Mitigating Fear in M&A Transactions

"The only thing we have to fear is... fear itself." - Franklin D. Roosevelt

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Every M&A transaction is an emotional roller coaster for both the owners and employees. Business owners have the ability to either alleviate fear or exacerbate it, so it is essential to set the right tone and carefully manage the message.

Fear of a Mass Exit
Many business owners often fear that their team may abandon ship once they find out about a potential sale. While the fear may be real, the truth is often quite different. Because employees are generally realistic, in our experience it is rare that valued employees leave prior to a closing, especially if the messaging is carefully managed.  

Fear of Employee Layoffs
Business owners also assume that the acquirer will fire employees following the closing. While cost synergies and elimination of duplicative operations often drive larger multi-billion mergers, middle market investment returns tend to be generated from growth and productivity, not cost savings. The buyer needs the team, not just the business, to be successful. Most middle market buyers actually hire more employees following a closing, often supplementing staff with additional resources or expertise to make them even more successful.

Bringing Key People 'Under the Tent'
While every situation is different, our playbook for owners to disclose the transaction to employees and mitigate fear is carefully staged into three distinct phases:

• Need-to-Know Employees: In preparation for the transaction, start with the most senior management, generally the head of sales, operations and finance. They will be important to articulate the business and position opportunities for the future. Additionally, if there are a couple of key employees that will be critical to assembling core due diligence items, bring them 'under the tent' early as well.
• Next Level Management Team: Once acceptable preliminary offers are received, broaden the scope of disclosure to include other members of management that will be important for the company following a closing. As part of any robust due diligence process, buyers will want to meet with operational management to understand the business at a deeper level than what they see on paper. Demonstrating a broad base of talent is key to enhancing value, so it is important to engage the next level of operational management at this point.
• Broad Disclosure: Lastly, only once a seller is highly confident that the deal will close (or right after it does), then it should be more broadly disseminated to employees, customers, vendors and other key stakeholders. This should only happen in close coordination with the incoming owner to set the tone with all stakeholders going forward.

Addressing the Employee Rumor Mill

If a seller is confronted about a pending transaction, we recommend they do not deny it, but rather embrace it. Depending on the situation here are some responses to address the rumors:

• Yes, we are seeking a private equity partner to invest growth capital so we can make bigger investments in leadership / access new markets / bring in operational talent.
• Yes, we are doing some estate planning and are considering taking some 'chips off the table' as we are not getting any younger.
• Yes, we are constantly approached by larger strategic buyers. We have a fiduciary responsibility to our family / shareholders / investors to hear them out. We are being extremely selective and will make sure the next owner significantly enhances the business and appreciates our unique culture.

The truth will come out eventually, so regardless of the reason, the message should be open, honest and candid.


Focus on Benefits for Employees
Owners need to recognize employee anxieties (new owner, job preservation, fearing the unknown) and address them with both compassion and honesty. Any messaging should also focus on the upside for employees. There may be more opportunity for advancement and promotions, more cross functional training and access to the resources of a larger company or deeper pockets from an investor.


Providing Employees a Good Home is often a Priority
There is typically a strong bond between middle market business owners and their employees. As we have experienced in hundreds of transactions, making sure employees are 'taken care of' is normally a key consideration for sellers, especially with family owned enterprises. We often see owners rejecting higher priced offers to partner with a buyer that will provide employees a better home for the future and protect the legacy and culture that the families and founders have established.


Final Thoughts
For the business owner, there is little to fear, but fear itself. Addressing the pending transaction openly, honestly, and unapologetically will garner goodwill with continuing employees as well as the next owner.

We are Here to Help
If we can help in managing communications with your employees as you contemplate a transaction, please do not hesitate to reach out to any one on our team.