, it seems incongruous that the new owner would consider the existing “talent” replaceable. Afterall, the expected return on investment means existing staff continue to be productive from day one. Instead of the added replacement costs of:
· Recruitment
· Training
· Time lost until they are performing at capacity
Having to re-hire can cost the new owner more than 400% of the existing salary, not to mention loss of time, energy, effort, and likely customer base and trust of the brand.
Changing the benefit plan after sale
Another all too common scenario for the new owner is to change or modify the benefit plan after the sale. Sometimes this is done to recoup costs as the business struggles with performance measures and meeting goal expectations after the sale. Without exception, this has a direct impact to the employee’s expected compensation.
This too adds liability risk for the purchaser, as well as increased uncertainty for the existing employees struggling to integrate under a new regime.
The NDA (non-disclosure agreement) does NOT prevent effective communication
Sound strategy prior to, during the transition process, and after the sale are essential. Despite an NDA, not everything is off limits. Remember, more than 60% of communication is non-verbal, so even if you assume that the employees know nothing, they likely know enough to realize that they are no longer on solid ground and that their position—their livelihood is about to change with the uncertainty of whether this will be for better or worse.
One of the ways to mitigate risk is to involve an experienced, succession certified benefit consultant who can assist with the process from valuation to integration, and beyond, helping to:
· provide a sound communication strategy,
· host employee education sessions
· retain engagement levels,
· promote culture unification,
· hence the retention of critical staff members.
The “risks” of not considering the benefit plan in due diligence
Almost without exception, employee benefit discussions are not considered until AFTER the deal is finalized. This lack of inclusion in the due diligence process may leave the company exposed to serious financial risks. Top of mind concerns include:
Will the existing plan be terminated, continue or merged? If so, consider:
· What can the employees expect and when will they be notified?
· Are there any open or pending disability claims?
· Are there going to be employees travelling during the transition period where expected coverage may cease mid travel. What if there is an emergency travel event?
· Are there any employees on a protected leave, such as maternity/paternity.
· Any employees with speciality drug needs where there may be a risk of coverage loss.
· Adherence to the policy contract for enrolment, actively-at-work, and termination clauses.
· Updating company and plan administrator information.
· Payroll and banking information.
· On-line access.
· If there is a Health Spending Account | Personal Spending Account in place, has the new owner reviewed the maximums and tax issues applicable?
· If the plan is changing, will there be any consultation with the existing staff being impacted?
· Has feedback been gathered?
· Have both parties considered what the “value” of the plan is to the members and the financial impact of any change?
· Will there be any amendments to the policy and when will those be required to be in-force?
From the beginning
Don’t expect your accountant, lawyer or business broker to raise the issue of the benefit plans, your employees, the impact to culture, or the liability risks. Instead,
- Consider employee benefits from the beginning as part of the due diligence process.
- Engage with your succession certified benefit consultant and include them in the NDA
- Reflect with legal counsel on employee benefits, liabilities, employment contracts, etc.
- Roll out a planned communication strategy.
- Understand how plans—both the benefits and retirement—will be affected post-merger.
- Just when you think you have communicated enough, do more to reassure employees, gather feedback and build a culture that existing and future talent will want to be associated with.
Learn more about the step-by-step roadmap for succession planning by downloading the book.
If you have questions on your benefit plan, reach out. Let’s have a conversation.
· Why working with a benefit consulting working your best interest matters.
· Start with clarity.
· The “people-first” disconnect.
Note: this was written without the aid of Artificial Intelligence (AI)
Disclaimer: Please note that the information provided, while authoritative, is not guaranteed for accuracy and legality. The site is read by a world-wide audience and employment, taxation, legal vary accordingly. Please seek legal, accounting and human resources counsel from qualified professionals to make certain your legal/accounting/compliance interpretation and decisions are correct for your location. This information is for guidance, ideas, and assistance.
